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Old 03-02-2014, 09:49 AM   #21
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I would not pay off the house. If you're earning $155k a year, then $800/month is a nit - put it on autopay and forget about it. I think in the long run you will earn more than the 4% mortgage interest that you are paying. You could probably even go out today and buy some muni bonds that pay more than the after-tax cost of mortgage interest (5 and 10 year investment grade munis are paying 3.3% and 4.7%, respectively).

Plus, the capital gains tax you would have to pay on stocks you sell to pay off the house doesn't make it worthwhile IMO.

Unless your job security is poor, you probably have too much cash, but you already know that. Your first step is to decide how much of an emergency fund you want to carry. I would target 12 months of spending.

Another decision is what is your target AA (excluding your emergency fund). When I was 32, it would have been 100% stocks, but you need to decide what is comfortable for you.

If you decide your AA is 100% stocks, then take any excess cash and invest 1/6 of it each month for the next 6 months or 1/12th of it for each of the next 12 months.

Then go play with that 4 month old.
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Old 03-02-2014, 09:50 AM   #22
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With firm plans on selling our house no matter what in 2 years (or less) and having no children and no real deductions (so using standard deduction) it makes a lot of sense to put money that would normally be allocated to bonds into the house loan instead, even at 3.625%.

To earn 3.625% in a 2 year CD tax free, you would actually need around 5% return. There is zero chance of a 2 year CD with a 5% return coming available in the next 2 years.
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Old 03-02-2014, 10:16 AM   #23
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Using 10% or less of your investments to pay off a mortgage is one thing. Using 50% of your investments to pay off a house is another thing entirely!

It's all about proportion here.

If someone has the liquid assets to cover several years of house payments and other emergencies if they lose their job, THEY AREN'T GOING TO LOSE THEIR HOUSE. Why pretend that's a risk?

Why go all or nothing? As many folks have pointed out, you can advance a little more money towards the principal each month and accelerate the payoff somewhat without compromising growing your stash of far more liquid assets. In a financial emergency you don't want to be house rich and cash poor.
That is a good point as we all must review our situations. My thought is to protect unexpected gains from evaporating. One could always pre-pay the mortgage and than establish a HELOC for protection.
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Old 03-02-2014, 10:26 AM   #24
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i have 4%, 30 year fixed rate. Also, i am not sure what to with the 90 K in cash, if i don't apply it towards the mortgage. i am in 28% tax bracket
Are you still accumulating cash at a reasonably fast pace? Said differently, will your cash war chest refill if you make it illiquid by putting it onto the mortgage?

Facing a similar situation in the past, we went part way. Take $40k of your cash and slam it on the house. You'll knock your lifetime mortgage costs way down and move your payoff date years closer while maintaining a nice cash position to invest on the market and cover emergencies. If you look up in a year and have $90k in cash on hand again, you can repeat the process until the house is paid off.

We did that from about the time I was 37 and finished it when I was about 40. It put a big smile on my face everytime I walked into the bank and wrote them a $25k check. Very liberating when we were done with the mortgage but We never put ourselves into a position where we didn't have a big cash reserve on hand.

Good luck. High class problem!!
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Old 03-02-2014, 11:21 AM   #25
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So many things enter into this question that it is very unlikely that anyone here or on any other forum will be able to give you good advice. There are to many considerations that we do not know about.

If you can, analyze it yourself and make your decision. If you do not feel you can do this, pay someone experienced to interview you and help you decide.

I felt that it was likely always a bad idea to pay off a mortgage, but with all the Obamacare goodies, and phase-out's etc. it may be a very tricky question for you.

Ha
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Old 03-02-2014, 11:56 AM   #26
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None of us can tell you whether this move will pay off financially
I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.
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Old 03-02-2014, 01:01 PM   #27
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We've been paying down our mortgage, but we have more assets than OP. We also have a 5/5 ARM, so in a few years our rate will reset. If we end up getting hit with more inflation, then we'd like to owe less. But I think that could be a wash, since we should be able to earn more on our money too.

The problem I have investing more than paying down the mortgage is because I'm not convinced buying more equities right now is a good idea. We're still accumulating, so we buy a solid 5 figures a year outside of the mortgage. I don't feel a strong need to buy more. And as for buying bonds, I think I'll pass for now. So paying down the mortgage right now works for us. However, if we were to experience a correction or rates on bonds went up, then we'd reevaluate.

In your case, I don't think it makes much sense. You have a good rate and your saved assets aren't that high. There'd be no harm in paying extra, but I'd much prefer to save that money for greater liquidity.

Of course, the choice is yours.
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Old 03-02-2014, 01:44 PM   #28
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I wonder where these people live who "can't lose the house" just because their mortgage is paid off. Are there that many places with no property taxes? My taxes are a significant portion of my total housing costs, and if I don't pay them I'll "lose the house" just as surely as if I don't make the mortgage payment.
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Old 03-02-2014, 04:43 PM   #29
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I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.

True but you are also giving up liquidity. As I retiree I think there are lots of good arguments for paying off the mortgage. I also agree with ERD that in generally it doesn't make much difference. A retiree with a $1 million portfolio and paid of mortgage isn't much different than a retiree with $1.2 million portfolio and $200K mortgage.

But for a 32 year old decades away from retirement, making house payment isn't the biggest worry. As long as he sufficient liquid assets to make the payment for at least 6 months, hence the need for an emergency fund.. With the current job situation it may actually take 2 years to find a comparable job, so a strong argument can be made that you need a larger emergency fund now than in the past.

Saving for retirement and making sure that your savings are earning a good return, IMO a higher priority than having a paid off mortgage. Over 30 years, I think you have to be extraordinarily pessimistic that stocks won't be making more than 4% nominal return.
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Old 03-02-2014, 05:10 PM   #30
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Why not do something simple and make an additional principal payment each month (and make sure it's applied to the remaining principal). For a few hundred dollars a month additional, you can turn that 30 year mortgage into a near 15 year one and save ton in interest.
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Old 03-02-2014, 10:27 PM   #31
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That's not really apples-apples, is it?

If those people lost their house when they lost their jobs, they likely were not in a position to be able to pay off the mortgage like the OP, right? Those people were likely living near paycheck-to-paycheck without much/any savings.

Like someone said earlier, $158,000 will make an $800 mortgage payment for lots of months. And the tax payment, and electric bill, and maintenance, and put food on the table, etc, etc. Where does that come from if you lose your job and have little savings?

Pay it off or not, but don't underestimate the value of the liquidity of a portfolio, and don't overestimate the 'freedom' from not having a mortgage, when all those other bills keep coming in.

-ERD50
Your point is valid. Perhaps not apples to apples.

The point that i was trying to make but failedis the inverse of what you said... that in a market downturn, such as the one we had between September 2008 and March 2009, when the stock market fell 50%, the OP's nest egg in stocks of 90K would have fallen to 45K. He would theoretically continued paying 800/month toward his 157K mortgage..true... But lets say he also lost his job..... that 45K would likely have to be allocated to more than just the 800/month in mortgage payment.... keep the lights on...feed the baby....gas in the car...insurance...etc. And if that nest egg runs out and you go into foreclosure, you lose the entire house.... including all the equity that you built up too. Also, in bankruptcy, your primary residence (paid off) is protected as I recall.

What I saw in 2009 were financially prudent folks who suddenly were unemployed, having to dip deeply into emergency funds, then stock portfolios, and in some cases retirement funds all the while resetting their spending levels to deep LBYM as they tried to weather the storm. Eventually, using said funds up during long periods of structural unemployment which decimated them financially and while they tried to hang onto their houses...but ultimately lost them to foreclosure. Compounding this issue was the fact that the asset itself was also depreciating right beneath their feet... Yes...likely a perfect storm but no one can deny that it happened just 5 short years ago....

Wont argue your points. Having a war chest is helpful. having zero debt is equally helpful. personal opinion is that being debt free gives more flexibility than being in debt...again, personal opinion.
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Old 03-02-2014, 10:28 PM   #32
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I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.
I'm a contrarian also.....I will keep the banks cheap money thank you.
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Old 03-02-2014, 11:02 PM   #33
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Wont argue your points. Having a war chest is helpful. having zero debt is equally helpful. personal opinion is that being debt free gives more flexibility than being in debt...again, personal opinion.
But take a look at your own example. Now, if stocks drop to 50%, a balanced portfolio won't be down that far. Regardless, we agree there are still lots of other bills to pay. So if all that money is stuck in the house, how do you pay those other bills? Better to have half a portfolio available then almost none.

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keep the lights on...feed the baby....gas in the car...insurance...etc. And if that nest egg runs out and you go into foreclosure, you lose the entire house.... including all the equity that you built up too. Also, in bankruptcy, your primary residence (paid off) is protected as I recall.
Going into bankruptcy is pretty extreme, but again, I'm not sure this is apples-apples either. With almost no funds, it would seem you would have to go into BK pretty quickly in order to preserve the primary residence. And I'm not following you when you say when the nest egg runs out you loose the house to foreclosure - wouldn't BK protect that as well? I guess I see your point that if your home is protected in BK, then all the equity in the home is protected (I think that's true, not 100% sure). But then BK has lots of repercussions, not sure that having to jump into that so quickly is a good thing long term either.


Quote:
Compounding this issue was the fact that the asset itself was also depreciating right beneath their feet... Yes...likely a perfect storm but no one can deny that it happened just 5 short years ago....
You are right, jobs get cut during downturns, so it certainly could happen together.

-ERD50
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Old 03-02-2014, 11:37 PM   #34
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I wonder where these people live who "can't lose the house" just because their mortgage is paid off. Are there that many places with no property taxes? My taxes are a significant portion of my total housing costs, and if I don't pay them I'll "lose the house" just as surely as if I don't make the mortgage payment.

Exactly right. There's also alternatives for living arrangements that don't require a house either.
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Old 03-02-2014, 11:57 PM   #35
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But take a look at your own example. Now, if stocks drop to 50%, a balanced portfolio won't be down that far. Regardless, we agree there are still lots of other bills to pay. So if all that money is stuck in the house, how do you pay those other bills? Better to have half a portfolio available then almost none.



Going into bankruptcy is pretty extreme, but again, I'm not sure this is apples-apples either. With almost no funds, it would seem you would have to go into BK pretty quickly in order to preserve the primary residence. And I'm not following you when you say when the nest egg runs out you loose the house to foreclosure - wouldn't BK protect that as well? I guess I see your point that if your home is protected in BK, then all the equity in the home is protected (I think that's true, not 100% sure). But then BK has lots of repercussions, not sure that having to jump into that so quickly is a good thing long term either.




You are right, jobs get cut during downturns, so it certainly could happen together.

-ERD50
For the sake of discussion, I did not limit corner cases. bankruptcy etc are all possibilities...especially so in light of what transpired during the past 5 years. We could bound this by corner cases, but then it limits the range of discussions. Lets just say we agree to disagree and everyone's situation is different. All angles need to be considered in this one...not just financial, but risk tolerance/mitigation and personal piece of mind.

In a worst case scenario, the homestead act at both federal and state level will protect a significant portion your home/equity from bankruptcy. Similarly, 401K and IRA accounts are also protected from certain lawsuits.

Same law does not apply to regular after tax/cash stock market portfolios or other assets ...almost all others are subject to creditor claims - so in a worst case scenario, that paid off house or 401K/IRA comes with creditor claim protection which could be the difference between losing everything and keeping a significant portion of one's net worth after a financial tragedy.

A little off topic....but good discussion none the less and thanks ERD50 !
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Old 03-03-2014, 02:27 AM   #36
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Maybe I am being too simplistic here... but.

Lets assume that OP is very good saver (given his income, accumulated assets, and young age probably a good bet) Despite making almost 14K/year he only spends 7K/month. Of the 7K, 800/month is for mortgage.

Great Recession II: Revenge of Moral Hazard comes back. Once again stocks drop by more than 50% and the OP reverse courses and has a high equity concentration.
The 300K in saving gets cut into $150K

Everyone gets laid off. Their 150K in saving will last more than 20 months.

Now lets imagine the mortgage is paid off and the savings go from 300K to $130K
Once again GRII happens and the savings gets cut in 1/2 to $65K, and lay offs occur.
Now expense are reduced from $7K/month to $6200 but their $65k worth of saving only last 10 months.
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Old 03-03-2014, 07:17 AM   #37
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Now lets imagine the mortgage is paid off and the savings go from 300K to $130K
Once again GRII happens and the savings gets cut in 1/2 to $65K, and lay offs occur.
Now expense are reduced from $7K/month to $6200 but their $65k worth of saving only last 10 months.
Exactly who keeps spending $6200 a month when the stock market drops 50% and they are laid off?
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Old 03-03-2014, 09:52 AM   #38
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Hi ( i am the OP),
If i don't pay off the house, what would you guys recommend i do with the cash ? As a reminder, i have 95K in cash - i need about 25K for 6-month emergency fund; So essentially what am i to do with 60K ( i am a really hesitant to apply that in the stock market, given it is at all time highs).
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Old 03-03-2014, 10:20 AM   #39
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I would not pay off the house. If you're earning $155k a year, then $800/month is a nit - put it on autopay and forget about it. I think in the long run you will earn more than the 4% mortgage interest that you are paying. You could probably even go out today and buy some muni bonds that pay more than the after-tax cost of mortgage interest (5 and 10 year investment grade munis are paying 3.3% and 4.7%, respectively).

Plus, the capital gains tax you would have to pay on stocks you sell to pay off the house doesn't make it worthwhile IMO.

Unless your job security is poor, you probably have too much cash, but you already know that. Your first step is to decide how much of an emergency fund you want to carry. I would target 12 months of spending.

Another decision is what is your target AA (excluding your emergency fund). When I was 32, it would have been 100% stocks, but you need to decide what is comfortable for you.

If you decide your AA is 100% stocks, then take any excess cash and invest 1/6 of it each month for the next 6 months or 1/12th of it for each of the next 12 months.

Then go play with that 4 month old.
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Old 03-03-2014, 11:00 AM   #40
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I sold stocks to pay off my home during the depths of the recession. I mention this so you realize I am not against a paid off home. I like having no mortgage, and do not regret my decision from either financial or emotional sides.

The numbers don't work for you. The numbers worked for me. I only owed about $50k, had adequate reserves, and was locked in to a 6% mortgage. You are cutting out too much liquidity, and potential upside due to how cheap money is now.

I wouldn't do it given the numbers you have shared.
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