Mortgage vs invest....tough choice ahead

[Beer-man]

I’ve been a pro-invest guy for the past few years after reading multiple threads had me convinced by the sheer math argument. However, from a combination of steady investing, heavy equity purchases all dec long on the ride down, and the market activity our taxable balance will be eclipsing our remaining mortgage in 6-8 months. Suddenly I find myself daydreaming what it would feel like to not make a mortgage payment etc. Anyone else face this dilemma? I know it’s definitely a first world problem but it has me doing some soul searching.
We already max every tax advantage account so this is taxable was meant to be a Roth ladder but RE might not be as desirable as much as FI is.
Sort of hoping a correction will take it off the table but my market timer has me wondering if paying off the mortgage at the peak of an overdue bull market would be less market timing and more wisdom. Anyone relate? What did/do you do?

 

[DrRoy]

I made a decision to pay off my mortgage in 2013. It was a 15 yr at 5.5% with 7 years and $75K left. I looked at it as a fixed income investment at 5.5% which was pretty good at the time. I definitely liked the cash flow that was freed up, most of which I then invested.

 

[flintnational]

Beer-man, important things first. I am brewing an Irish Stout this morning.

To your question. While working, I kept a mortgage - potentially increasing both return and risk. When I FIRED, I paid off the mortgage - potentially decreasing both return and risk.

In the alternative, if you have an allocation to bonds, you can reduce the bond allocation and pay off the mortgage. This will shift your allocation to a higher percentage of stocks. The increased stock allocation is the reason keeping the mortgage has higher potential returns. Reducing the bond allocation accomplishes the same thing. This thread explains the above idea in more detail.

 

[ckelly78z]

There is nothing like the peace of mind from living in a paid off house. It's a personal decision, but i'll take the paid off mortgage over the big investment portfolio, because one can't be taken away from you, while the other can be reduced by 50% in a day or two.

 

[pjigar]

Logically speaking, all things being equal, paying off a fixed interest debt (which is your mortgage) is not a good idea in a raising interest rate environment. But home mortgage has lot of emotional baggage with it so there is no straight answer. If you hold bonds in your portfolio then it is an easy call, like flintnational mentioned, Trade bonds portion with a paid-off mortgage. Otherwise it is a personal decision.

FWIW, I am going to hold the fixed rate mortgage as long as I am working. My reasoning:
1. Forced expense which has a forced saving component built-in.
2. Keeps my "expenses" up so I don't spend more!
3. I get better returns in stocks.

 

[Col. Klink]

It feels good to have no mortgage in retirement.

 

[CardsFan]

I’ve been a pro-invest guy for the past few years after reading multiple threads had me convinced by the sheer math argument. However, from a combination of steady investing, heavy equity purchases all dec long on the ride down, and the market activity our taxable balance will be eclipsing our remaining mortgage in 6-8 months. Suddenly I find myself daydreaming what it would feel like to not make a mortgage payment etc. Anyone else face this dilemma? I know it’s definitely a first world problem but it has me doing some soul searching.
We already max every tax advantage account so this is taxable was meant to be a Roth ladder but RE might not be as desirable as much as FI is.
Sort of hoping a correction will take it off the table but my market timer has me wondering if paying off the mortgage at the peak of an overdue bull market would be less market timing and more wisdom. Anyone relate? What did/do you do?

I think your question has less to do with the economics of paying off the mortgage, and more to do with how you want to allocate your assets between taxable and tax deferred accounts.

Based on the phrase I bolded above, it sounds like you are talking about liquidating virtually all of your after tax account to pay off the mortgage. I would not do this. If you plan to RE, you will want money in an after tax account to give you flexibility.

 

[ERD50]

What is your interest rate? If it is near the lows of what we saw a few years ago, I'd strongly consider keeping it.

And while looking at recent market highs really is "market timing", I also think it's not unreasonable to factor that in. If the interest rate isn't all that attractive, and your market outlook is muted, a payoff might be the right thing for you to do. In the case of so-so interest rates, the difference between keeping and paying off are likely small. Don't sweat it too much.

I need to add - IMO, comments like "It feels good to have no mortgage in retirement." are not helpful. That's one persons view. Based on what (they don't say)? And I feel just the opposite, I feel great with my mortgage, I've made many tens of thousands of dollars by holding my mortgage, and I sleep great, knowing my money is working for me. So that's another persons view. What to make of that?

-ERD50

 

[ERD50]

I think your question has less to do with the economics of paying off the mortgage, and more to do with how you want to allocate your assets between taxable and tax deferred accounts.

Based on the phrase I bolded above, it sounds like you are talking about liquidating virtually all of your after tax account to pay off the mortgage. I would not do this. If you plan to RE, you will want money in an after tax account to give you flexibility.

I missed that. Excellent point! -ERD50

 

[corn18]

I think your question has less to do with the economics of paying off the mortgage, and more to do with how you want to allocate your assets between taxable and tax deferred accounts.

Based on the phrase I bolded above, it sounds like you are talking about liquidating virtually all of your after tax account to pay off the mortgage. I would not do this. If you plan to RE, you will want money in an after tax account to give you flexibility.

+1

I am in the same boat. Taxable will eclipse mortgage balance this year. By a lot (big bonus this year). So we will have a lot left over if we pay off the house.

I have been futzing around with my spreadsheet looking at myriad options. My gut says don't pay it off, keep the liquidity. My heart says pay it off, no one has ever regretted paying off a mortgage.

I will vacillate at least 432,458,967 times between now and August. And a lot can change in 6 months.

 

[ERD50]

... no one has ever regretted paying off a mortgage. ...

Not true! I was prepaying my high rate mortgage from the 80's, but it was an ARM, and the rate kept dropping, maintaining a delta below the reference rate. A few years later, they were almost paying me ! And then the market took off. I regret pre-paying any amount on that mortgage.

-ERD50

 

[corn18]

Not true! I was prepaying my high rate mortgage from the 80's, but it was an ARM, and the rate kept dropping, maintaining a delta below the reference rate. A few years later, they were almost paying me ! And then the market took off. I regret pre-paying any amount on that mortgage.

-ERD50

Good point. I'll bet there were a lot of folks in the early 80's that loved having a mortgage before the rates skyrocketed. I hope that's not what we are headed for, though. I would not want to look like a genius for that reason.

 

[corn18]

Instead of paying off the mortgage, I am considering making a large lump sum payment and then recasting the mortgage. Puts enough equity in to make the interest not hurt as bad and doesn't kill my liquidity.

 

[Beer-man]

Mortgage is 3.75%,
Yearly spend minus mortgage would be 30-35k

 

[RunningBum]

I think your question has less to do with the economics of paying off the mortgage, and more to do with how you want to allocate your assets between taxable and tax deferred accounts.

Based on the phrase I bolded above, it sounds like you are talking about liquidating virtually all of your after tax account to pay off the mortgage. I would not do this. If you plan to RE, you will want money in an after tax account to give you flexibility.

Another +1. Think carefully about how you are going to fund an early retirement if you are leaving before you can tap retirement accounts. Even if you are over 59.5 it gives you a lot more flexibility to have a large taxable account. If the mortgage interest rate isn't too bad, it's very often best to leverage the house. You should be able to sleep just as well with a 6 or 7 figure taxable account and the ability to pay off your mortgage at any time as you would if the mortgage was paid off. If you can't, think about separating emotions from logic in your finances. If you still can't, do what you feel you have to do, it's your life.

Disclaimer: My house was paid off during construction so I don't have a mortgage. My reasons is that I would've had to have gotten a construction loan and converted it or taken out a mortgage, and I also have plenty in taxable to live on. It was also a bit of market timing very near the peak of the dotcom bubble that worked out well. However, I did have a second home for about 5 years and did take out a mortgage on that. This was after the dotcot bubble burst. Both worked out well for me. Having that mortgage didn't affect my sleep at all.

 

[akl432]

I made a decision to pay off my mortgage in 2013. It was a 15 yr at 5.5% with 7 years and $75K left. I looked at it as a fixed income investment at 5.5% which was pretty good at the time. I definitely liked the cash flow that was freed up, most of which I then invested.

I used similar logic to conclude I would rather have the "guaranteed return" of not having to pay the monthly interest. It was the right decision for me.

 

[pb4uski]

I have been an advocate of keeping the mortgage but have been thinking about paying off our 3.375% mortgage.... but only because it is hard to find 5 year CDs paying that rate (we have 8 years left on our mortgage).

IF I did, I would adjust my AA so the net impact would be paying off the mortgage with fixed income money for which I think it will be hard to earn 3.375% over the next 5-10 years. As a result my equity allocation would be about 4% higher and my fixed income allocation 4% lower. The higher risk of more equities would be fine and offset by a lower WR because I would no longer have a mortgage payment... effectively avoiding paying 3.375% is as good as earning 3.375%.

Just mulling it over it this point. If the Fed increases rates in June and Cd yields don't improve much then it is an arrow in my quiver.

 

[CardsFan]

I have been an advocate of keeping the mortgage but have been thinking about paying off our 3.375% mortgage.... but only because it is hard to find 5 year CDs paying that rate (we have 8 years left on our mortgage).

IF I did, I would adjust my AA so the net impact would be paying off the mortgage with fixed income money for which I think it will be hard to earn 3.375% over the next 5-10 years. As a result my equity allocation would be about 4% higher and my fixed income allocation 4% lower. The higher risk of more equities would be fine and offset by a lower WR because I would no longer have a mortgage payment... effectively avoiding paying 3.375% is as good as earning 3.375%.

Just mulling it over it this point. If the Fed increases rates in June and Cd yields don't improve much then it is an arrow in my quiver.

Perfect logic, in my mind. Either decision could be defended, but only proven correct after the fact.

In our case, we simply got to about 2 years left, and said "pay it off and be done". But the pay off was only about $20k, so not a big percentage of after tax assets. And that was 5+ years before FIRE. So we still had a steady income.

In OP's case, it sounds like it would be close to 100% of after tax assets. I don't think that is a sound move.

 

[joeea]

Suddenly I find myself daydreaming what it would feel like to not make a mortgage payment etc. Anyone else face this dilemma?

No. I don't daydream about mortgage payments nor about the lack thereof.

 

[Beer-man]

Beer-man, important things first. I am brewing an Irish Stout this morning.



To your question. While working, I kept a mortgage - potentially increasing both return and risk. When I FIRED, I paid off the mortgage - potentially decreasing both return and risk.



In the alternative, if you have an allocation to bonds, you can reduce the bond allocation and pay off the mortgage. This will shift your allocation to a higher percentage of stocks. The increased stock allocation is the reason keeping the mortgage has higher potential returns. Reducing the bond allocation accomplishes the same thing. This thread explains the above idea in more detail.

Lots of good info thank you everyone.
For now we’ll just keep on trucking and put away what we can while we can. If and when(markets willing) our taxable account eclipse our mortgage we will revisit but as long as we are in peak earnings years I will likely keep the mortgage.
Paying off will only save us $700 month

 

[bushpilot]

Pay it. Just do it.

 

[target2019]

Pay ahead on the principle and shorten mtg to fit your plan.

 

[Cassius King]

This is my philosophy as well:

"Think carefully about how you are going to fund an early retirement if you are leaving before you can tap retirement accounts. Even if you are over 59.5 it gives you a lot more flexibility to have a large taxable account. If the mortgage interest rate isn't too bad, it's very often best to leverage the house. You should be able to sleep just as well with a 6 or 7 figure taxable account and the ability to pay off your mortgage at any time as you would if the mortgage was paid off."

Thanks for posting.

 

[UnrealizedPotential]

Too many factors involved to give a straight answer that covers all situations. But I can say for me I kind of split the difference between the two. If I had to do it all over again, I would have just made my regular mortgage payments and just invested in the stock market.

 

[ERD50]

Pay it. Just do it.

So insightful! I'm sure the OP will spend considerable time contemplating the positive and negative ramifications of this thorough analysis.



-ERD50