Is anyone taking "profits" to pay down the mortgage

[nun]

Before the market cr*shed I followed the mutual investing mantra for a 40 something and was allocated 70/30 (equity/bonds) and rebalanced a couple of times a year. At the market peak I had enough in my after tax account to almost pay off my mortgage, but of course I figured that at 4.5% interest I could make more in the market so I let it ride.

Post cr*sh I've gone to 50/50 asset allocation and I've been taking "profits" (they're still small capital gains losses on my taxes) through this recent run up to pay down the mortgage. It's a conservative approach, but each month I've been able to put a few thousand towards extra principal and now my after tax accounts are 1.25x my outstanding mortgage. Anyone else doing this?

 

[Gumby]

I think the recent market crash reintroduced many people to the concept of "risk" in the risk/return algorithm. My situation prior to the crash was similar to yours -- I had more than enough in my taxable account to pay off the mortgage, but felt that I could earn a market return exceeding the mortgage interest. I kicked myself more than once during February/March 2009 slough of despond for not simply taking the risk free 5% return of paying the mortgage. At the worst point, I could have paid the mortgage almost 5 times over with my total losses.

But then I realized that if I had that type of market timing ability, Warren Buffet would be eating my dust. So, to make a long story short -- I did nothing. The young wife and I have continued to buy our predetermined mix of stock and bond funds with our weekly 403b/457 contributions, and I have continue to pay on the mortgage on our previously planned schedule (which has always included a small principal prepayment). We have almost completely recovered our losses.

However, your approach is by no means irrational. You have looked into the abyss and decided to step back from the edge by adopting a more conservative asset allocation -- including paying down the mortgage.

 

[W2R]

My mortgage is already paid off, but for those in the "pay off the mortgage" camp like I am I think it's a great idea.

When I paid off my mortgage I threw money into it from every source I could possibly imagine - - found some old paper securities in the back of my socks drawer that I had had for decades and cashed them in, sold things, and also used money owed to me, cash gifts, tax refunds, and so on, lived like a pauper, and even put my emergency fund into my mortgage (NOT smart, by the way). I really "scrabbled" and managed to pay it off in four years. I didn't think of using my investment profits, though. Good idea!

 

[nun]

I have continue to pay on the mortgage on our previously planned schedule (which has always included a small principal prepayment). We have almost completely recovered our losses.

However, your approach is by no means irrational. You have looked into the abyss and decided to step back from the edge by adopting a more conservative asset allocation -- including paying down the mortgage.

Before the crash I made small extra principal payments because with a 4.5% 15 year mortgage my monthly payments were already quite large and I thought that I could get more in the market. I'm still saving into retirement and after tax accounts, but when my after tax accounts get up to a certain level I take the gains and plough it into the mortgage so that some months my extra payment is 2 or 3 times my regular payment. It's great to see the balance drop so quickly.

 

[Animorph]

The market is up enough and my cash is low enough that I took a little cash out a couple of days ago. Not a strategic thing, but just keeping my cash level up with my expenditures.

I had added in most of my cash as the market went down, including from a cash-out mortage refi at 4.375%. That worked nicely, and now it is time to start taking some of it back. I do think equities will do better than 4.375% over the next 30 years, so that money will stay invested. I'm not going to pay off the mortgage.

 

[Texas Proud]

I would much rather be paying on my 4.5% mortgage and take my chances in the market long term...

So, no, I did not pay off my mortgage and will not. Now, if it were in the 6% or higher range... I would have to think about that one.. or refinance to 4.5%....

 

[FIREd]

If I knew for sure that we would stay in this house forever, I would definitely make paying off the mortgage more of a priority. Right now especially. With the currently low interest rates and after last year's strong equity market rally, paying down our mortgage would make sense to me. But if we have to move in a few years, I don't want to have all that equity locked in an asset which could take months or years to sell.

 

[scrabbler1]

Back in the mid-1990s, I took some profits in the rising stock market to pay down and pay off my mortgage. In 1992, I had refinanced the mortgage I had taken out in 1989 when interest rates were really high. But in the few years after 1992, interest rates began to rise quickly again so my mortgage payment was rising again.

By the time I paid off the mortgage, my stock mutual fund's value had just about doubled the amount I took out of it to pay the loan off. So I basically playing with the house's money at that point. (For example, I invested $25k over a few years, it doubled to $50, then I took out $25k, leaving me with the $25k of appreciated value, a value which continued to grow.)

This (becoming debt-free) was a key step toward my being able to retire in 2008.

 

[audreyh1]

We are buying a house this year, and paying cash for it. But most of this is coming from the proceeds set aside when we sold our house in 2005.

I have also taken some profits to pay for furnishing the house later this year. I am motivated more by the 2011 changes in tax rates than anything, although if things hadn't run up early this year I would have waited until later, but I figured I better strike while the iron is hot! Who knows what will happen 2H 2010.

Audrey

 

[nun]

Back in the mid-1990s, I took some profits in the rising stock market to pay down and pay off my mortgage. In 1992, I had refinanced the mortgage I had taken out in 1989 when interest rates were really high. But in the few years after 1992, interest rates began to rise quickly again so my mortgage payment was rising again.

By the time I paid off the mortgage, my stock mutual fund's value had just about doubled the amount I took out of it to pay the loan off. So I basically playing with the house's money at that point. (For example, I invested $25k over a few years, it doubled to $50, then I took out $25k, leaving me with the $25k of appreciated value, a value which continued to grow.)

This (becoming debt-free) was a key step toward my being able to retire in 2008.

My philosophy too. I've taken about 60% of my gains in the last year and paid down my principal. Once I'm debt-free I can ER without any worries or issues with cash flow. I rent out part of my house so it will feel even better not to be putting the rent towards the mortgage.

 

[clifp]

What perfect timing for this thread. I just finished wiring my mortgage pay off to Bank of America a few minutes ago. Last month I paid off my Pen Fed Home Equity Loan

So in the immortal words of Dave Ramsey

I AM DEBT FREE

Frankly I am pretty surprised by my actions, since I generally have sided with the keep a low mortgage crowd in the pay off vs keep mortgage debate. Mine were low 4.99% for PenFed HEL and 4.875 for the 1st.


As Gumby suggests part of the reason for doing so in looking in the abyss and deciding to step back. Somebody, probably Buffett, said that "leverage is the only way for a rich man to become poor". While a small 1st mortgage isn't leverage in the same way as say a margin account, an interest only option ARM, or buying call options, it is still leverage. One thing that leverage isn't good for is a getting a good nights sleep, as I remember from last year, when my net worth hit a 10 year low. There is a psychological advantage to not having a mortgage.

Still, in my case this was primarily a financial decision. I have been whining on several threads about the lack of good investments. Looking everything from CDs, to refinancing I was struck by the change that has occurred compared to most of the last decade.

A few months before taking out a 4.99% Pen Fed HEL in Jan 2008, I opened a 6% 3 year CD at PenFed. Part of my reasoning for keeping a mortgage was because it always seemed that if you had a very good credit score,you could obtain a mortgage at rate that was less than you could get on a CD. After all if you could borrow money at 5% and turn around invest it a 6% why not do it? If interest rates drop you refinance, and if interest rates climb you roll over your CDs at a higher rate (or even pay the early withdrawal penalty.) Similarly my Vanguard GNMA fund was yielding about 5.5% slightly higher than the home equity loan. Plus to a dirty market timer and stock picker like myself, the lure of "safe" stocks and Master Limited Partnership (MLPs) paying 6,7,8 and even 10% dividends with a history of growth was irresistible. I wish I was young so I could blame my hubris on youth .

In today's investment environment, I couldn't find CD over 3 or 3.5%, government bonds are lower and corporates and Muni in the 4-5% range. The dividend yield on the market is 2%, traditional dividend growth stocks are 3-3.55%. REIT, and MLPs are in the 5%-7%. In short, anything safe paid less than my mortgage interest rate, and anything that paid the same or higher was significantly riskier. Eliminating my mortgage payments will let me take the standard deduction saving me taxes. Finally as as side benefit. I can cancel my expensive hurricane insurance. (My house is concrete cinder block and the deductible on the insurance is more than 10K!). In all I figure I'll save about 4-5K a year paying of the mortgages. I am sure that this first time in 5 years that paying of my mortgage was unambiguously a money saver.

To the OP question did I use profits to pay off the mortgage. You bet about 1/2 was from money made when from the nice run up in Vanguard High yield, I trimmed a position in a pipeline Master Limited Partnership and I also took a loss on Vanguard Large Cap index fund. Paying off the mortgage puts my AA at 80/20 which is higher than I like but as much as I don't like stocks, I hate bonds, and 0% cash is almost as bad..


As aside not having to deal with BofA and their horrible automated phone system and there so called "customer service", is almost as nice as not having to write an electronic check.

 

[haha]

In today's investment environment, I couldn't find CD over 3 or 3.5%, government bonds are lower and corporates and Muni in the 4-5% range. The dividend yield on the market is 2%, traditional dividend growth stocks are 3-3.55%. REIT, and MLPs are in the 5%-7%. In short, anything safe paid less than my mortgage interest rate, and anything that paid the same or higher was significantly riskier. Eliminating my mortgage payments will let me take the standard deduction saving me taxes. Finally as as side benefit. I can cancel my expensive hurricane insurance. (My house is concrete cinder block and the deductible on the insurance is more than 10K!). In all I figure I'll save about 4-5K a year paying of the mortgages. I am sure that this first time in 5 years that paying of my mortgage was unambiguously a money saver.

Congratulations! I am glad you are happy with your action. The things you say above are all true, and quite relevant, today.

OTOH I have trouble imagining that a 5% mortgage won't be a huge bargain before long. All that money that Mr Ben and the treasury have printed isn't likely to just go away. It never has before anyway. The long term fixed American mortgage with no prepayment penalties is a unique gift to the consumer.

Of course if you have an expensive house and feel that there would be some chance of losing it if you had to make payments then it was definitely the right thing to do.

I am looking for a condo, specifically because I want to at least semi-fix my housing costs, and because I want one of those 5% notes! But I won't be going very high priced, so if I could make rent I could make the mortgage, or at least close.

My background thesis is that we have had a 30 year disinflation that has very likely come to an end.

Ha

 

[bbbamI]

I AM DEBT FREE

Congratulations!

 

[W2R]

Congratulations, Clifp!! You're right - - it really helps one to sleep at night.

 

[clifp]

Congratulations! I am glad you are happy with your action. The things you say above are all true, and quite relevant, today.

OTOH I have trouble imagining that a 5% mortgage won't be a huge bargain before long. All that money that Mr Ben and the treasury have printed isn't likely to just go away. It never has before anyway. The long term fixed American mortgage with no prepayment penalties is a unique gift to the consumer.


Ha

I agree with you and that is why I've held out so long in keeping a mortgage. On the other hand, my overall portfolio should perform well in medium or even high inflation environment. A nice piece of land in a great location, inflation protected bonds, a lot of stocks/MLPs tied to energy transportation, REITs, and dividend paying stocks of companies that can pass on inflation increases.

Maintaining my lifestyle in world of 2% CDs and 2% yields is a lot tougher, especially if stocks corrects I fear they might.

 

[Nords]

Mortgages are as much an emotional decision as a financial one, and either basis is equally valid for the decision. They also have to be considered in the overall context of asset allocation... doesn't make much sense to have a 5% mortgage when part of your assets are in bonds paying less.

It's a conservative approach, but each month I've been able to put a few thousand towards extra principal and now my after tax accounts are 1.25x my outstanding mortgage. Anyone else doing this?

Everything else in our ER finances is conservative, so we're taking the opposite approach with our ER investments:
http://www.early-retirement.org/for...rtgage-without-losing-your-ass-ets-15237.html

I'll update the numbers after this month's dividend distribution.

Speaking of BofA, I have to tip my hat to them for being [-]suckers[/-] willing to lend money to real-estate investors for only 4.625%, admittedly at the cost of a couple points. They got our landlord-mortgage business in a heartbeat.

 

[Uncle Drew]

I have been doing a little of this. I had three stock positions that where the price got ahead of itself in my opinion. So, sold them and applied to the mortgage.

The interest rate on our mortgage is 6.125%. In our situation, refinancing to a lower rate doesn't make financial sense as we should have the mortage paid off within sixteen months.

 

[ziggy29]

I think the recent market crash reintroduced many people to the concept of "risk" in the risk/return algorithm.

I think a corollary to this is that a lot of people didn't actually have as much risk tolerance as they previously thought they did.

I think part of the massive rally off the March 2009 bottom was technical; the market was priced for economic apocalypse which (for now) seems to have not materialized.

But the other part of it is simply that pretty much all other places to put capital to work also are unattractive now. Bond yields are low and the potential for interest rate and inflation hikes hurt them. Cash yields are below even the putrid level. The unattractiveness of cash and fixed income right now, I think, is adding some of the fuel to the market rally. I suspect a lot of people would take money out of stocks if they could get 4-5% yields on cash, but at 1% people suddenly find a willingness to take more risk again. Paying down a 6% mortgage seems like an attractive use of a pile of cash, but it comes at the cost of reduced liquidity.

 

[nun]

I have been doing a little of this. I had three stock positions that where the price got ahead of itself in my opinion. So, sold them and applied to the mortgage.

The interest rate on our mortgage is 6.125%. In our situation, refinancing to a lower rate doesn't make financial sense as we should have the mortage paid off within sixteen months.

Paying off a 6.125% loan is a good investment in today's low yield environment. Doing it on the 4.5% mortgage that I have is not as obvious. But I figure that I have 50% of my asset allocation in bonds that yield between 4 and 5 % anyway, so why not take about half of my equity gains and "rebalance" into mortgage payoff rather than more bonds. It gives me the added emotional boost of seeing my mortgage balance plummet and when I can take the $2500 monthly mortgage payment out of my budget I'm home free to ER.

Part of this is definitely emotional and an increased aversion to risk. I'm backing both horses, I'm cashing about half my profits to pay down mortgage debt and letting the rest ride.

 

[Uncle Drew]

Paying off a 6.125% loan is a good investment in today's low yield environment. Doing it on the 4.5% mortgage that I have is not as obvious.

I agree that in your situation, it's not as obvious a decision. 4.5% is a great rate. My wife is so risk averse. I get brownie points when the decision to sell and apply to mortgage is made. So that affects my decision making also.


We both are currently employed in fairly stressful fields. In our minds, eliminating the $2,000 monthly mortgage payment will afford us the OPTION to change careers while not sacraficing our lifestyle.

 

[ERD50]

... Somebody, probably Buffett, said that "leverage is the only way for a rich man to become poor". While a small 1st mortgage isn't leverage in the same way as say a margin account, an interest only option ARM, or buying call options, it is still leverage. One thing that leverage isn't good for is a getting a good nights sleep, ...

I won't comment on the mortgage decision itself, as I *know* that you know the pros/cons and have chosen as you see fit. However, I do think that your 'leverage' statement could be misleading to some.

Sure, leverage can be dangerous. But sometimes, I think people just get scared by the term itself, and avoid it w/o digging deeper. That's fine, but they might miss out on an opportunity. Or they might be taking more risk than they think.

For example, who is taking more 'risk':

- Person A with an ~ 50/50 AA who decides to use margin to put 1% of his portfolio on a stock, or...

- Person B, with a 70/30 AA?

Person B doesn't have that dirty leverage or margin term in his portfolio - he *must* be better off, no?

I've been in the position where I saw what I thought might be an attractive short term investment. But I'd have to sell other stock in that portfolio to free up the cash, and I didn't want to trigger a Cap Gain event (or maybe a wash?). So, I used margin for a month or two, on a small % of my portfolio. Slept fine, knowing that I had a chance of a quick profit, and if it went to heck, I risked a total of x% of my portfolio, a risk I was willing to take.

In the meantime, my un-leveraged portfolio could have reduced my net worth far more by dipping just a few %, like markets often do.

Which part of my portfolio should have kept me up at night?

-ERD50

 

[jerryo]

Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).

 

[clifp]

I won't comment on the mortgage decision itself, as I *know* that you know the pros/cons and have chosen as you see fit. However, I do think that your 'leverage' statement could be misleading to some.

Sure, leverage can be dangerous. But sometimes, I think people just get scared by the term itself, and avoid it w/o digging deeper.

For example, who is taking more 'risk':

- Person A with an ~ 50/50 AA who decides to use margin to put 1% of his portfolio on a stock, or...

I am the last one criticism the use of leverage. You are right people get scared by the term, when it should be viewed as tool. But hey I get little nervous about using power tools, even though are clearly the right things to use most of the time.

All I am saying is that there is no difference between a 50/50 AA with 1% margin loan and a 51/49 AA. In my case I had 75/25 AA (near the efficient frontier for a young retiree) but because I had 10% house loan my real AA was closer to 85/15. I sold 5% of each and I am now at 80/20 which looks riskier than 75%/25% but in reality my portfolio is safer. If it will earn more money in the future of course the $64,000 question. I'd like be at 70/30% but I am loath to buy either bonds or have 10% in cash earning nothing.

 

[nun]

Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).

Going with my "middle of the road" approach I'd pay off half the mortgage and invest the rest in equity index funds. Here's my reasoning. I'd invest the proceeds from the sale of that house 50/50 anyway so I look at the 50% going into a 4.75% mortgage as the "bond" portion and I'd get the added feel good factor of reducing debt.

I'm also concerned with the general shape of the US economy and part of my motivation for becoming totally debt free is to give me the freedom to live on a very small income. I'm a pessimist so I'm cashing in some money on the way up.

 

[clifp]

Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).

In a word you need to run the numbers. There are a quite a few mortgage threads in the forum. In particular ERD has done great work outlining all of the various factors you need to do make a financial decision. With a mortgage in the few hundred thousand range, the tax benefits are a big factor and really requiring using Turbo Tax to do some estimates. It is very possible that once you retire the benefits of having a big mortgage deduction are reduced because you simply pay off the mortgage and take the standard deduction. That is what is going to happen in my case.

My wild ass guess is that probably doesn't make much difference financially while you are working but probably is better once you retire to pay it off in today interest rate environment. But so much depends on your tax and financial situation that it just a wild ass guess.

The emotional component is also important. There is a psychological benefit to not having a mortgage. I have had no mortgage, mortgage, no mortgage, mortgage, no mortgage. Right now no mortgage feels much better.
I also know my investment temperament and if interest rates go to 10%, I will be cursing a blue streak about getting rid of $250K of below 5% debt. Lots of people the board won't have second thoughts.