Selling Stocks to Pay off Home Earlier ?

[Elbata]

None of us can tell you whether this move will pay off financially

I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.

 

[tulak]

We've been paying down our mortgage, but we have more assets than OP. We also have a 5/5 ARM, so in a few years our rate will reset. If we end up getting hit with more inflation, then we'd like to owe less. But I think that could be a wash, since we should be able to earn more on our money too.

The problem I have investing more than paying down the mortgage is because I'm not convinced buying more equities right now is a good idea. We're still accumulating, so we buy a solid 5 figures a year outside of the mortgage. I don't feel a strong need to buy more. And as for buying bonds, I think I'll pass for now. So paying down the mortgage right now works for us. However, if we were to experience a correction or rates on bonds went up, then we'd reevaluate.

In your case, I don't think it makes much sense. You have a good rate and your saved assets aren't that high. There'd be no harm in paying extra, but I'd much prefer to save that money for greater liquidity.

Of course, the choice is yours.

 

[samclem]

I wonder where these people live who "can't lose the house" just because their mortgage is paid off. Are there that many places with no property taxes? My taxes are a significant portion of my total housing costs, and if I don't pay them I'll "lose the house" just as surely as if I don't make the mortgage payment.

 

[clifp]

I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.

True but you are also giving up liquidity. As I retiree I think there are lots of good arguments for paying off the mortgage. I also agree with ERD that in generally it doesn't make much difference. A retiree with a $1 million portfolio and paid of mortgage isn't much different than a retiree with $1.2 million portfolio and $200K mortgage.

But for a 32 year old decades away from retirement, making house payment isn't the biggest worry. As long as he sufficient liquid assets to make the payment for at least 6 months, hence the need for an emergency fund.. With the current job situation it may actually take 2 years to find a comparable job, so a strong argument can be made that you need a larger emergency fund now than in the past.

Saving for retirement and making sure that your savings are earning a good return, IMO a higher priority than having a paid off mortgage. Over 30 years, I think you have to be extraordinarily pessimistic that stocks won't be making more than 4% nominal return.

 

[Options]

Why not do something simple and make an additional principal payment each month (and make sure it's applied to the remaining principal). For a few hundred dollars a month additional, you can turn that 30 year mortgage into a near 15 year one and save ton in interest.

+1

 

[papadad111]

That's not really apples-apples, is it?

If those people lost their house when they lost their jobs, they likely were not in a position to be able to pay off the mortgage like the OP, right? Those people were likely living near paycheck-to-paycheck without much/any savings.

Like someone said earlier, $158,000 will make an $800 mortgage payment for lots of months. And the tax payment, and electric bill, and maintenance, and put food on the table, etc, etc. Where does that come from if you lose your job and have little savings?

Pay it off or not, but don't underestimate the value of the liquidity of a portfolio, and don't overestimate the 'freedom' from not having a mortgage, when all those other bills keep coming in.

-ERD50

Your point is valid. Perhaps not apples to apples.

The point that i was trying to make but failedis the inverse of what you said... that in a market downturn, such as the one we had between September 2008 and March 2009, when the stock market fell 50%, the OP's nest egg in stocks of 90K would have fallen to 45K. He would theoretically continued paying 800/month toward his 157K mortgage..true... But lets say he also lost his job..... that 45K would likely have to be allocated to more than just the 800/month in mortgage payment.... keep the lights on...feed the baby....gas in the car...insurance...etc. And if that nest egg runs out and you go into foreclosure, you lose the entire house.... including all the equity that you built up too. Also, in bankruptcy, your primary residence (paid off) is protected as I recall.

What I saw in 2009 were financially prudent folks who suddenly were unemployed, having to dip deeply into emergency funds, then stock portfolios, and in some cases retirement funds all the while resetting their spending levels to deep LBYM as they tried to weather the storm. Eventually, using said funds up during long periods of structural unemployment which decimated them financially and while they tried to hang onto their houses...but ultimately lost them to foreclosure. Compounding this issue was the fact that the asset itself was also depreciating right beneath their feet... Yes...likely a perfect storm but no one can deny that it happened just 5 short years ago....

Wont argue your points. Having a war chest is helpful. having zero debt is equally helpful. personal opinion is that being debt free gives more flexibility than being in debt...again, personal opinion.

 

[ripper1]

I'm a contrarian. I don't care if it makes financial sense.

There's something calming about never having to be concerned/bothered/whathaveyou with a house payment ever.

I'm a contrarian also.....I will keep the banks cheap money thank you.

 

[ERD50]

...
Wont argue your points. Having a war chest is helpful. having zero debt is equally helpful. personal opinion is that being debt free gives more flexibility than being in debt...again, personal opinion.

But take a look at your own example. Now, if stocks drop to 50%, a balanced portfolio won't be down that far. Regardless, we agree there are still lots of other bills to pay. So if all that money is stuck in the house, how do you pay those other bills? Better to have half a portfolio available then almost none.

keep the lights on...feed the baby....gas in the car...insurance...etc. And if that nest egg runs out and you go into foreclosure, you lose the entire house.... including all the equity that you built up too. Also, in bankruptcy, your primary residence (paid off) is protected as I recall.

Going into bankruptcy is pretty extreme, but again, I'm not sure this is apples-apples either. With almost no funds, it would seem you would have to go into BK pretty quickly in order to preserve the primary residence. And I'm not following you when you say when the nest egg runs out you loose the house to foreclosure - wouldn't BK protect that as well? I guess I see your point that if your home is protected in BK, then all the equity in the home is protected (I think that's true, not 100% sure). But then BK has lots of repercussions, not sure that having to jump into that so quickly is a good thing long term either.

Compounding this issue was the fact that the asset itself was also depreciating right beneath their feet... Yes...likely a perfect storm but no one can deny that it happened just 5 short years ago....

You are right, jobs get cut during downturns, so it certainly could happen together.

-ERD50

 

[Turboslacker]

I wonder where these people live who "can't lose the house" just because their mortgage is paid off. Are there that many places with no property taxes? My taxes are a significant portion of my total housing costs, and if I don't pay them I'll "lose the house" just as surely as if I don't make the mortgage payment.

Exactly right. There's also alternatives for living arrangements that don't require a house either.

 

[papadad111]

But take a look at your own example. Now, if stocks drop to 50%, a balanced portfolio won't be down that far. Regardless, we agree there are still lots of other bills to pay. So if all that money is stuck in the house, how do you pay those other bills? Better to have half a portfolio available then almost none.



Going into bankruptcy is pretty extreme, but again, I'm not sure this is apples-apples either. With almost no funds, it would seem you would have to go into BK pretty quickly in order to preserve the primary residence. And I'm not following you when you say when the nest egg runs out you loose the house to foreclosure - wouldn't BK protect that as well? I guess I see your point that if your home is protected in BK, then all the equity in the home is protected (I think that's true, not 100% sure). But then BK has lots of repercussions, not sure that having to jump into that so quickly is a good thing long term either.




You are right, jobs get cut during downturns, so it certainly could happen together.

-ERD50

For the sake of discussion, I did not limit corner cases. bankruptcy etc are all possibilities...especially so in light of what transpired during the past 5 years. We could bound this by corner cases, but then it limits the range of discussions. Lets just say we agree to disagree and everyone's situation is different. All angles need to be considered in this one...not just financial, but risk tolerance/mitigation and personal piece of mind.

In a worst case scenario, the homestead act at both federal and state level will protect a significant portion your home/equity from bankruptcy. Similarly, 401K and IRA accounts are also protected from certain lawsuits.

Same law does not apply to regular after tax/cash stock market portfolios or other assets ...almost all others are subject to creditor claims - so in a worst case scenario, that paid off house or 401K/IRA comes with creditor claim protection which could be the difference between losing everything and keeping a significant portion of one's net worth after a financial tragedy.

A little off topic....but good discussion none the less and thanks ERD50 !

 

[clifp]

Maybe I am being too simplistic here... but.

Lets assume that OP is very good saver (given his income, accumulated assets, and young age probably a good bet) Despite making almost 14K/year he only spends 7K/month. Of the 7K, 800/month is for mortgage.

Great Recession II: Revenge of Moral Hazard comes back. Once again stocks drop by more than 50% and the OP reverse courses and has a high equity concentration.
The 300K in saving gets cut into $150K

Everyone gets laid off. Their 150K in saving will last more than 20 months.

Now lets imagine the mortgage is paid off and the savings go from 300K to $130K
Once again GRII happens and the savings gets cut in 1/2 to $65K, and lay offs occur.
Now expense are reduced from $7K/month to $6200 but their $65k worth of saving only last 10 months.

 

[Fermion]

Now lets imagine the mortgage is paid off and the savings go from 300K to $130K
Once again GRII happens and the savings gets cut in 1/2 to $65K, and lay offs occur.
Now expense are reduced from $7K/month to $6200 but their $65k worth of saving only last 10 months.

Exactly who keeps spending $6200 a month when the stock market drops 50% and they are laid off?

 

[atfourty]

Hi ( i am the OP),
If i don't pay off the house, what would you guys recommend i do with the cash ? As a reminder, i have 95K in cash - i need about 25K for 6-month emergency fund; So essentially what am i to do with 60K ( i am a really hesitant to apply that in the stock market, given it is at all time highs).

 

[gerntz]

I would not pay off the house. If you're earning $155k a year, then $800/month is a nit - put it on autopay and forget about it. I think in the long run you will earn more than the 4% mortgage interest that you are paying. You could probably even go out today and buy some muni bonds that pay more than the after-tax cost of mortgage interest (5 and 10 year investment grade munis are paying 3.3% and 4.7%, respectively).

Plus, the capital gains tax you would have to pay on stocks you sell to pay off the house doesn't make it worthwhile IMO.

Unless your job security is poor, you probably have too much cash, but you already know that. Your first step is to decide how much of an emergency fund you want to carry. I would target 12 months of spending.

Another decision is what is your target AA (excluding your emergency fund). When I was 32, it would have been 100% stocks, but you need to decide what is comfortable for you.

If you decide your AA is 100% stocks, then take any excess cash and invest 1/6 of it each month for the next 6 months or 1/12th of it for each of the next 12 months.

Then go play with that 4 month old.

+1

 

[Keim]

I sold stocks to pay off my home during the depths of the recession. I mention this so you realize I am not against a paid off home. I like having no mortgage, and do not regret my decision from either financial or emotional sides.

The numbers don't work for you. The numbers worked for me. I only owed about $50k, had adequate reserves, and was locked in to a 6% mortgage. You are cutting out too much liquidity, and potential upside due to how cheap money is now.

I wouldn't do it given the numbers you have shared.

 

[pb4uski]

Hi ( i am the OP),
If i don't pay off the house, what would you guys recommend i do with the cash ? As a reminder, i have 95K in cash - i need about 25K for 6-month emergency fund; So essentially what am i to do with 60K ( i am a really hesitant to apply that in the stock market, given it is at all time highs).

Market timing does not work. Besides, presumably this is money will be invested for the long haul and even though the market is near all-time highs, I still think that the stock market will be good in the long run.

If you still want to market time, one option is to stay in cash (online savings accounts yield about 0.8%) and have some gunpowder if there is a correction.

I would value average it in over 6-12 months.

Another alternative that I recently bought is Merger Fund which would add some diversification (google it above and you'll find some posts on it).

Do you currently have international equities in your portfolio? If not, that may be a good home that would provide some diversification.

 

[aja8888]

Hi ( i am the OP),
If i don't pay off the house, what would you guys recommend i do with the cash ? As a reminder, i have 95K in cash - i need about 25K for 6-month emergency fund; So essentially what am i to do with 60K ( i am a really hesitant to apply that in the stock market, given it is at all time highs).

Put it in a high interest MM account like Ally @ ~.85%.

Then figure out what one additional principal payment is per month on that house note and start adding that amount to each payment to make it a 15 year note paydown.

 

[samclem]

Hi ( i am the OP),
If i don't pay off the house, what would you guys recommend i do with the cash ? As a reminder, i have 95K in cash - i need about 25K for 6-month emergency fund; So essentially what am i to do with 60K ( i am a really hesitant to apply that in the stock market, given it is at all time highs).

This $60K is no different from any other savings/investments you have, so include it into the rest of your asset allocation plan. If you don't have such a plan,then this would be a great time to make one. There are lots of variables as to where the best place to put this money would be for you, given your circumstances. You have a long time horizon, so a large portion of this should probably be in stocks. They can spend a >lot< of time at or near their highs, trying to time the "get in" point is not feasible. Just know that when you invest your $60K you'll be buying XX number of shares in a lot of companies, and you'll still own exactly the same number of shares even if the market takes a drop. That is, you'll still own the same percentage of a large number of companies, and you'll still get dividends from many of them. Historically US stocks have nearly always done better than bonds, CDs, etc over a 20 year timeframe. And that type of long timeframe is what matters, not what happens next quarter or next year.

Pick an asset allocation you are comfortable with, rebalance every year or so, and don't look at it very often.

 

[clifp]

+1 to what Sam said.

One important thing to understand is that stock are not at an all time high. Inflation matter even when it is low like it has been this last decade. When you adjust for inflation stocks are more than 8% below there all time high of 2010.84 in Aug 2000. More importantly what drives stock is earning and last years earning are more than 50% higher than they were in 2000.


I made a long post discussing Warren Buffett annual letter here. Now my analysis ain't particularly important, but I think everyone should at least read a summary of what Buffett's says. His track record is beyond impressive and when he suggests that his 60 year wife stick 90% of her assets in stocks.. I'd pay attention.

 

[Sesq]

Don't drain the Roth's, you don't get to put that stuff back in.

How much can you pay off w/o the Roth's? How much if you let the cash drop to zero and sold your taxable (if you were going to tap the Roth's you could still do that in an emergency, but if no emergency occurs then you haven't wasted years of tax free growth)?

If you really only need $25k as liquid and you don't want to go in the stock market I see nothing wrong with pushing $60k against the mortgage. Its not liquid and won't help you in the various "sky is falling" scenarios, but so what. Earning sub 1% taxable while paying 4% blows.

 

[Turboslacker]

Or just spent $60K on a new pickup. Amazing how expensive those are these days. Then your decision is much simpler... pick a color. See problem solved just like the majority American consumer.

Sent from my HTC One using Early Retirement Forum mobile app

 

[panhead]

Or just spent $60K on a new pickup. Amazing how expensive those are these days. Then your decision is much simpler... pick a color. See problem solved just like the majority American consumer.

Sent from my HTC One using Early Retirement Forum mobile app

Mmmm, 1 ton Dodge Quad Cab Cummings Turbo Diesel.....forget paying off the house, I know what I'm getting!
Haha, if I bought one of these it'd already be 15 years old and I'd be fixing it for fun. I'm just too cheap, lol!