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What should we do with money we want to pay off our mortgage with?
Old 07-24-2011, 10:55 AM   #1
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What should we do with money we want to pay off our mortgage with?

I am curious if anyone has any advice. We have a 30 year fixed @ 4.25% that we refinanced last year so our payoff date is 2040. I am 33 and my wife is 32. Our #1 financial goal is to have this paid off in 20 years (this is our ONLY form of debt). We also have every other Friday payments set up, which will shave off a few years right there, but I want to pay it off by 2030 at the latest.

Anyway, right now we're in a good spot financially - to the point where we have a full year of savings, max out IRAs and 401Ks, so all of our excess money on top of this I have earmarked for a Vanguard Target Retirement Fund for 2030, which we have designated this as our mortgage payoff fund. Every little bit extra we get we put into this fund so we can pay off the mortgage early. Our goal is to put at least $3,500/year into this fund, which by my calculations at 8% return will put us at the point in 2030 that we can pay off the remaining mortgage if we so choose from this account.

So, my questions are:
  • Should we continue putting money into this Vanguard Target Date 2030, or should we put it directly into our mortgage principal and get the guaranteed 4.25% return? With a 20 year horizon, I feel confident that we'll get better than a 4.25% return, so that is why we started the 2030 account.
  • Is there a different strategy people would recommend for this money and any other ideas to get the mortgage paid off earlier?
  • Due to some fortunate bonuses for each of us and the fact we have no other debts, we've been able to put just a bit over $15K in a bucket for this mortgage payoff fund that I have sitting in ING for eventual placement into the Vanguard fund (I haven't put it in yet because I have anticipated the market to pull back a bit, which I know is a stupid reason to have this in ING, especially with a 20 year horizon). Should we be thinking of doing anything different with this $15K and $3,500 annual than putting both into the Vanguard 2030 earmarked entirely for mortgage payoff?
Thanks for any advice.
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Old 07-24-2011, 11:00 AM   #2
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You are very young. I agree with your strategy of investing outside of the mortgage which is at a very favorable rate.

I wouldn't call what the Target Date fund earns as "interest" though. Although you seem to understand that the return is uncertain.
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Old 07-24-2011, 11:07 AM   #3
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You are very young. I agree with your strategy of investing outside of the mortgage which is at a very favorable rate.

I wouldn't call what the Target Date fund earns as "interest" though. Although you seem to understand that the return is uncertain.
Thanks - good edit. I changed it to reflect 8% return, I'm not sure why I put "interest."
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Old 07-24-2011, 11:39 AM   #4
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We did essentially what you are doing. We designated a portion of our developing portfolio as mortgage payoff funds. Early on it was just part of the portfolio. As ER approached we moved more funds into the "money bucket" so we could pay off the mortgages and current expenses without having to sell equities in a downturn. I liked having the fundss available to me until I chose to pay off the mortgage and the tax deduction remained higher while we were working.
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Old 07-24-2011, 11:55 AM   #5
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Here's what we did to pay off our mortgage:

1. Never make early payments of principal for such a low interest rate.

2. Invest money in retirement accounts to the maximum possible allowed by law.

3. Invest in a taxable account in a tax-efficient way. This means no bonds, no CDs, no savings accounts, no balanced funds, no target retirement funds, no funds with any bonds in them. Instead have tax-efficient index stock funds such at Total Stock Market Index, Total Int'l Stock Market Index, Emerging Markets Index, etc. Put the fixed income assets in the retirement accounts.

4. If the market crashes, so what? Simply tax-loss harvest in the taxable account and rebalance in the tax-deferred accounts.

5. When you have enough money in taxable to pay off the mortgage, just withdraw the necessary amount and pay it off.

This works because the goal of mortgage payment is not a drop-dead goal. If stocks go down, you have time to wait for them to recover. If stocks go up, then you just pay off the mortgage sooner. Folks will give you all kinds of arguments about "riskless" and/or "same risk". That's true, but they also do not talk about your options which are worth something. The option to wait if the market goes down is worth something. The option to spend your gains on something else is worth something. The option to cash in early if the market goes way up is worth something.
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Old 07-24-2011, 12:03 PM   #6
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We did just about the same thing you are doing. We maxed out our retirement accounts and still had leftover money to invest. We invested it with the purpose of paying off the mortgage when the account was big enough. The rising value of this account and declining mortgage balance crossed paths a couple years ago. By that time we were reasonably sure that our returns would be higher than the interest rate we were (are) paying so we did not pay off the mortgage and just continued along the same path and continued pouring more money into this account. We still have peace of mind that we can pay off the mortgage anytime we want.
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Old 07-24-2011, 12:16 PM   #7
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Originally Posted by TennisFan View Post
Our #1 financial goal is to have this paid off in 20 years (this is our ONLY form of debt). We also have every other Friday payments set up, which will shave off a few years right there, but I want to pay it off by 2030 at the latest.
Why the fixation on paying off the mortgage early? You've got a (historically) fantastic mortgage rate.
Let's look ahead and it is 2020. Inflation is at 10% per year. New mortgages are at 14%.
Option A: You've kept up the biweekly payments and socked lots of extra money into the mortgage every year. As a result you are about to pay it off. Because you've put your available funds into the mortgage, your other investment accounts are much smaller than they otherwise would be.
Option B: You stopped the biweekly payments and paid just the minimum on your mortgage, it has 20 years more to run. But you've accumulated enough in the investment accounts to pay it off whenever you want. With inflation at 10% and your mortgage at 4.5%, you are in great shape--you are paying off your debt with cheaper money every year, and your investments are in assetts expected to keep up with/exceed inflation (even CDs would be expected to yield 13+% in an environment like this)

Now, the future might not turn out this way, but it very well might. So, I'm in favor of socking that money away, using the tremendously cheap financing you've got now to your advantage, and keeping your options open.
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Old 07-24-2011, 12:26 PM   #8
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My mortgage money, including cash out from the last refi, is invested as part of my normal AA. However, funds that have to have tax accountability as investment loans are in a separate account. No plans for an early payoff. In fact, I kind of like the fact that my refi's keep pushing out the payoff date. At least until the martgage tax break disappears.
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Old 07-24-2011, 02:32 PM   #9
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Originally Posted by TennisFan View Post
I am curious if anyone has any advice. We have a 30 year fixed @ 4.25% that we refinanced last year so our payoff date is 2040. I am 33 and my wife is 32. Our #1 financial goal is to have this paid off in 20 years (this is our ONLY form of debt).
You seem to be fairly confident that your money (which could go to paying off the mortgage right away) will earn more than the mortgage by being invested in equities.

So why would you want to pay off the mortgage a minute earlier than necessary?

We've had this perpetual debate running since practically the first post on this board, and I'm in the "don't pay off the mortgage" camp. My advice would be to figure out why you're feeling so compelled to pay off the mortgage early. The way you frame the question, it does not make financial sense.
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Old 07-24-2011, 05:00 PM   #10
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I agree. Why pay off the mortgage early at all? With inflation in coming years likely, and the tax deduction I assume you are getting, your mortgage debt will be even smaller in 20 years.

We have enough in a brokerage account to pay off our mortgage; that money came from the profit on selling our previous home. But the mortgage is at 4.65% (3.5% with mortgage deduction, even more valuable because we're self-employed so it reduces our SE income as well). We're earning 7-8% on the brokerage account. We take out enough from that account each month to pay the actual mortgage payment. When the mortgage is paid for, we'll still have the principal, and the principal is also growing (more slowly than if we were reinvesting it of course, but still growing). If we'd just bought our house for cash, it would be locked up in bricks and mortar. Make your money work for you.
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Old 07-24-2011, 05:56 PM   #11
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Actually, this thread is unusual in that the "I paid off my mortgage for peace of mind and I sleep at night better than ever" folks are conspicuously absent.
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Old 07-24-2011, 08:08 PM   #12
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Actually, this thread is unusual in that the "I paid off my mortgage for peace of mind and I sleep at night better than ever" folks are conspicuously absent.
I paid off my mortgage for peace of mind, and I sleep at night better than ever.

Feel better now?

I paid mine off as early as possible (within 4 years), by putting every cent I could scrape together into the mortgage immediately. I didn't have to look for another place to put that money, at all. The money has a much greater effect earlier than later.
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Old 07-24-2011, 09:10 PM   #13
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I do feel better now and can sleep well tonight.
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Old 07-24-2011, 10:13 PM   #14
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Ric Edelman has a good read and DVD titled 10 great reasons to own a long term mortgage.
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Old 07-24-2011, 11:23 PM   #15
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Actually, this thread is unusual in that the "I paid off my mortgage for peace of mind and I sleep at night better than ever" folks are conspicuously absent.
Oh, great, that didn't last long.

When we all first started this debate, mortgage interest rates were 6-7%. Been a lot of changes since then...
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Old 07-25-2011, 05:21 AM   #16
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Careful.... several people on this thread are describing different situations in response to the OPs question. How can that be? Well, you described your situation that perhaps turned out ok or perhaps the outcome is still in the future (not done yet). Is your situation exactly like the OPs? All of it.. not just the fact that there is a mortgage and some sort of savings going on! All of your personal circumstances?


Using debt to purchase a house is common. THe most common reason is that people do it because they cannot afford to purchase the house with cash.


Doing that and saving for retirement along the way is common. I did it. There was some risk involved. But I felt the risk was acceptable given "Our Specific" circumstances.


I could not speak for other people's circumstances and whether or not they should do it. People are often at different stages of life with differecnt circumstances.


The OP should look at Milevsky's book... "Are you a Stock or a Bond". It does not cover all of the life risks that could mess them up... but it does some of them and puts across a concept that he needs to understand. That concept... there is risk in assuming too much about their future situation and that it will be the same as their situation today!!


Debt presents risk for a family. Make sure you understand all of the risks! Many of which are life events that may or may not have anything to do with market returns... but add market returns to it and the risks compound.... especially when one understands that returns and growth are correlated to positive and negative economic events.


Just look at what happened over the last 6 to 8 years. Overvalued house, using the mortgage as leverage, severe recession hits, stock market tanks (possibly freak out and take the money out of the market), then a job loss...


The OP would be wise to identify their specific risks in the context of their situation. What will you do if something does not work out as planned!


Also... keep in mind may people on this forum will give an opinion. That does not mean it is sound advice. Caveat Utilitor!
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Old 07-25-2011, 06:38 AM   #17
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Actually, this thread is unusual in that the "I paid off my mortgage for peace of mind and I sleep at night better than ever" folks are conspicuously absent.
Well, DW/me did - but that was at another time (with much higher interest rates) and the goal to become note/mortgage free before retirement.

We paid off our 30-year note in just over 5 years (6.875% rate) and "saved" (IOW, foregone interest that we would not have to pay) of $125k; actually around the $150-60K mark, since we would have had to pay taxes on our earnings, to pay that interest.

We have no regrets as to what we did at that time, but realize that today things are different, with different "possibilities".

BTW, our two previous notes/mortgage were at 10.0%, which was much better (believe it or not) than the 18%+ rates of the 70's.

And yes, we do sleep better at night, being debt free ...
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Old 07-25-2011, 07:01 AM   #18
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I'm sleeping well and I paid off two mortgages.
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Old 07-25-2011, 08:24 AM   #19
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Debt presents risk for a family. Make sure you understand all of the risks! Many of which are life events that may or may not have anything to do with market returns...
Just so I understand--in what type of "life event" is it riskier to have a fixed rate mortgage as well as sufficient money to pay it off, rather than having a paid off house? I can think of many cases where it's riskier to have a paid off house and lower savings.
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Old 07-25-2011, 08:39 AM   #20
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I can think of many cases where it's riskier to have a paid off house and lower savings.
Savings - yes.
Investing - no.

One must measure market risk and how it affects their own situation. Everybody is different.

I'll give you an example. We built our current (retirement) home in 1994. During the period of 1994 through the end of 1999 (when we paid it off), the market was in a go-go mode, as you are probably well aware.

While others were dumping more into the marketplace (and even taking equity out of their homes, to invest), we just plodded along and put our excess dollars (e.g. after our 401(k)/IRA contributions) toward the principal.

Come the end of 1999, we were debt free but "lost out" on the run-up of the market.

Guess what happened shortly after?

I'll admit, it could have gone the other way and we could have been kicking ourselves by not investing more at the time. As it turned out, it was one of the best financial moves we ever make. We saved the "foregone interest payments", along with being in a better situation overall on the equity side of our balance sheet, with the downturn.

Sometimes you can't beat dumb luck, but IMHO it's a good thing to consider the possibilites and the impact to you (and your family's) lifestyle rather than just count on shooting for the stars.

Our actions reflect our risk acceptance; that is while we kept investing in the market, we also reduced our debt at the same thing. Rather than "bet" on one over the other, we just did a little bit of both.

Again, that was another time, but I just mentioned it as a real life example of what happened in our past...

I won't argue the point of savings vs. note/mortgage debt (at a low interest rate), but I don't think that is what the thread is about. I believe (and I could be wrong - again) is the discussion of investing vs. note/mortgage debt. I believe the OP is asking the question of investing vs. paying off (not savings vs. paying off).

BTW, in early 2000 (after we paid off the note/mortgage) we started dumping the normal monthly payments/extra principal payments we made in the 90's run-up into the market - resulting in "cheap buys". That was one of the major "luck factors" that allowed us to plan for a retirement much earlier than we thought we could (again, dumb luck...)
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