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Some opinions, please, re: mortgage prepayment
Old 12-23-2009, 08:44 AM   #1
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Some opinions, please, re: mortgage prepayment

I just really need some opinions on this because I just keep going round and round in my head. Here is our situation as a 35 year old married couple:

Assets:
--Approx $1M in a well-diversified 80% stock/20% bond portfolio at Vanguard
--Emergency fund $20,000 in CD ladder
--$95,000 in 529 for our one nearly 4 year old daughter (no plans for more children)

Liabilities:
$295k on a 5.25% 30-year fixed mortgage with 29 years left

Income:
combined salaries: $94,000/yr
annual gift from parents: approx $47,500/yr

Contributions:
--Max out 401(k) - $16,500
--Fully fund Roth IRAs for me and hubby - $10,000
--Hubby has no retirement plan at work, unfortunately

We usually have about $10,000 annually "left-over." So my question is should I pre-pay the mortgage? Here are my thoughts:

Pros:
--If we prepay $10,000/yr, we will have it paid off by the time my daughter enters college, thus allowing us to supplement her tuition, if necessary, with cash flow.
--After daughter finishes college, we can think about retiring early (in our 50s) and with no mortgage payment. I don't like the idea of having to generate an extra $1,700/month in income from our investments until we are 65 and the mortgage is paid off.

Cons:
--We are 35 years old and our savings rate is still really important. That $10,000 will have about 20 years to grow if we invest it yearly in our taxable account.
--The rate on our mortgage is low (5.25%), but our tax bracket is also pretty low (15%) so we don't get too much savings from the deduction. Our itemized deductions are only about $9,000 more than the standard deduction,.

Any thoughts? From people who have been there/done that? Thanks so much for any input. Like I said, I am really stuck on this.
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Old 12-23-2009, 08:48 AM   #2
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Sirion, this subject is one of the most frequently debated topics on the forum. See this FAQ for many threads on the subject.

My advice: do whatever makes you feel good.
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Old 12-23-2009, 08:53 AM   #3
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Thank you for the link. I will get started by reading those threads. I suppose, like many things, there is no right answer.
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Old 12-23-2009, 08:58 AM   #4
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Quote:
Originally Posted by sirion View Post
I suppose, like many things, there is no right answer.
You got it.
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Old 12-23-2009, 09:18 AM   #5
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Also a good summary here: Paying down loans versus investing - Bogleheads

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Old 12-23-2009, 10:38 AM   #6
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I'm trying to run the scenarios through FireCalc, as the threads suggest, but I can't figure out how to do this type of calculation.

I'd need expenses of $70,000 for the first 10 years of retirement, which drops down to $50,000 after the mortgage is paid off. Is there a way to do that?

******

Later, I figured out only to run for the first 10 years of retirement. I got 100% success both ways.

With mortgage: Avg bal $2,451,180
W/O mortgage: Avg Bal $2,303,322

Guess what?? It really doesn't matter much at all what I do.
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Old 12-23-2009, 10:56 AM   #7
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I'd need expenses of $70,000 for the first 10 years of retirement, which drops down to $50,000 after the mortgage is paid off. Is there a way to do that?
Yes.

If you make a small donation to FIRECalc (click the "resources" link) you can sign in and take advantage of a couple of additional features. One of these is the ability to enter manual spending changes on the Spending Models tab.
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Old 12-23-2009, 11:16 AM   #8
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Sirion,

you two are certainly well on your way to an early FIRE date.

The debate rages on about prepaying a mortgage. On one side we have the peace of mind of not having a mortgage over your head during retirement. On the other side we have the math that basically says with the tax deduction (which gets your interest down to about 4%) you are better off not prepaying if you think that over the term you will have a better return investing the money (4% annual return average over 29 years is not a high hurdle).

A compromise which might give you some of the benefits of both....Pay an additional $400 per month out of your leftover $10k to the mortgage. Invest the rest. This would have the mortgage paid off by 2028 when you will be in early 50's just in time to FIRE!
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Old 12-23-2009, 11:25 AM   #9
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Thank you all for your thoughts and for not beating me up for re-hashing a much hashed topic. I've been reading the old threads and thinking and thinking and I still don't know what to do. I'm glad FireCalc says it doesn't really matter.
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Old 12-23-2009, 11:26 AM   #10
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Yes.

If you make a small donation to FIRECalc (click the "resources" link) you can sign in and take advantage of a couple of additional features. One of these is the ability to enter manual spending changes on the Spending Models tab.
Thank you for the tip. I will make a donation because I've been meaning to do that anyways!

****

Donation made!
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Old 12-23-2009, 11:28 AM   #11
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Yes.

If you make a small donation to FIRECalc (click the "resources" link) you can sign in and take advantage of a couple of additional features. One of these is the ability to enter manual spending changes on the Spending Models tab.
Just a point of order:

Now that firecalc is owned by a profit-seeking organization rather than an altruistic individual, this is not really a "donation" any more. Lets call a spade a spade: this is fee for service.
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Old 12-23-2009, 11:35 AM   #12
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This seems to be a personal decision and everyone has their own opinion. So here's mine...

With the size of portfolio you already have, and the growth it will expect, your savings are in great shape. The biggest obstacle to you being FI is the monthly level of fixed expenses. Knocking off (or at least knocking down) the mortgage would be my first priority were I in your situation. With lower monthly costs, and the portfolio you already have, you will have lots of freedom in the future to do what you want - be that work, retirement, semiretirement, volunteer work, travel, etc, especially if you aren't tied to a big monthly payment.
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Old 12-23-2009, 12:05 PM   #13
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Quote:
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If you make a small donation to FIRECalc (click the "resources" link) you can sign in and take advantage of a couple of additional features. One of these is the ability to enter manual spending changes on the Spending Models tab.
All donations are still be routed to Dory. At some point in the early part of the New Year we will remove the donation option (sorry Dory) and open up all the features to everyone for FREE (because I am a profit-seeking organization rather than an altruistic individual).
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Old 12-23-2009, 12:09 PM   #14
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(because I am a profit-seeking organization rather than an altruistic individual).
Presumably extra traffic drives more value than the piddling stream of "donations," so your self-characterization appears accurate.

Thanks for the clarification. Kudos on offering full functionality free of charge.

Signed,

One of your Content Generators (an altruistic individual AND profit seeking organization)
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Old 12-23-2009, 12:34 PM   #15
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Presumably extra traffic drives more value than the piddling stream of "donations," so your self-characterization appears accurate.
If that drives a lot of extra traffic, great. If not, no problem. Really, the truth is I am lazy and don't want to have to manually upgrade accounts after donations. I guess that would really make me a lazy individual who is being altruistic even though I own a profit-seeking organization. Isn't America great. A symbiotic relationship where lazy people can give away things free and still try to make a profit!
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Thanks for the clarification. Kudos on offering full functionality free of charge.
You're welcome. Lots of people dislike the ad supported internet but it's been the catalyst for many innovations and free services for people.
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Old 12-23-2009, 12:39 PM   #16
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Andy, FWIW, I am not really interested in pulling your tail. Happy that the donation issue is cleared up, since the appearance of calling something a donation when it is not bothers me. Ad supported internet is what it is, and has indeed spurred a lot of things on. Its a mixed blessing, like most things, but is hardly likely to go away any time soon so there is no point worrying about it anyway (much like the tax code). Keep up the good fight with the spammers and hackers.
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Old 12-23-2009, 12:45 PM   #17
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Basically the decision is an emotional one. We like being able to say "We don't owe anybody a damn thing!

That's worth a lot to us. YMMV.
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Old 12-24-2009, 08:16 AM   #18
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Sirion, if I can add two things which put me over the edge when I decided to pay off my mortgage back in 1998:

(1) I had a 1-year ARM and the interest rate was rising after I did a refi in 1992. It had not returned to the pre-refi years but had gotten about halfway there.

(2) As my mortgage interest deduction dropped in the mid-1990s, I saw that it was barely above the standard deduction for my state (not federal) taxes. This told me that paying off the mortgage would not cost me anything in state income taxes because the itemized deduction would replaced by the "floor" standard deduction. So the interest savings on the state side was pure.
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Old 12-24-2009, 09:13 AM   #19
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Sirion....

There is a two edged sword that I see.... you get over $47K from parents!!!

That either means they are rich, and you might be in line to get a big estate payment later in life... OR, they are spending a lot of money on you and will have nothing when they go...

But it also seems like most of what you have now is because of them (savings I mean)... If they have been doing this for 12 years, that is almost half of your savings... and I would assume the other half is from earnings...


SOOO, to my point.... what would happen IF you did not get this money Do you have enough to live on with your own salaries? It looks close to me... If so, then maybe paying down the mortgage NOW is easier with the extra cash you receive and if it stops and you are in a cash flow problem (because you don't want to touch savings), then you can refinance and spread out the payments...


But I still think your 'crisis point' is not the mortgage, but if your cash flow can be interrupted....
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Old 12-24-2009, 02:24 PM   #20
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One general comment:

Public opinion on this one wavers with the tides of the market. When the market was going up up up a few years ago, the reaction to "pay off your mortgage?" was "are you crazy?" With the recent downturn and job losses, the reaction is more along the lines of "hmmm, maybe it is a good idea to pay the thing down."

I'd tell you what I'm doing but I think the decision is very circumstance-driven, and mine don't match yours at all.

Good luck with the decision,

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