I was tooling around on the site looking at some previous DCA vs lump sum investing for my my personal predicament when it struck me... Should I (or anyone) consider paying off my mortgage(s) as an alternative to my bond allocation? By way of a simple example, use the following assumptions...
- $2m investeted portfolio
- AA 70/30, $1.4m/$600k
- assume bonds are paying after tax returns of 2%
- mortgage balance of $300k with an effective after tax interest rate of 2.5%
- still working, 4+ yrs from ER, no concerns about having to tap the bond funds or allocation anytime soon
Can you make an argument to take $300k of your bond allocation and pay off your mortgage as part of your overall AA? I suppose you have effectively bought a cd for the remaining period of your mortgage and that becomes the pickle?? So I suppose that is the real question relative to opportunity cost... in this example if your mortgage has 15 yrs left, you are locking in your return effectively for 15 yrs at 2.5% and if you think you will average more than that over 15 yrs in your bond funds, than don't pay it off? On the other hand, if you have 3 yrs left on your mortgage than I suppose you could make the argument to pay it off as part of your AA?
My previous logic always had me comparing my after tax mortgage rate to my projected whole portfolio returns as opposed to looking at it the way described. I know there are probably allot of "depends", but I wanted to get everyone's thoughts here, particularly while we are in a such a low yield environment.
- $2m investeted portfolio
- AA 70/30, $1.4m/$600k
- assume bonds are paying after tax returns of 2%
- mortgage balance of $300k with an effective after tax interest rate of 2.5%
- still working, 4+ yrs from ER, no concerns about having to tap the bond funds or allocation anytime soon
Can you make an argument to take $300k of your bond allocation and pay off your mortgage as part of your overall AA? I suppose you have effectively bought a cd for the remaining period of your mortgage and that becomes the pickle?? So I suppose that is the real question relative to opportunity cost... in this example if your mortgage has 15 yrs left, you are locking in your return effectively for 15 yrs at 2.5% and if you think you will average more than that over 15 yrs in your bond funds, than don't pay it off? On the other hand, if you have 3 yrs left on your mortgage than I suppose you could make the argument to pay it off as part of your AA?
My previous logic always had me comparing my after tax mortgage rate to my projected whole portfolio returns as opposed to looking at it the way described. I know there are probably allot of "depends", but I wanted to get everyone's thoughts here, particularly while we are in a such a low yield environment.