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Old 03-15-2015, 09:43 AM   #21
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AAPL is up only 13% since then, and that will be taxed as ordinary income since short term gain. Sounds like you could have nearly paid it off before you bought AAPL too!
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Old 03-15-2015, 10:06 AM   #22
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I think differently about my home mortgage than about mortgages on investment properties. That's partly because I live in Canada, where home mortgage interest is not tax deductible. I have had two home mortgages, both of which I have paid off within two years. Result: nice feeling of security, increased cash flow.

For my investment properties, the mortgage interest is tax deductible. At the beginning, most of the mortgage payment consists of interest, so the after tax mortgage rate is significantly lower than the posted rate. Later on, the interest, and the corresponding tax advantage, are less important.

Right now I have two small mortgages on rental properties at 4.1-4.2%. The effective after-tax rate is about 3.75%. I am looking around for fixed income investments at that rate, and I can't find any. So I just put some spare cash against one of those mortgages (the one with the higher rate) and took 1.5 years off the amortization period. Effectively, I bought myself some future income. It's predictable, simple and risk free. I think that's a good investment. Now, at the end of the term, I will be negotiating for a new, lower mortgage rate. If the new rate is comparable to other fixed income rates, there will be no advantage to paying down those mortgages further. It's just an investment.
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Old 03-15-2015, 11:56 AM   #23
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AAPL is up only 13% since then, and that will be taxed as ordinary income since short term gain. Sounds like you could have nearly paid it off before you bought AAPL too!
I bought it in Jan 2014 ~ $72 spilt adjusted, a 76% gain.
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Old 03-15-2015, 12:21 PM   #24
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I am happy to celebrate with you that you reallocated some of your assets into a real estate percentage. Party on.
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Old 03-15-2015, 01:58 PM   #25
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I think differently about my home mortgage than about mortgages on investment properties. That's partly because I live in Canada, where home mortgage interest is not tax deductible. I have had two home mortgages, both of which I have paid off within two years. Result: nice feeling of security, increased cash flow.

For my investment properties, the mortgage interest is tax deductible. At the beginning, most of the mortgage payment consists of interest, so the after tax mortgage rate is significantly lower than the posted rate. Later on, the interest, and the corresponding tax advantage, are less important.

Right now I have two small mortgages on rental properties at 4.1-4.2%. The effective after-tax rate is about 3.75%. I am looking around for fixed income investments at that rate, and I can't find any. So I just put some spare cash against one of those mortgages (the one with the higher rate) and took 1.5 years off the amortization period. Effectively, I bought myself some future income. It's predictable, simple and risk free. I think that's a good investment. Now, at the end of the term, I will be negotiating for a new, lower mortgage rate. If the new rate is comparable to other fixed income rates, there will be no advantage to paying down those mortgages further. It's just an investment.
+1
Plus in Canada, the MER (Management Expense Ratio) rates are often 2% on many of the mutual funds. Meaning other options are not quite as good.
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Old 03-15-2015, 02:08 PM   #26
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+1
Plus in Canada, the MER (Management Expense Ratio) rates are often 2% on many of the mutual funds. Meaning other options are not quite as good.
Yabbut, I don't pay those MERs anyway.
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Old 03-15-2015, 03:44 PM   #27
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I agree with the above and that is close to what I did... I did a cash out refinance at 3.375% and invested the proceeds from the refinance. While I would not do it at 6%, 3.375% was too good to pass up... plus I reduced my rate on then existing mortgage by 1.425%.

PB,

It seems to me that it's a good bet that we would do better than 3.375% in investments, so that's a reasonable choice. But it also seems like the proper comparison is to risk free investments like parts of your fixed income portfolio. If you used part of your fixed income portfolio to pay off the mortgage isn't that the same as getting 3.375% risk free? Which would be a better deal?


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Old 03-15-2015, 04:29 PM   #28
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PB,

It seems to me that it's a good bet that we would do better than 3.375% in investments, so that's a reasonable choice. But it also seems like the proper comparison is to risk free investments like parts of your fixed income portfolio. If you used part of your fixed income portfolio to pay off the mortgage isn't that the same as getting 3.375% risk free? Which would be a better deal?


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I understand your point of view but do not agree because my AA didn't change one iota when I refinanced and put the proceeds to work in my investments nor would it change if I were to pay off my mortgage, so for me the relevant comparison is to the return of the pot as a whole since the refinance proceeds are effectively invested in a 60/40 portfolio.

For the same reasons when evaluating an investment decision in finance we use weighted average cost of capital rather than incremental cost of capital. Since I'm a total return investor, its all one pot... I do not try to cash flow match in any way shape or form.

I am accepting the risk that the investment results on the proceeds may be more volatile and might even underperform the 3.375% I owe on the mortgage and it might end up being a bad decision, but as an averages player who is accepting of risk I'm playing the averages with my eyes wide open.
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Old 03-15-2015, 06:41 PM   #29
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I understand your point of view but do not agree because my AA didn't change one iota when I refinanced and put the proceeds to work in my investments nor would it change if I were to pay off my mortgage, so for me the relevant comparison is to the return of the pot as a whole since the refinance proceeds are effectively invested in a 60/40 portfolio.



For the same reasons when evaluating an investment decision in finance we use weighted average cost of capital rather than incremental cost of capital. Since I'm a total return investor, its all one pot... I do not try to cash flow match in any way shape or form.



I am accepting the risk that the investment results on the proceeds may be more volatile and might even underperform the 3.375% I owe on the mortgage and it might end up being a bad decision, but as an averages player who is accepting of risk I'm playing the averages with my eyes wide open.

Thanks!


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Old 03-15-2015, 09:53 PM   #30
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Thanks!
I'll echo what pb4uski said, and throw in another way to look at it -

If you want to consider the risk-free aspect of the mortgage payoff in that way, then it would follow that you would not have a penny invested in the stock market until after the mortgage was 100% paid off, right?

But that would keep a lot of people out the market for a long time, and that would likely put them way behind.

I think it's fair to say that the risk-free aspect of a mortgage pay-off is a kind of anomaly. You really can't duplicate it, other than maybe if Govt bonds went up higher than your mortgage rate. So rather than try to replace it with an equivalent, think of it as pb4uski described - an overall risk profile.

And again, it doesn't make either decision right/wrong, but I still fail to understand the celebration of the pay-off itself, for all the reasons mentioned over the years.

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