Payoff mortgage from investments?

[OddGuy]

Example:

You have money in equities that could wipe clear your mortgage.

Mortgage is under 4% and interest is tax deductible.

Seems to make sense to keep the mortgage if your risk tolerance allows you to attempt an average of at least 4% return on investment for the remaining life of the loan.

What am I missing?

 

[Sunset]

Your mortgage would have to be pretty high or have a lot of other things to itemize on the tax return, since everyone gets $13,850 standard deduction (single person). A couple standard deduction is twice that.
Most folks now take the standard deduction for that reason.
So the mortgage interest is often not deductible for that reason.

Then compare the mortgage interest example 4% , you need to earn 4% * 1.20 (as taxes have to be paid) = 4.8% on the cash to pay the mortgage with the earnings.

If you have a lower rate mortgage, the numbers are more likely to work.

 

[Montecfo]

Not missing anything. You have it right.

One thin often missed though is you want to achieve loan rate plus a margin. Paying off mortgage is a risk-free return. You want to achieve on average say a point higher to justify the risk of loss.

Another thing to look at is your deductible interest versus standard deduction. How much of your interest, if any, is not giving you a tax benefit?

Also, the utility of having a higher investment balance comes into play.

I have a 2.49% mortgage and am 11 years in. It is a small one so deductions.

No plans to pay that off with inflation continuing to diminish the value of mortgage dollars. That would be my standard view right now for virtually any mortgage holder until inflation comes down further. Keep it in place.

 

[Montecfo]

Then compare the mortgage interest example 4% , you need to earn 4% * 1.20 (as taxes have to be paid) = 4.8% on the cash to pay the mortgage with the earnings.

If you have a lower rate mortgage, the numbers are more likely to work.

If you are comparing taxable investments to deductible mortgage the taxes may be a wash. But there are taxes on both sides.

A 4 percent mortgage costs 3.2% after tax benefit (using your 20%). A 4% taxable MM account also yields 3.2% after taxes.

But a related point is if you are liquidating taxable investments, there would typically be a tax cost to even freeing up the funds to pay down mortgage.

 

[Sunset]

If you are comparing taxable investments to deductible mortgage the taxes may be a wash. But there are taxes on both sides.

A 4 percent mortgage costs 3.2% after tax benefit (using your 20%). A 4% taxable MM account also yields 3.2% after taxes.

But a related point is if you are liquidating taxable investments, there would typically be a tax cost to even freeing up the funds to pay down mortgage.

If you can deduct the mortgage interest, then yes the tax benefit means less earnings needed from the investment. but many folks cannot as the standard deduction is worth more.

 

[Sunset]

There is another possible reason to pay off a mortgage, if a person has a bunch of investments and earns very close to the IRMAA amount, and is age 63+, then paying off a huge mortgage will cause the investments to earn less giving more headspace in case of surprise extra earnings.
While also reducing the cashflow need.

 

[COcheesehead]

OP is not missing anything. I have an under 3% mortgage that I will likely never pay off short of selling the house. With donations, property taxes, etc, I can also deduct the interest expense. I am living in my house for free.
My muni - tax free - ladder throws off 4.5%+ yield and my taxable closer to 6%.

 

[qwerty3656]

I'm in the keep the mortgage camp. There is a saying that inflation favors borrowers.

 

[pb4uski]

Example:



You have money in equities that could wipe clear your mortgage.



Mortgage is under 4% and interest is tax deductible.



Seems to make sense to keep the mortgage if your risk tolerance allows you to attempt an average of at least 4% return on investment for the remaining life of the loan.



What am I missing?

If you are 100% equities then you have it right, but if you did sell equities to pay off your mortgage then you overall financial risk would be lower because your withdrawals would be lower

Now OTOH if you have a combination of equities and fixed income and all or part of the fixed income is yielding less than 4% then you could sell some fixed income and use the proceeds to pay off the mortgage then, importantly, adjust your target AA to reflect the change.

 

[ducky911]

I enjoy the feel of no mortgage. I lowered my bond percentage.

 

[karen1972]

I have a 2.875% mortgage, I'm never paying a penny extra on. Granted our mortgage isn't huge, less than 15% of our invested assets so I'm not stressed about how i'd pay it off either.

1. its a hedge against inflation
2. Paying it off would mess with my plan as I don't want to dip into my IRAs until 59.5 which is 9 years away, and paying it off would drain the brokerage enough that would be forced to happen

 

[kblagron]

I was buying a house back in 2007 and went through this decision - a bit different, but I figured the only way it would be a bad call was if I made 10% in my investments based on the interest rates at the time. Probably the best (luckiest) thing I did was use that money to purchase the house because the market crashed in 2008.

IMO, the feeling that you are debt free also makes a big impact on your outlook as well.

 

[DrRoy]

If you are making above the mortgage rate on the investments, then keep the loan. Especially if you are itemizing the interest for taxes.