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Old 09-29-2009, 07:07 PM   #41
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The best of the bunch IMO so far has been Ally. Fastest transfers and good rates. Just opened an account at Discover for the 2pct rate but no real experience there yet.
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Old 09-29-2009, 07:24 PM   #42
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This is a good thread hope you dont mind me putting in my problem
I am having the same type of debate with myself, retired 61 1552 month with taxes and insurance, 9 years left @5% around 96k. Wife is on SS I have a pension but no
SS until 62. Thats a whopping 45% of monthly cash flow before my SS, and 30% after I start SS. The percent of cash flow will of course lower if I compute not counting
taxes and insurance. I can pay it off, but would use all liquid non sheltered cash, plus
my wifes sheltered funds.
Any thoughts on this problem
Thanks
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Old 09-29-2009, 07:42 PM   #43
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Plus, the less the monthly nut, the more room in the budget for all that fun discretionary stuff!
Ah, but that is one of my worries, at least in the accumulation stage. I do best when things are automated and I cannot get my filthy hads on the money for discretionary purposes. It is who I am and I know it. So in part, a 15 year fixed mortgage is enforced savings that soaks up a bunch of my otherwise free cashflow.
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Old 09-29-2009, 07:48 PM   #44
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This is a good thread hope you dont mind me putting in my problem
I am having the same type of debate with myself, retired 61 1552 month with taxes and insurance, 9 years left @5% around 96k. Wife is on SS I have a pension but no
SS until 62. Thats a whopping 45% of monthly cash flow before my SS, and 30% after I start SS. The percent of cash flow will of course lower if I compute not counting
taxes and insurance. I can pay it off, but would use all liquid non sheltered cash, plus
my wifes sheltered funds.
Any thoughts on this problem
Thanks
Old Mike
I'd be very reluctant to repay a fixed rate mortgage if it would drain all of my liquid reserves. I don't think 5% interest is too much to pay for a solid liquidity cushion. The only reason you should be considering paying down the mortgage is if you have more than enough in cash and bonds to repay the mortgage and still have enough emergency money left over.

As far as your analysis goes, I wouldn't factor taxes and insurance into your consideration because these payments won't change regardless of weather you pay down the mortgage or not. I also don't think you should look at the payment as a % of monthly cash flow if you are in the position to pay off the mortgage. Just view those monthly mortgage payments as coming from your cash balances if it makes you feel better. After all, that's where the money would come from if you decided to repay the mortgage all at once.
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Old 09-29-2009, 08:39 PM   #45
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Looking at it as you suggest makes me feel better about keeping the mortgage.
Many things to ponder, such as if one of us dies then we only get one SS check,
which if we have a mortgage the cash flow is negative by about 1k month. Of course the mortgage can be covered by insurance.
Accountant says, don't buy life insurance, if one dies sell vacation home
to cover the primary mortgage.
Going Crazy now since I only have two paychecks left from ER package.

Thanks
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Old 09-30-2009, 07:16 PM   #46
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I don't think 5% interest is too much to pay for a solid liquidity cushion. The only reason you should be considering paying down the mortgage is if you have more than enough in cash and bonds to repay the mortgage and still have enough emergency money left over.
I fully agree with the first part. Liquidity is too valuable to squander unless you're getting a LOT more than 5%.

I've always thought that there is really only one situation where it arguable makes sense to pay off the mortgage.

If you don't have enough cash/investments to pay it off, then of course you should keep it.

If you have a large portfolio, there is no real advantage to paying it off. If you can (figuratively) pay it off out of pocket change, then you clearly will never have any problem with making the payments, and you probably have a portfolio that is safely diversified and therefore earns you much more than the 5% you're paying to the mortgage company.

The only situation I can see where it might makes sense to pay it off is if you have a smallish portfolio, where paying off the mortgage will take a significant bite out of the portfolio.
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Old 09-30-2009, 08:43 PM   #47
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I fully agree with the first part. Liquidity is too valuable to squander unless you're getting a LOT more than 5%.

I've always thought that there is really only one situation where it arguable makes sense to pay off the mortgage.

If you don't have enough cash/investments to pay it off, then of course you should keep it.

If you have a large portfolio, there is no real advantage to paying it off. If you can (figuratively) pay it off out of pocket change, then you clearly will never have any problem with making the payments, and you probably have a portfolio that is safely diversified and therefore earns you much more than the 5% you're paying to the mortgage company.

The only situation I can see where it might makes sense to pay it off is if you have a smallish portfolio, where paying off the mortgage will take a significant bite out of the portfolio.
*Sigh*

We live in an uncertain world. Over the years, I have come to the conclusion that we should behave like the smartest of the commodity producers, who successfully navigate brutally cyclical industries (think Exxon): when times are good you improve your balance sheet by piling up liquidity and paying off debt, that way when times are bad you have the wherewithal to stay in one piece and hopefully clean up at the expense of the improvident. So I would suggest that even if you give up some positive spread, if you can pay down your debt without significantly impairing your liquidity profile, it is a good thing to do.
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Old 10-01-2009, 08:53 AM   #48
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*Sigh*

We live in an uncertain world. Over the years, I have come to the conclusion that we should behave like the smartest of the commodity producers, who successfully navigate brutally cyclical industries (think Exxon): when times are good you improve your balance sheet by piling up liquidity and paying off debt, that way when times are bad you have the wherewithal to stay in one piece and hopefully clean up at the expense of the improvident. So I would suggest that even if you give up some positive spread, if you can pay down your debt without significantly impairing your liquidity profile, it is a good thing to do.
I completely agree. The problem I have with so many of these threads is that IMHO the people are significantly impairing their liquidity, by either paying off the portgage or making extra principal payments. Also, paying extra reduces your liquidity without lowering your risk one iota. (It actually increases your risk, since you have more equity in the house that can be lost to foreclosure.)

Question: what is your criteria for "significantly impairing one's liquidity profile"? This is where I have a problem because I can't decide. 1% of your investment (that is, excluding the house) portfolio? 10%?

For example, if you have a $200K mortgage ($1700 monthly P&I), and a $1,000,000 portfolio, should you pay off the mortgage? That would take 20% of your portfolio (assuming you consider the entire portfolio as liquid assets). That seems rather high to me. And of your total net worth of $1,200,000, 17% of it is locked up in one single piece of illiquid, non- income-producing real-estate. Your diversification is all lopsided.

How about a $2M portfolio? That would take only 10% of the portfolio to pay off. That still seems like a lot to me.

A $4M portfolio? That would take only 5% of the portfolio. But......a 4% SWR of $4M is $13,300/mo. Why even bother paying off the mortgage? Out of $13K coming in each month, you'll barely notice the $1700 mortgage payment.

Emitionally, I can see paying off the mortgage. Financially, not so much.
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Old 10-01-2009, 11:13 AM   #49
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For example, if you have a $200K mortgage ($1700 monthly P&I), and a $1,000,000 portfolio, should you pay off the mortgage? That would take 20% of your portfolio (assuming you consider the entire portfolio as liquid assets). That seems rather high to me. And of your total net worth of $1,200,000, 17% of it is locked up in one single piece of illiquid, non- income-producing real-estate. Your diversification is all lopsided.
Another positive point is if your house appreciates by 10% you get the full amount, mortgage or not. Leverage can be good.
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Old 10-01-2009, 12:00 PM   #50
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A $4M portfolio? That would take only 5% of the portfolio. But......a 4% SWR of $4M is $13,300/mo. Why even bother paying off the mortgage? Out of $13K coming in each month, you'll barely notice the $1700 mortgage payment.

This may be a valid argument for a $10-20M portfolio, but at $4M a 13% expense reduction is hardly "in the noise" to many LBYM types. I think there is a significant gray zone between the "liquidity impairment" argument and the "I have so much that I don't care" argument, where paying off can make sense. If you have enough that you are not concerned about rainy day liquidity, the next priority should be portfolio survivability, and there the expense reduction argument can have merit.

Take your 4M scenario. Suppose you don't think 4% SWR is safe enough these days, and you want to target 3%, perhaps because you have 40-50 yrs to go. Now you are looking at 10k/month @ 3% SWR. Without the mortgage you are looking at 8.3k/month on a $3.8M portfolio for an implied SWR of 2.6%. That is a significant reduction in SWR, when it matters most in the first few years of retirement. (The real picture is somewhat more complicated due to the fact the mortgage payment is not subject to inflation, see my other posts). Nonetheless, if portfolio survivability and not liquidity is your main concern, paying-off can indeed make financial (not just emotional) sense.
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Old 10-01-2009, 12:00 PM   #51
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Another positive point is if your house appreciates by 10% you get the full amount, mortgage or not. Leverage can be good.
hmmmm ... isn't this the thinking that got us to where we are today?
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Old 10-01-2009, 12:19 PM   #52
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Another positive point is if your house appreciates by 10% you get the full amount, mortgage or not. Leverage can be good.
This is kind of like treading water. If your house appreciates, so likely does replacement housing. Sure, you might be able to downsize and gain a little more, but still. Home appreciation doesn't help that much when you are likely to be an owner most of your life.

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Old 10-01-2009, 12:28 PM   #53
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This is kind of like treading water. If your house appreciates, so likely does replacement housing. Sure, you might be able to downsize and gain a little more, but still. Home appreciation doesn't help that much when you are likely to be an owner most of your life.

Audrey
Gains and losses differ by geographic location. People have sold their homes in CA and moved to WA at great profit. However, the point I was making is that you can get the same gain with only 20% down.
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Old 10-01-2009, 04:24 PM   #54
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a 13% expense reduction is hardly "in the noise" to many LBYM types.

Sure----as long as you only look at one aspect of the picture, and ignore the others aspects. And that's where I run into a problem with aggressive "pay off your mortage" proponents.

That 13% expense reduction doesn't happen in a vacuum. It happens because you've removed money from the "producing earnings & gains" part of your portfolio. That 200K is, for example, no longer earning the 4.26% yield of the Vanguard Total Bond Market fund/ETF (BND). You give up $710/month to save $833/mo (plus a mandatory transfer of $867 from liquid assets to illiquid asset in the form of principal payment).

So your actual net savings is really only $123/mo, not $1700. Plus, of course, the benefit of not being required to convert some of your assets from cash to principal. But that's not a cost, it's just shifting around some of your assets.

Emotionally, I can understand somebody wanting to do this. But financially, not so much. A proponent who touts a $1700/mo savings is lying by omission, if they don't also mention the foregone $710 of earnings and the $867 which is just moving your own money from one pocket to another.

Too, somebody with a $1M or $4M portfolio does not have all of it in BND. They've got a well-diversified portfolio which is probably earning/growing at a long-term blended rate of 6%-8%.

This discussion will never end. Some people feel that saving $123/mo is worth giving up the liquidity. Some people feel that paying $123/mo is well worth the liquidity that this buys them.
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Old 10-01-2009, 05:43 PM   #55
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A proponent who touts a $1700/mo savings is lying by omission, if they don't also mention the foregone $710 of earnings and the $867 which is just moving your own money from one pocket to another.
There is no omission. The 200k was subtracted from the portfolio size (denominator in the SWR becomes 3.8M.) The metric of interest is expenses/portfolioSize.

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This discussion will never end. Some people feel that saving $123/mo is worth giving up the liquidity. Some people feel that paying $123/mo is well worth the liquidity that this buys them.
What really matters in the distribution phase is portfolio survivability not liquidity. (You can have a very liquid portfolio and still run out of money.) For a given sequence of returns, survivability is strictly a function withdrawal rate (WR) as a function of time. You can't deny that the initial WR is less by paying off the mortgage in the above case. The only question is whether over time, inflation kicks in to mitigate the difference by devaluing the fixed mortgage payments and thereby lowering the WR of the non-payoff case enough for it to win in the long haul.

I analyzed this pretty heavily a while back for my individual case, my conclusions were:
- with average/low inflation assumptions, to pay off was slightly better
- with high inflation assumptions, to pay off was slightly worse
- in either case the effect of paying off was small (a percent or two in terminal portfolio value).

I believe a percent or 2 is probably within the error tolerance of the entire exercise..... so I went with what would make me feel better (and paid it off). So while its true that emotion factored into my final decision, it was only after the detailed analysis proved inconclusive.

YMMV, of course.
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Old 10-01-2009, 05:45 PM   #56
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I'd be very reluctant to repay a fixed rate mortgage if it would drain all of my liquid reserves. I don't think 5% interest is too much to pay for a solid liquidity cushion. The only reason you should be considering paying down the mortgage is if you have more than enough in cash and bonds to repay the mortgage and still have enough emergency money left over.

As far as your analysis goes, I wouldn't factor taxes and insurance into your consideration because these payments won't change regardless of weather you pay down the mortgage or not. I also don't think you should look at the payment as a % of monthly cash flow if you are in the position to pay off the mortgage. Just view those monthly mortgage payments as coming from your cash balances if it makes you feel better. After all, that's where the money would come from if you decided to repay the mortgage all at once.
If one is receiving SS benefits and also withdrawing from tax-deferred accounts, then the extra cash flow needed to pay the mortgage can cause those SS benefits to be heavily taxed. If the mortgage had been paid off before SS benefits started, it is possible that one could have reduce income taxes by thousands of dollars.

You have to run some "what-if" scenarios in TurboTax to see the effects.
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Old 10-03-2009, 04:15 PM   #57
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For most of us, The Home is the Biggest Investment we make and I was raised to Get the House Paid off First, before you go Investing into much anything else, having a Roof over your Head and Paid for is a wonderfull feeling.. ( and of course, your don't go using it like a Bank Loan business either to go buy anything with it, evenpaying for College)

In my community, our homes ave a 8% apy growth for Decades an that's doubling every 9-10 yrs an it will return to that again shortly. But, if you don't live in such a Good Location/State/City etc with that kind of Track record? It may not be worth it to pay it off ASAP.. We retired and moved into another State and a 3.8% APY growth history and thus paying it off early wasn't worth it to us, plus being able to get a 3% Rate Mortge at the time vs what we get on our Bond Portfolio...

Those Living in States with the Homestead act, like Florida are in a Different situation an many pay off their Homes to hide their $ ( or go buy a home down there to do the same thing)

Those in the South West- AZ, Nevada, etc was not a good idea to pay it off an many bought a retirement place down there with very little Down and just walked away when they crashed.. Knowing it will take A 5 yrs to a Decade or longer for their Place to recover it's value ( what my Retired Uncle and some of his friends did an moved back to Illinois ) he told me their street down there was a Ghost Town...
he was glad they decied not to buy their Place and pay for it in Full.. They paid about $10k yr to live in it or they consider it was just Rent..

So, I woul guess, IAD on where you live an the prospects of it's future Growth in value..
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Old 10-07-2009, 12:04 AM   #58
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Today, I wired the payoff amount to my mortgage holder. The thrill is second only to FIREing. It wasn't a large amount in comparison to our FIRE portfolio and we would have payed it off in 4 or 5 years anyways. So the liquidity we gave up was not that great.

DW had been wanting to do this for a while, so she is happy too.

The psychological boost in this era of recession worrys ... etc. is certainly a welcomed feeling.
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Old 10-07-2009, 07:20 AM   #59
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Congratulations! It is indeed wonderful to know that you will always have your home, especially in these uncertain economic times.
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Old 10-07-2009, 07:37 AM   #60
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It is indeed wonderful to know that you will always have your home, especially in these uncertain economic times.
Under what circumstances would keeping this:

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It wasn't a large amount in comparison to our FIRE portfolio and we would have payed it off in 4 or 5 years anyways.
lead to 'losing your home', compared to paying it off now?

Hey, I get it, for some people it "feels good". So do it. But why try to justify it on economic principals that don't hold water?

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