Payoff mortgage

[szvacek]

What’s the groups opinion on paying off a mortgage from investments or make the payment each month from the investment? Current mortgage is about $144k with a 2 5/8%

 

[J277]

The smart money says invest the extra payment amount instead of paying down your mortgage due to how cheap you loan is. But would you prefer to pay your mortgage off instead? It all comes down to personal belief. Personally for me I invest my extra money that would go towards my mortgage and once it equals my mortgage amount I’ll start cashing it out slowly year by year to pay it off early.

You can’t go wrong either way. I say go with what your heart wants. Do you want the “security” of a paid off home or a larger net worth?

 

[pb4uski]

At 2 5/8%, I think paying off a mortgage from investments only makes sense if you simultaneously change your AA target so in effect you are using bonds to pay off the mortgage.

For example, let's say you have $1 million in investments that are 60/40 and the 40 is in BND. BND is currently yielding ~1.5%... less than 2.58%... so IMO forgoing 1.5% to avoid paying 2 5/8% is a good deal.

So before the $144k payoff you would have $600k of equites and $400k of BND and after the payoff you would have $600k of equities and $256k of BND... so your AA would change from 60/40 to 70/30.

I don't think it is wise to payoff the mortgage and stay at 60/40 because I think a 60/40 portfolio will earn more than 2 5/8% in the long term.

Since you no longer have a mortgage payment you have less financial risk so you can prudently have a higher AA.

YMMV and I'm sure others will come along with other views.

 

[Romer]

there are a few threads and even more opinions

If you do the math, staying invested and paying the loan comes out ahead.

Many people like myself take greater satisfaction of owning their home and being debt free. This is more an emotional choice vs mathematical one and I will admit that

I went with the payoff because the extra money wouldn't change my lifestyle no matter how long I live and I felt being debt free was a "win". That was my choice. The forum here has differing opinions in the two camps.

Just my 2 cents

 

[RunningBum]

Whatever you want to do, unless paying off the mortgage leaves you cash poor. For an example, if you are in your mid 50s and most of your money is unavailable to you because it is in retirement accounts you can't access until 59.5, you should not pay off the mortgage until you have access to that money, at the earliest.

 

[Retireby45ish]

At 2 5/8%, I think paying off a mortgage from investments only makes sense if you simultaneously change your AA target so in effect you are using bonds to pay off the mortgage.

For example, let's say you have $1 million in investments that are 60/40 and the 40 is in BND. BND is currently yielding ~1.5%... less than 2.58%... so IMO forgoing 1.5% to avoid paying 2 5/8% is a good deal.

So before the $144k payoff you would have $600k of equites and $400k of BND and after the payoff you would have $600k of equities and $256k of BND... so your AA would change from 60/40 to 70/30.

I don't think it is wise to payoff the mortgage and stay at 60/40 because I think a 60/40 portfolio will earn more than 2 5/8% in the long term.

Since you no longer have a mortgage payment you have less financial risk so you can prudently have a higher AA.

YMMV and I'm sure others will come along with other views.

This is how I think about it too. The only question is over the life of the mortgage would you have done better holding bonds…plus with inflation the set mortgage payments get better over time. I flip flop on this daily.

 

[captain3d]

Payoff the mortgage if you no longer need to grow that money

 

[SnowballCamper]

paying off a mortgage from investments or make the payment each month from the investment?

I think it depends on the investment, as others have mentioned. If the investment is the typical Stock & Bond allocation with 50% or more in stocks, then you are almost surely better off in the long run to keep the mortgage for its duration.

If your investment timeline is shorter, or you are living off the investments, then the numerically optimal choice is less clearly to keep the mortgage. Lots of other issues impact this decision as well, such as the future home value, how long you expect to live in the home, etc. We paid off our home rather early and are happy with the decision.

 

[Montecfo]

Are you able to deduct the interest?

If not the case for paydown is stronger.

My mortgage is at about the same rate and I can itemize. So for me I feel it makes more sense to leave the mortgage in place.

But if/when I reach the point where it no longer has a tax benefit, i would consider paying it down or off.

Key consoderation is I expect stock market returns to be in the 1-5 percent range over the next 5-10 years. A guaranteed 3ish% effective rate of return (assuming no deductibility, not sure your tax rate) is pretty attractive in that environment.

Cutting the other way is that a mortgage is an excellent hedge against inflation. So I would not paydown till we find out where overall pricing levels are headed over the next 12-24 months.

A few moving parts here!

 

[armor99]

I my opinions it is all about risk. May it never happen to you, but if you lost your job, would you want more investments, or a paid off place to live? I finally became debt free last month.
It is a nice feeling to know, that if a lost this job, or needed to quit… I can…

 

[Markola]

^^^^ And I feel similarly that if the SHTF, I have enough hard-working liquid investments that I can get my hands on to cover the mortgage and everything else, indefinitely, vs. having a large chunk of net worth locked up in an inert box of wood and bricks. Potato/Potahto.

 

[Badger]

I was half way through paying on a 30 yr mortgage when the tax benefits from interest were no longer of any help. So I doubled the payments with the second payment going to paying on the principle. We got rid of the mortgage in about 5 years. It saved many thousands of dollars that ultimately went into my investments. When it was paid off I invested the same amount into my retirement accounts.
The ability to put more money into our 403b and Roth IRAs along with the satisfaction/comfort of having a home free and clear was worth it to us. Now the only expense we have that is necessary to keep the house is a low property tax. Was it financially the best thing to do? I don't know so I will leave that up to all the experts. What I do know is that it allowed us to put considerably more money into our retirement accounts years earlier than if we had waited for 15 years. Time and compounding has been our friend. We are now financially way better off than we ever expected.


Cheers!

 

[pacergal]

It is a personal choice.
Are you retired or still working?
You have a low interest rate loan.
Try both scenarios in Firecalc and see if there is any major difference in the long term.

We have a low interest mortgage and have it covered on our monthly budget. It does not bother me at all because I have the money to pay it off anytime I wish. We still get a tax deduction, so it works for us.
I don't need the comfort of a paid off home, but some folks do. And that is OK.
Again, Personal Choice is what it is all about.

 

[youbet]

there are a [-]few[/-] mountain of threads and even more opinions

There. FIFY.

 

[youbet]

When it was paid off I invested the same amount into my retirement accounts.
The ability to put more money into our 403b and Roth IRAs along with the satisfaction/comfort of having a home free and clear was worth it to us.

How did paying off your mortgage allow you to put more money into your retirement accounts? Actually if you had kept the mortgage, you could have begun the higher level of retirement account funding sooner.

The satisfaction/comfort of having a home free and clear is a powerful, driving force behind the decision and I get that. But it would be tough to explain paying off a sub-3% mortgage based on the financial numbers IMHO.

 

[youbet]

I my opinions it is all about risk. May it never happen to you, but if you lost your job, would you want more investments, or a paid off place to live? I finally became debt free last month.
It is a nice feeling to know, that if a lost this job, or needed to quit… I can…

In the case of a job loss, I'd take more investments over a paid-off house. I can always the investments to pay off the mortgage in total or I could just make the mortgage payments from the investments instead of my now lost paycheck. Plus, I'd have more flexibility. (I'm assuming a very attractive, low interest mortgage as the OP is asking about paying off.)

 

[corn18]

What’s the groups opinion on paying off a mortgage from investments or make the payment each month from the investment? Current mortgage is about $144k with a 2 5/8%

With the 10 year breakeven inflation rate @ 2.51%, that mortgage is basically free money. My mortgage is 2.25% fixed with 30 years left. I am making money by keeping it.

That's what the data show.

Your emotions might be different from the data. I have almost gotten over the urge to pay off my mortgage, but I still think about it. At this point, not paying cash for my house last May has netted enough gains to pay for a patio, landscaping, fence and a 5th wheel camper. With money left over. But that's not why I keep the mortgage. The net present value of my mortgage is less than what I owe. And if inflation keeps going up, it will only get better over time. What a great inflation hedge. Better than anything else I've found.

 

[MdaPetralia]

What’s the groups opinion on paying off a mortgage from investments or make the payment each month from the investment? Current mortgage is about $144k with a 2 5/8%

Did you consider how far along into your mortgage you are and how much of each payment is going towards interest versus principle?

For a traditional fixed rate mortgage, while the payment is the same each month, the amount that goes towards interest declines while the amount that goes towards principle increases the further along you go into the loan.

If you are paying off the mortgage balance towards the end of the loan when most of it is going to principle is really not saving you much in interest. Instead you would be losing potential investment returns on that money. You would also be reducing liquidity by tying your money up in the house and would need to borrow against your equity (e.g. HELOC) if you need access to the money before you sell it.

 

[pb4uski]

With the 10 year breakeven inflation rate @ 2.51%, that mortgage is basically free money. My mortgage is 2.25% fixed with 30 years left. I am making money by keeping it. ...

It all depends on what the money that would be used to pay off the mortgage was earning.

In our case, at the end of 2019 we drained a savings account that was earning 1.7% to pay off our 3.375% mortgage... but it would have been a good decision even if our mortgage was only 2.25%. As it turns out, that same account now earns 0.4% and has for the last year or so.

 

[CardsFan]

What’s the groups opinion on paying off a mortgage from investments or make the payment each month from the investment? Current mortgage is about $144k with a 2 5/8%

No one can give any rational advise with this limited amount of info.

Things like:

- How many years are left on the mortgage
- What is the home worth?
- What % of your assets does it represent?
- Do you have other income?
- How old are you?
- How is the money you would use currently invested

I could make the list a lot longer, but I think you get my drift.

If you want specific advise based on your circumstances, more is needed.

If you just want generic advice, just search for "should I pay off the mortgage?" You will find a thousand (or more) opinions.

 

[ERD50]

I tried to model this in FICalc. I chose that calculator because it lets me run the typical constant dollar FIRE calculator without adjusting the number for inflation, via unchecking a box. Plugging your $144K and interest rate into a mortgage calculator and multiplying the result by 12 months, I get an annual $10,340 payment. So, in FICalc, I used 30 years, $144K, 60/40 portfolio, and $10,340 (non adjusted!). The thinking here was to let the $144K fund the mortgage payments while also growing. Would the portfolio survive, or would I have to dig into the rest of my retirement funds?

FICalc says this portfolio only survives 60.33% of the time against all historical 30 year periods. And of course, if you just considered similar high CAPE years, it would be well worse. And that doesn’t even consider things like taxes and ACA subsidies.

I looked at some of the failure years. 1929, I knew, was followed by some deflation, so I suspected that might be problematic. Sure enough, the portfolio fails just 14 years in.

To be sure, you haven’t lost ALL your money. You’ve got whatever equity. But you now need to find that extra $10K+ every year out of other funds.

If I followed you, you left no buffer in the portfolio at all, the $144K in the portfolio is the mortgage money, nothing else? OK, but that only means that it went negative at some point along the way. But if you had a buffer, you could get through the short term volatility, and hold for the 20 or 30 year time periods, which have *all* been positive compared to current mortgage rates, and many/most have been very significantly positive.

It's an interesting analysis, it tells us something (don't do this if you don't have a buffer!), and demonstrates that over short periods of time, investments may lag the mortgage payments.

But that's not a reason to not do it for the long term (with a buffer). But if you still don't like those historically fantastic odds, don't do it.

-ERD50

 

[DireWolf]

If that initial $144K runs to $0, it’s gone. You can grow it 1000% but it’s still zero. People just aren’t understanding SORRs when it comes to this investment. If you held the house free and clear, you’d have the value of the house. Instead, you hold some amount of equity and still owe however many more years on the house. This buffer you are pulling from, it’s just your regular portfolio that would either have grown or not of its own accord, but now you’ve pulled from it to cover an expense.

 

[corn18]

If that initial $144K runs to $0, it’s gone. You can grow it 1000% but it’s still zero. People just aren’t understanding SORRs when it comes to this investment. If you held the house free and clear, you’d have the value of the house. Instead, you hold some amount of equity and still owe however many more years on the house. This buffer you are pulling from, it’s just your regular portfolio that would either have grown or not of its own accord, but now you’ve pulled from it to cover an expense.

$1,000,000 portfolio. $144,000 mortgage. $40,000 / year spending. $10,340 / year mortgage (kindof a 5% WR but the mortgage is nominal)

Scenario 1:

Don't pay off the mortgage = 74.4%

Scenario 2:

Pay off the mortgage = 76%

Let's say you take the Rule of Thumb for 4% WR with the mortgage:

$1,285,000 portfolio. $144,000 mortgage. $40,000 / year spending. $10,340 / year mortgage (kindof a 4% WR)

Scenario 1:

Don't pay off the mortgage = 100%

Scenario 2:

Pay off the mortgage = 95.9%

Go figure, huh?

I just looked at my situation. I have a 2.25% fixed rate 30 year mortgage with 30 years left. Retired this year. My actual data is 100% with the mortgage and 100% without, so hard to compare that. I upped my spending until my Ps hit 94.7% with the mortgage. Then I paid off the mortgage. Guess what? Ps went DOWN to 88.6%. Not a huge difference, but @ 2.25% fixed rate 30 year money vs. 2.51% inflation, it doesn't take a rocket scientist to figure out what's going on.

 

[ERD50]

If that initial $144K runs to $0, it’s gone. You can grow it 1000% but it’s still zero. People just aren’t understanding SORRs when it comes to this investment. If you held the house free and clear, you’d have the value of the house. Instead, you hold some amount of equity and still owe however many more years on the house. This buffer you are pulling from, it’s just your regular portfolio that would either have grown or not of its own accord, but now you’ve pulled from it to cover an expense.

And there is something many do not understand about SORR. With a balanced portfolio, when stocks are down, you sell off your FIXED investments to maintain your Asset Allocation. You rarely ever have to sell off your stocks. In fact, you might be buying stocks instead.

It's an interesting analysis, but lacking context.You can use that same logic to say you should never invest in anything, it might go down. And then there's inflation if you stay in cash.

-ERD50

 

[ERD50]

... Plugging your $144K and interest rate into a mortgage calculator and multiplying the result by 12 months, I get an annual $10,340 payment. ....

Wait a minute. What interest rate did you use?

Did I do something wrong? I get 10340 ∕ 12 ≈ 861.67 a month.

When I plug that into a mortgage calculator, that requires a 5.98% interest rate! Rates are almost half that! A 3.5% rate, 30 year takes you from your 7.2% W/D on that no−buffer portfolio, to a 5.4% WD ($7,759.44 annual in place of your $10.340). Big difference on short term success rates, and will improve success rates over the long term with a reasonable buffer.

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Please show your work...

-ERD50