Refi Options?

[stephenson]

Hi All,

Background - married, same age 66 1/2, both in good health, income more than sufficient from military and corporate pensions, dividends, and a few rental properties that are paid for - good shape and very happy we spent 40 years saving and planning for this time. Waiting until 70 for social security. Solid balances at Fidelity and Vanguard where we rolled components of the megacorp 401s, and where our personal IRAs were consolidated.

We purchased a new home in March 2020 - poor timing in some regards, but it’s done and we’re pretty happy in the new house and neighborhood - 15 year, VA at 3.125% with several thousand dollars or credits from the lender that made it a pretty good deal.

We’ve been considering options regarding the loan, including:
(1) refi (local or online)
(2) paying it off (sub options - from A. cash, or B. equity mutual fund sell off)

1. Refi option - local mortgage institutions are quoting 15 year VA refi at 2.25% but with about $8K in closing costs with only minor credit offsets. I know there are many online mortgage lenders, but not sure this would improve either the net rate, or provide credits sufficient to make sense to refi. The difference between 3.125 and 2.25 is about $150 a month = $1800 a year. Figure about four years payback. Unless I can obtain more credits/concessions from lenders, this doesn’t seem to be a great idea.
Question - I know some of you have refi’d online - anyone dealt with circumstances like these? Which of the lenders are sharp and quick with best rates?

2. Paying it off - more complicated as there are more options and sub options
A. pay off from cash
- uses about 70% of our buffer, and we would immediately start trying to build cash back up over time
B. pay off by selling mutual funds in which we invested over the years.
- Anyone who knows of the “Wayback Machine” will also remember the monthly Money magazine with pages of mutual fund ratings and annual growth data
- Over many year we constantly reviewed mutual funds to see which were doing well over various periods of time, then tried to pick based on a non-statistical model (ie - kinda swagged it) to determine what to invest in THAT YEAR - I can hear the tittering about this approach, but we did save and invest - and, while we have liquidated a bit over the years as we needed cash for home medications, most of these fund holdings have simply grown. We did this across taxable money we had saved each year as well as IRAs. We were pretty ignorant, so the overlap is embarrassing, but it was money not spent on new cars, et al.
- IF we chose this option, I would continue my review of each of these 22 holdings (see attached) to determine basis and what capital gains we have paid over the years to determine how much taxes will bite when we sell.
Question - I would, in general want to sell equity funds that are: low performing, high cost, and on which we have paid capital gains over the years to minimize tax hit, right?

So, attached is a list of the funds we still have - I did NOT include individual stocks, or ETFs in the total - and, to be clear, all these are taxable status. Would appreciate pointed or broad thoughts on what you would do in like circumstances - I know there may not be a perfect or even clear answer. For instance what is it worth to NOT have a mortgage loan?

Tried to make this logical, but it still sounds confused ... sorry.

Thanks in advance!!

 

[Another Reader]

Hi All,

Background - married, same age 66 1/2, both in good health, income more than sufficient from military and corporate pensions, dividends, and a few rental properties that are paid for - good shape and very happy we spent 40 years saving and planning for this time. Waiting until 70 for social security. Solid balances at Fidelity and Vanguard where we rolled components of the megacorp 401s, and where our personal IRAs were consolidated.

We purchased a new home in March 2020 - poor timing in some regards, but it’s done and we’re pretty happy in the new house and neighborhood - 15 year, VA at 3.125% with several thousand dollars or credits from the lender that made it a pretty good deal.

We’ve been considering options regarding the loan, including:
(1) refi (local or online)
(2) paying it off (sub options - from A. cash, or B. equity mutual fund sell off)

1. Refi option - local mortgage institutions are quoting 15 year VA refi at 2.25% but with about $8K in closing costs with only minor credit offsets. I know there are many online mortgage lenders, but not sure this would improve either the net rate, or provide credits sufficient to make sense to refi. The difference between 3.125 and 2.25 is about $150 a month = $1800 a year. Figure about four years payback. Unless I can obtain more credits/concessions from lenders, this doesn’t seem to be a great idea.
Question - I know some of you have refi’d online - anyone dealt with circumstances like these? Which of the lenders are sharp and quick with best rates?

2. Paying it off - more complicated as there are more options and sub options
A. pay off from cash
- uses about 70% of our buffer, and we would immediately start trying to build cash back up over time
B. pay off by selling mutual funds in which we invested over the years.
- Anyone who knows of the “Wayback Machine” will also remember the monthly Money magazine with pages of mutual fund ratings and annual growth data
- Over many year we constantly reviewed mutual funds to see which were doing well over various periods of time, then tried to pick based on a non-statistical model (ie - kinda swagged it) to determine what to invest in THAT YEAR - I can hear the tittering about this approach, but we did save and invest - and, while we have liquidated a bit over the years as we needed cash for home medications, most of these fund holdings have simply grown. We did this across taxable money we had saved each year as well as IRAs. We were pretty ignorant, so the overlap is embarrassing, but it was money not spent on new cars, et al.
- IF we chose this option, I would continue my review of each of these 22 holdings (see attached) to determine basis and what capital gains we have paid over the years to determine how much taxes will bite when we sell.
Question - I would, in general want to sell equity funds that are: low performing, high cost, and on which we have paid capital gains over the years to minimize tax hit, right?

So, attached is a list of the funds we still have - I did NOT include individual stocks, or ETFs in the total - and, to be clear, all these are taxable status. Would appreciate pointed or broad thoughts on what you would do in like circumstances - I know there may not be a perfect or even clear answer. For instance what is it worth to NOT have a mortgage loan?

Tried to make this logical, but it still sounds confused ... sorry.

Thanks in advance!!

I think you can get an equal or better rate with much lower fees by avoiding the VA mortgage and going with a conventional loan. Check Aimloan.com for their rates and then shop around. I would get the mortgage in your shoes.

 

[38Chevy454]

You need to figure out the end goal. Is it to save money by net investment profits greater than cost of mortgage? Or is it preservation of capital? I am not sure what you are striving for.

It seems your finances can pay it off if wanted. Might deplete cash for a while, but you are good with mortgage included, so less the mortgage you can replenish easily.

Just my thoughts, but having no mortgage is very nice. Brings down your fixed expenses, and you can adjust discretionary as you wish.

 

[troutnut1]

The major advantage of a VA loan is being able to get a 100% loan, not the interest rate. Provided you have equity, and decent credit, be sure and check out conventional refi options. Loans may be had with lots of closing costs, medium closing costs, or no closing costs. Which one you get or want is dependent upon whether you need a loan with a less than market rate, a market rate, or above market rate. If the loan is above market the lender can recover the costs from the purchaser of the loan instead of you.

Which one you get (if any) depends upon your personal sitauation and how certain you are that you will be there forever, and that rates will not decrease further.

I favor the paid off house. But I always get a lot of grief over that here by one or two people with a love of mortgages. The question I always ask myself is “having a paid off house, would I mortgage it to invest in the stock market (or whatever else I wanted to do with it).”

Your milage may vary...

 

[pb4uski]

What is your overall AA... stocks, fixed, cash? Sounds like 100% stocks other than a cash buffer of 142% of mortgage? And what is that cash earning?

About a year ago I had 5% of my portfolio in cash that was earning about 1.7%. Similiarly, I had a 3.375% mortgage that was about equal to 5% of the portfolio. I decided to eliminate the cash and pay off the mortgage, which reduced our annual withdrawals by about 18%. Since the little of that cash that is remaining is now earning 0.6%, I think it was a good trade.

Also, if you no longer itemize deductions like many then it is even better.

Finally, if after your pensions and dividends you still have room in the 0% capital gains tax bracket (that's $104,800 of total income in 2020 for a married couple) then you should be filling that headroom with 0% capital gains (which could be another source of funds to pay off the mortgage).

Not enough to go on.

 

[stephenson]

Another Reader - the VA loan in March was less expensive than any other due to aggressive credits by the lender. Thanks for the AimLoan reference.

454 - not exactly preservation of capital, more I don't like paying over market rate and also wondering whether I really need to be paying for a mortgage at all

troutnut - all those loans were available, but VA was cheapest way at the time due to credits from the lender. Didn't actually "need" the loan, but it was favorable due to low rate and really low closing costs.

pb4 - in taxable, outside the cash, close to 100% stocks and equity mutual funds (some with bond components). And that cash is earning almost nada right now (a major difference from years past) - so certainly would save close to 3% on the mortgage amount if paid off with near zero interest cash. The payment would enable me to itemize, where I could not last year. We're in the 15% capital gains bracket.

Broadly, after having loans for most of my life, I really like the idea of not having loans, but I don't want to do anything silly while getting rid of a pretty good interest rate on my family home.

And, as a BTW I forgot to mention, we did convert our last house to a rental - it had a 50% loan on it at around 3% (got a mortgage on that one as we were moving and in between a couple of other properties), but since this had been part of the plan we let it roll. Other rental properties do not have loans.

And, while not asked, after putting together the list of MFs yesterday, I really dislike some of the funds for high expenses and low growth (relative statement), but understand some being that way - like the euro market funds.

Please ask more questions - would be glad to answer!

 

[pb4uski]

Don't you mean to say enable you to use the standard deduction rather than itemize?

If you do use cash to pay off the mortgage, you'll want to change your target AA so that you don't negate the benefit the next time you rebalance... I went from a target 60/35/5 AA (stocks/fixed/cash) to a target 65/35/0 AA.

Technically, it probably should have been to 63.2/36.8/0 but I rounded to the nearest 5% increments.

 

[OldShooter]

... I would continue my review of each of these 22 holdings (see attached) to determine basis and what capital gains we have paid over the years to determine how much taxes will bite when we sell.
Question - I would, in general want to sell equity funds that are: low performing, high cost, and on which we have paid capital gains over the years to minimize tax hit, right? ...

With respect, how did you get into all those funds? There is not a single one there that, absent tax considerations, I would not dump in a New York minute. They are uniformly high cost and almost 100% stock pickers -- a known losing strategy. Your biggest holding, Kaufman, has an ER of 2.2%. It's amazing to me that anyone has the cojones to gouge people like that in this day and age.

My guess is that with the huge array of high-cost funds, your total portfolio will be highly correlated to total US and international markets and be underperfoming by at least 2-3%, maybe more. IOW you probably own almost everything and are paying dearly for the privilege.

Re selling low performing, all of these will be low performing over the long term just due to expenses and strategy, but in the short term (5 years or less) performance is not predictive anyway. So I wouldn't look to that particularly as a selling criterion.

Re your having paid capital gains in the past, that is irrelevant and anyway it is sunk cost. So ... not a criterion.

The only thing I would look at is capital gains in each fund, managing the sales to suit your tax situation but with the resolve to get to a very simple, low cost, portfolio within three years or so. Expense ratios on US total market funds should be under 10bps and on international total market maybe 20-40bps. Fidelity has funds with zero expenses.

Sorry to be harsh, but someone has sold you a bag of junk. Unfortunately it is completely legal for a Series 7 "registered representative" to do that. If the person selling you these funds was a fiduciary (like a registered investment advisor), then I would look for recourse. No fiduciary can justify selling funds with 12b-1 fees. If you got gouged for any loads that is even worse.

I'll also suggest that you look at my post #7 in this thread: https://www.early-retirement.org/forums/f28/asking-for-mutual-fund-advice-for-iras-106858.html and read Morningstar on fund fees: https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure.html

 

[copyright1997reloaded]

Hi All,

We purchased a new home in March 2020 - poor timing in some regards, but it’s done and we’re pretty happy in the new house and neighborhood - 15 year, VA at 3.125% with several thousand dollars or credits from the lender that made it a pretty good deal.

We’ve been considering options regarding the loan, including:
(1) refi (local or online)
(2) paying it off (sub options - from A. cash, or B. equity mutual fund sell off)

I'm assuming you want to pay it off because you believe the rate is high?

Why is this an all or none question? That is, isn't there a third option: Pay off some of the loan while leaving a large safety margin in terms of cash.

 

[stephenson]

"Don't you mean to say enable you to use the standard deduction rather than itemize?"

Sorry - having the payment puts us into being able to itemize - last year we did not have this payment so could not itemize.
+++++
"With respect, how did you get into all those funds?"

Splained in the intro - "Over many year we constantly reviewed mutual funds to see which were doing well over various periods of time, then tried to pick based on a non-statistical model (ie - kinda swagged it) to determine what to invest in THAT YEAR - I can hear the tittering about this approach" - and, then just went to work, raised kids, got too busy, moved a few times, etc.

Having paid the capital gains means I would have far less to pay than with selling a stock or ETF I had held without paying CG, right? So, if I determine which ones to sell based on which I have paid the highest percentage of CG, I will have less tax bite in the year of sale?

BTW - yeah, I now get the point of index vs actively traded funds - I didn't way back - like when I was 25 and flying airplanes out of silly places around the world, without the internet, without access to info ... yeah, just an excuse . And, it was me who sold me the bag of junk, no sales folks involved, just lack of education and information. In my defense, I did weight which of hundreds of funds were doing well over the various periods provided by a couple of magazines, and did not chose based on that current year.

So, core issue was whether to sell the low performing, high ER equity funds to pay off the 3.25% mortgage? And, add to that what could I reasonably do to move out of some of these funds into low ER, index funds?

 

[stephenson]

I'm assuming you want to pay it off because you believe the rate is high?

Why is this an all or none question? That is, isn't there a third option: Pay off some of the loan while leaving a large safety margin in terms of cash.

It certainly doesn't have to be and all or nothing - I understand the principle behind paying down loans early. Perhaps it makes sense to approach over a three year period or so.

 

[OldShooter]

... Over many year we constantly reviewed mutual funds to see which were doing well over various periods of time, then tried to pick based on a non-statistical model (ie - kinda swagged it) to determine what to invest in THAT YEAR - I can hear the tittering about this approach" - and, then just went to work, raised kids, got too busy, moved a few times, etc. ...

I don't think anyone would criticize you for that approach. DOL says there are something like 950K people in the investment business and a huge fraction of them work to convince investors that track record matters. So you were convinced. Lesson learned. Life goes on. I apologize if I came across as insulting, which I suppose I probably did.

Re "went to work, raised kids, got too busy" I think you would really enjoy a book I recommend a lot: "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (He just released a new book. Read the original book first then consider the second."

...Having paid the capital gains means I would have far less to pay than with selling a stock or ETF I had held without paying CG, right? So, if I determine which ones to sell based on which I have paid the highest percentage of CG, I will have less tax bite in the year of sale? ...

I'm 99% sure this is not right but at this point we have all our money in Roths and tIRAs, so we haven't paid capital gains taxes in years. So wait for others' comments.

... I did weight which of hundreds of funds were doing well over the various periods provided by a couple of magazines...

Yes, the magazines are maybe the worst for misleading people about the value of prior results. My guess is that the advertising sales department has a heavy thumb on the measuring instruments.

... So, core issue was whether to sell the low performing, high ER equity funds to pay off the 3.25% mortgage? And, add to that what could I reasonably do to move out of some of these funds into low ER, index funds?

I wouldn't even look at performance history except for tax considerations. I would sort your table by expense ratio (ref that Morningstar report I linked) and sell from the top rate to the bottom. Take a look at and understand the various tax rules on capital gains and optimize taxes to the extent possible. Check any state tax rules, too.

Are you an ATP? Maybe on a layover you can play with Portfolio Visualizer (https://www.portfoliovisualizer.com/). Enter your equity portfolio (adjust % allocations to total 100) and compare with 2-fund simplicity. Like VTSMX and VTIAX in a proportion similar to your current US/International proportions. See if my guess is right that they will be very, very similar. That site is great for comparing the behavior of alternative portfolios, but since it's based on history it should not be viewed as predictive.

 

[pb4uski]

FWIW, your hodgepodge portfolio seems to have done ok compared to Total Stock. Including all tickers (I fudged a bit since it didn't seem to add to 100%) your portfolio returned 13.14% vs 13.28% fotal Stock for Jan 2011 to Nov 2011. And if I lop off a few tickers to extend the period backwards to Jan 2004, you actually outperformed Total Stock... 9.96% vs 9.64%.

All of that said... way to complicated for me and why have 20 tickers when 1 would do just as good a job. Pare them down as tax considerations allow... start with the smaller ones first and reinvest the proceeds into VTSAX.

https://www.portfoliovisualizer.com...=VTSMX&allocation22_1=19.8&allocation22_2=100

https://www.portfoliovisualizer.com...l22=VTSMX&allocation22_1=9&allocation22_2=100

 

[stephenson]

pb4, way thanks for running this on PV. I think you left out HACAX at 7.7%, so I added it back and swapped some fund symbols per the software to earlier versions of same to go back further in time. Also, NMANX was 3.2% vs 2.2% so that would get to 99.7% so I added 0.1 to the last three symbols for simplicity sake. Still only got back to 2006, but it is somewhat instructive.

Doesn't look as bad as I thought - great tool, btw, that both you and oldshooter noted. I may do the signup thing.

Can you comment on the tax bite relative to how much I have paid on the reinvested capital gains? How to compute based on purchase NAV, capital gains paid, and selling NAV to understand tax implications?

 

[stephenson]

And, continuing ... I ran KAUFX (1) vs VTSMX (2) - is this possible? Is the data in PV net of fees?

 

[OldShooter]

It's possible. One of the most famously lucky stock pickers was a guy name Bill Miller at Legg Mason. He had like a decade run of beating the S&P and then completely destroyed his portfolio in just two or three years. Statisticians looked at this and calculated that there was about a 17% chance of someone lucking into this and Miller was the guy. https://www.morningstar.com/articles/946982/my-biggest-portfolio-mistake

 

[stephenson]

And, then here is Ultra vs VTSMX ... still showing better results - and, again, can't tell for sure, but this quote from PV seems to point to the data including all ER and costs ... "The results are based on the total return of assets and assume that all received dividends and distributions are reinvested."

So, going back to pb4's assessment - my hodgepodge, even with higher fees has done about the same or better in some cases than a low cost index from Vanguard? And, if I had picked and stayed only with Kaufman, it would be even more of a mismatch?

 

[OldShooter]

And, then here is Ultra vs VTSMX ... still showing better results - and, again, can't tell for sure, but this quote from PV seems to point to the data including all ER and costs ... "The results are based on the total return of assets and assume that all received dividends and distributions are reinvested."

I have always believed that PV's data is good total return data.

I would say that VTSMX comparison says the two funds are close to identical in performance. You can make either one come out ahead by picking your time interval and for sure the future will be different in details.

So, going back to pb4's assessment - my hodgepodge, even with higher fees has done about the same or better in some cases than a low cost index from Vanguard? And, if I had picked and stayed only with Kaufman, it would be even more of a mismatch?

Well my guess was that you had ended up basically owning the whole market; the good news is that those high fees are not hurting as much as I would have expected.

Here is what I got at Schwab tonight, KAUFX vs VTSMX (orange):

Schwab seems to be unusually slow tonight and wife is calling, so I can't do more investigation.

Is it possible that you got your labels reversed?

 

[38Chevy454]

Here's a thought, getting away from the portfolio discussion. BTW I agree on simplifying your portfolio to broad market low fee index funds.

On the mortgage, and taking std deduction vs itemized. Here is my idea: take a cash out equity loan on one of paid off rentals, use that cash to pay off personal residence. Take std deduction, but use the rental interest as offset to income on Sch E. So you benefit from lower income from the rentals and no itemizing hassle.

Saves your cash. Although it really could be invested as well for better returns.

 

[stephenson]

Here’s 10 year from market watch ...

 

[Bamaman]

I have two homes that are paid for, and it's sure nice to be without any debts. I like to keep both my life and my business dealings simple.

Simplification also means keeping my investments down to just a few--6 accounts in one place. I just don't want to have so many different investments where I would have to spend my days in my office making decisions. If I wanted to be tied to a phone and a desk, I would have kept working.

I vote for paying off the real estate. Maybe half cash and half selling equities.

 

[stephenson]

Here’s last one ... I’m beginning to feel a bit better ...

 

[pb4uski]

But..... even a broken clock is right twice a day.

Be thankful that a flawed strategy did no harm and move on.

 

[SecondCor521]

Can you comment on the tax bite relative to how much I have paid on the reinvested capital gains? How to compute based on purchase NAV, capital gains paid, and selling NAV to understand tax implications?

Not @pb4uski here, and I didn't look at your funds. But I'll answer your question anyway.

Mutual funds distribute dividends and interest they receive from the stocks and bonds they buy back to the shareholders, who then get to pay taxes on those dividends and interest each year. When a mutual fund sells assets at a capital gain, they also distribute those capital gains to the shareholders, who then likewise get to pay taxes on them each year.

Active funds tend to realize gains more frequently than index funds, so they tend to distribute more capital gains. In volatile years, I think they distribute a lot of capital gains.

In addition to paying taxes every year on those capital gains distributions, you will also pay capital gains if you sell shares of your mutual funds for more than what you paid for them. This is, simply and generally speaking, what you get at the sale minus what you paid for the shares when you bought them.(*)

The capital gains distributions over the years do not factor in here at all and will not affect your taxes with respect to the gains you realize upon sale. (There is an exception. If you reinvested any proceeds from those mutual funds back into additional shares, then those reinvested proceeds could be included in the amount you paid for those shares that you bought with the reinvested proceeds when you go to sell them.)

In general, I'd agree with OldShooter's notion of lining them up by expense ratio. Another option would be to line them up by unrealized capital gain smallest to largest (i.e., the ones you paid the closest to current market price for) and then sell as much as you think is wise each tax year. This way would prioritize simplification ahead of wealth-building.

(*) You can also account for any costs involved in buying and selling, and there are certain adjustments that can be made that more than likely don't apply.

 

[PoorOldCountryBoy]

OP, a big picture comment - I think what you are getting at is you're trying to simplify things. Good for you. Why not take baby steps toward your goal? Sell the smallest 5-10 funds at whatever terms are most advantageous for you. Take a deep breath and then see what things look like.



You probably have until the economy turns up before mortgage rates rise, so you may have a few more months before losing the chance at refi. The existing mortgage sounds pretty good anyway.



Liquidity is paramount in retirement - whatever you decide about the mortgage, make sure you have the cash/liquid investments for 3 years' expenses.