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Pay off mortgage to protect assets?
Old 07-07-2020, 05:27 PM   #1
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Pay off mortgage to protect assets?

I am selling a small stake of a company I own part of. I will continue working there in management, but as an employee. We will continue to operate independently.

The sales proceeds will be enough to pay off my house, car, and have maybe $10k left over.

Alternatively, I could beef up my emergency fund big time, invest $50k into a taxable account, beef up 529s, and do a bunch of other small things to improve my financial comfort.

I'm leaning towards paying off the house. Why? The purchase agreement includes numerous standard reps & warranties (basically promises the sellers make like the financials are honest, there are no pending lawsuits, etc.) which give the purchaser 12-24 months to go after the sellers in the event of a breach. We are not hiding anything and have been 110% honest from Day 1, but you just never know. Our state doesn't allow home equity in a primary residence to be seized. The other argument is that it's a guaranteed 3.25% return and with stocks at all time highs and bond yields trash, a 3.25% return doesn't seem so bad.

I figure I can use the future cash flow to invest in a taxable account, continue funding 529s, while the buyer's protection period runs out... Right now I pay $1500 but only $1000 goes towards principal. If I pay off the mortgage, I can put $1500 into a taxable account and all $1500 will be used to buy shares.

Am I crazy in looking at things this way? Am I being overly paranoid?
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Old 07-07-2020, 05:43 PM   #2
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In what's more or less a coin flip decision, it seems that you have a tie breaker. If somehow something bad does happen, you'll be very happy to have protected the full house value. In the more likely case where nothing happens, there's nothing to regret about paying off the house. Seems like it'll help you sleep better the next 2 years too.
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Old 07-07-2020, 06:55 PM   #3
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Originally Posted by RunningBum View Post
In what's more or less a coin flip decision, it seems that you have a tie breaker. If somehow something bad does happen, you'll be very happy to have protected the full house value. In the more likely case where nothing happens, there's nothing to regret about paying off the house. Seems like it'll help you sleep better the next 2 years too.
totally agree. pay it off.
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Old 07-07-2020, 07:19 PM   #4
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How long is the remaining length of the mortgage? You've got a good point about a high market and low interest rates. Or if you would just use the sales proceeds to increase your emergency fund or other cash-like accounts. If the mortgage has 15 years left (with that interest and principal it sounds shorter) I would prefer a stock-heavy investment that would have a good shot at beating 3.25% over the long term. Especially when that 3.25% target includes inflation. If it's closer to 5 years remaining and you don't want a lot of stocks then paying it off looks pretty reasonable.

Given the investment preferences you have outlined and your special liability (how much is up in the air?) paying off the mortgage seems like a reasonable move.
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Old 07-07-2020, 07:55 PM   #5
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How long is the remaining length of the mortgage? You've got a good point about a high market and low interest rates. Or if you would just use the sales proceeds to increase your emergency fund or other cash-like accounts. If the mortgage has 15 years left (with that interest and principal it sounds shorter) I would prefer a stock-heavy investment that would have a good shot at beating 3.25% over the long term. Especially when that 3.25% target includes inflation. If it's closer to 5 years remaining and you don't want a lot of stocks then paying it off looks pretty reasonable.

Given the investment preferences you have outlined and your special liability (how much is up in the air?) paying off the mortgage seems like a reasonable move.
12 years left on a 15 year @ 3.25%, no PMI. We plan to stay in this house at least 2 years (that's at least $12k of interest) but very likely much longer. Right now I'm in my early 30s, our investment asset allocation is about 87% stock / 13% bond.
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