Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

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Orange_Philosophy
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Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

I've read all the back and forth threads on this topic and I know it's down to my personal preferences and concerns/fears but I'm asking anyway in case I'm missing something obvious.

I have $1.6M spread roughly equally over three accounts - taxable, IRA, and 401K. The only debt I have are two properties - one I live in and one investment. The investment is scheduled to close (sell) shortly and I'll receive a 300K "windfall". Obviously I'll have to give uncle sammy his cut... That said my mortgage is right at $200K remaining and it is worth perhaps $800K. Mortgage is 3.66%. I refi'd just little too early so it wasn't worth it to do it again.

On one hand, I'd be all done with any type of debt with about $50K in cash to deposit which I'd put in my taxable... either a 3-fund or life strategy moderate. That's very appealing from an ease of mind perspective. I know my rate of return is essentially locked in at 3.7% and I can invest my mortgage payments from both starting immediately and grow that way using more of a DCA. Given this is close to the 4% rule I'm leaning pretty hard in this direction.

The other half of me tells me I can pay off that mortgage any time given my assets if I got into some kind of life emergency and that I'd be better off growing my retirement nest egg. Obviously if the market pulls back hard I'd regret it but I'd just have to wait it out like I have in the past. I'm just North of 50 so I've seen my share of market downturns.

Any further suggestions/concerns you'd add?
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marti038
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by marti038 »

No right or wrong here really, but personally, I'd pay off the mortgage and invest whatever's left. I'd lean heavier in this direction the closer I was to retirement. Not sure when you're planning on taking that step, but if it's soon I'd say drop that mortgage.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by grkmec »

Your mortgage rate is too high. Pay it down or refinance
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Kitty Telltales »

If you haven't yet experienced it in your adulthood, what an amazing and freeing feeling it is knowing you have zero debt.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by masha12 »

IMO, there is a huge difference between paying down a mortgage, and paying off a mortgage. Paying down a mortgage with a windfall might not make sense because you still have the monthly payments. Paying off a mortgage with a windfall eliminates a monthly expense.

Given your interest rate, I'd pay off the mortgage. You can't get 3.66% guaranteed anywhere right now. And, you will no longer have to think about if you should try to pay of the morgage early.

And, I'll second how great it is to know you don't owe anybody anything. I have no philosophical objection to mortgage debt, but it is really nice not to owe it.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Watty »

Orange_Philosophy wrote: Mon Apr 12, 2021 1:43 pm I know my rate of return is essentially locked in at 3.7% and I can invest my mortgage payments from both starting immediately and grow that way using more of a DCA. Given this is close to the 4% rule I'm leaning pretty hard in this direction.
Investing the money and earning a higher rate of return is a lot harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.

Everyone is different but if I was in your situation I would just pay it off and then invest the freed up mortgage payment each month.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by miket29 »

Everyone is different so no wrong answer. For me, it would come down to how long before I planned on retiring and how aggressive I am in the market. If you have 15-20 years until retirement and plan on being heavily in stocks for most of that period (perhaps gliding towards more bonds the last few years before retirement) then investing in the broad market including international and hoping to beat the mortgage rate would be reasonable. But its a risk, and sometimes one is worse off when they take a risk.

Incidentally if you itemize then I'd contend the rate to beat is not 3.7% but the after-tax interest rate which is lower. Or, conversely, if you pay off the mortgage you aren't getting a guaranteed 3.7% but the after-tax interest rate. The $200K mortgage (ignoring amortization) costs $7,400 a year paid to the bank, but since it is deductible from income the after-tax cost is $5,772 if you are in the 22% tax bracket and pay no state income tax. So if you paid off the mortgage you would be $5,772 better off per year, which is about 2.9% of that $200K
Last edited by miket29 on Mon Apr 12, 2021 2:37 pm, edited 1 time in total.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Toons »

pay off that mortgage



:wink:
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by lazynovice »

What would I do? I’d pay off the mortgage.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by anon_investor »

marti038 wrote: Mon Apr 12, 2021 1:48 pm No right or wrong here really, but personally, I'd pay off the mortgage and invest whatever's left. I'd lean heavier in this direction the closer I was to retirement. Not sure when you're planning on taking that step, but if it's soon I'd say drop that mortgage.
+1.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by LittleMaggieMae »

I guess I'd base my decision on why I was selling the Investment Property. (I'm assuming there was some over reaching goal or reason to sell....)

If I was close to retirement and my current nest egg (and pension and/or SS) wouldn''t cover my retirement expenses - I'd invest the money and keep paying on the mortgage.

If I was close to retirement (and had enough for retirement) AND I wasn't planning on downsizing/moving someplace else in retirement - I'd just pay off the mortgage and be done with it. If I had enough for retirement, was close to retiring AND going to move - I'd invest/bank the $$ - I'd need $$ for a DP, fixing up the house, moving, getting the new house up to snuff. The convenience of having the $$ available for this big move would be worth whatever 'returns' I wouldn't get by investing it.

If I wasn't close to retirement and planning to move soon anyway I'd invest/bank the $$. If I wasn't close to retiring and planning to stay put = I MIGHT decided to prepay the mortgage monthly to get the mortgage paid off by some "special to me" date. In the future if I had to I could reallocate the extra I was paying on the mortgage (life happens). Both of those options MIGHT get me to Financial Independence or Early Retirement in the future - if it's something I haven't thought about becasue I'm not old or experiencing job burn out right now.

How's that for an answer?
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Dave55 »

I would absolutely pay it off. That freedom is "priceless".

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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Wannaretireearly »

Following. Any gotchas to paying off early?
Will the mortgage company try to squeeze you somehow?

I'm in a similar spot to OP. Expect a smallish windfall in the summer. Likely enough to pay off my remaining mortgage of around $50k @ 2.875% with 15 months left. Feel like it could be a good move, but not sure its worth it with just a year or so left?
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by 8foot7 »

Personally I would feel different with 1.6 million and a paid off house than 1.8 million and a 200k mortgage.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by rockstar »

What's your FIRE number?
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by LittleMaggieMae »

Wannaretireearly wrote: Mon Apr 12, 2021 7:06 pm Following. Any gotchas to paying off early?
Will the mortgage company try to squeeze you somehow?

I'm in a similar spot to OP. Expect a smallish windfall in the summer. Likely enough to pay off my remaining mortgage of around $50k @ 2.875% with 15 months left. Feel like it could be a good move, but not sure its worth it with just a year or so left?
The only gotcha I've ever encountered was that BoA (I hate that bank) sat on my escrow $$ for 20 business days before cutting the check and sending me the money. I got a nice snail mail letter letting me know my mortgage was paid in full, and BoA removed the loan from my online banking screen - and then it was about 4 weeks before I got the escrow account amount.

Ah, not really a "gotcha" but if you review your mortgage info on line - you might want to print out any documents/statements that you might find helpful (like how much your escrow amount is - and when the insurance(s) and property taxes are paid... you'll need to make those payments yourself in the future. Once your mortgage is closed/ended you might not have access to those documents. If you haven't given much thought to your Property Taxes and Insurance - nows a good time to figure out when and how much the bills will be. You can then prepare accordingly. I have allocate money "monthly" to the Property Tax sinking fund - so I can pay the twice a year bill.

I have paid off mortgages with a 10K or 15K - if I had cash on hand (mind you I had small mortgages under 100K...)

In your case I'd probably pay off the mortgage with your windfall. Or set it up so it pays off at a convenient time for you - there will be mail and paperwork you will want to keep.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Grt2bOutdoors »

Burn that mortgage. No question, I'd pay it off. From a financial perspective, no one is offering a bond at 3.66% guaranteed today but you have the opportunity to purchase one with that reallocation of assets from real estate to cash. From an emotional perspective - you owe "no one".
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by HootingSloth »

What's your approximate current age and spending, and your goals for age and spending at retirement? I think these kinds of things matter to the answer. Without more information, I would say probably pay off the mortgage. You won't go wrong either way.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Watty »

Wannaretireearly wrote: Mon Apr 12, 2021 7:06 pm Following. Any gotchas to paying off early?
Will the mortgage company try to squeeze you somehow?
It is just a clerical transaction.

You need to call them to get the payoff amount and instructions and not just send them the loan balance. The exact amount can be a be a bit different depending on the day that the money is received and there may be something like a $100 processing fee by the county to record the mortgage lien release.

The amount they tell you to send may be a hundred dollars or so higher than is actually needed just so that there will not be a shortage if there is a glitch. They will send you a check for any extra amount.

If you had an escrow account you do need to be sure that your insurance and property tax is paid even if you do not get a bill that was due around the time when you paid off the loan. You should make sure that future bills are sent to you and not the lender.

You also need to call your home insurance company to take the lender off of your home insurance policy. Otherwise if there is a large claim any checks will be made out to you and your lender.

A few months after all the paperwork has had time to clear you should check with your county to make sure that the mortgage lien was correctly removed. Once in a blue moon there will be a glitch and it is not removed which will be a lot more difficult to fix in 20 years when you or your heirs are trying to sell the he house. In my county you can see the property liens online since it is a public record so it only took me five minutes to do this.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

Thanks for all the thoughtful replies. As mentioned in my post, I'm 52 and would like to retire no later than 56. FIRE number is somewhere about 2.0 but I can do better than that if I stick around just a little longer and hustle. I just don't know how much hustle I've got left in me. I'd like my post-retirement spending to be around 125K/year gross. I have a 10K/year pension that will adjust with inflation. 2.0 will get me 80+10+40 from wife and my SS. I just have to find something to do to keep my wife and myself busy to close the gap between FIRE age and SS. Surely we can find a "hobby job" that we both like and make 40K combined. She likes her job enough she may work a bit longer than me so that'd be a bonus as it covers us both.

I don't think paying off vs. investing it will make much of an overall difference in that timeline. During those 3-4 years after having paid off all debts, 100% of any extra money left each month will get invested. Both max 401K and maybe another 25K in taxable.

The more I read the responses the more I'm convinced that I'm leaning the right direction... Pay it off and pour as much as I can in to a life strategy or similar portfolio, try to get to 2.0M total plus 1 full year of living in cash and pull the ripcord.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by grabiner »

It makes more sense to split the question in two:

How much do you want to have in stock?

Do you want the money not in stock to be in bonds, or use it to pay off the mortgage?

The first question is the harder one to answer. The second question has a relatively easy answer; given that you don't need additional liquidity (since you already have a large taxable account), it is better to invest in a mortgage payment at a risk-free 3.66% than in a bond fund yielding significantly less. (If you can refinance to a much lower rate, and the interest will be all tax-deductible, that would reduce the risk-free return on a mortgage prepayment by enough that it might not be worthwhile.)
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by tibbitts »

I'd pay off the mortgage; I wouldn't even consider investing instead.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

grabiner wrote: Mon Apr 12, 2021 10:14 pm If you can refinance to a much lower rate, and the interest will be all tax-deductible, that would reduce the risk-free return on a mortgage prepayment by enough that it might not be worthwhile
I don't have a whole lot of deductions. We barely went over the 24K standard deduction with both properties. Selling the second one... I'll not have enough deductions to climb that hurdle.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by grabiner »

Orange_Philosophy wrote: Mon Apr 12, 2021 10:55 pm
grabiner wrote: Mon Apr 12, 2021 10:14 pm If you can refinance to a much lower rate, and the interest will be all tax-deductible, that would reduce the risk-free return on a mortgage prepayment by enough that it might not be worthwhile
I don't have a whole lot of deductions. We barely went over the 24K standard deduction with both properties. Selling the second one... I'll not have enough deductions to climb that hurdle.
The investment property should not affect whether you itemize deductions, as the interest on its mortgage is deductible against the income from that property, rather than as an itemized deduction.

Whether your mortgage is tax-deductible depends primarily on how much you donate to charity; some people donate enough that the SALT deduction plus charity is already more than the standard deduction, and thus deduct all the interest.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by todaysBob »

Watty wrote: Mon Apr 12, 2021 2:05 pm
Orange_Philosophy wrote: Mon Apr 12, 2021 1:43 pm I know my rate of return is essentially locked in at 3.7% and I can invest my mortgage payments from both starting immediately and grow that way using more of a DCA. Given this is close to the 4% rule I'm leaning pretty hard in this direction.
Investing the money and earning a higher rate of return is a lot harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.

Everyone is different but if I was in your situation I would just pay it off and then invest the freed up mortgage payment each month.
I am not sure this example is apples to apples. OP will not use the investment account to pay his mortgage. He will continue paying his mortgage from wherever he is paying it right now, most likely a paycheck. If invested, windfall will become part of his portfolio like rest of his money. If he is not selling investments today to pay mortgage, why would he suddenly start an yearly sell now?
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by todaysBob »

todaysBob wrote: Tue Apr 13, 2021 1:25 am
Watty wrote: Mon Apr 12, 2021 2:05 pm
Orange_Philosophy wrote: Mon Apr 12, 2021 1:43 pm I know my rate of return is essentially locked in at 3.7% and I can invest my mortgage payments from both starting immediately and grow that way using more of a DCA. Given this is close to the 4% rule I'm leaning pretty hard in this direction.
Investing the money and earning a higher rate of return is a lot harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.

Everyone is different but if I was in your situation I would just pay it off and then invest the freed up mortgage payment each month.
I am not sure this example is apples to apples. OP will not use the investment account to pay his mortgage. He will continue paying his mortgage from wherever he is paying it right now, most likely a paycheck. If invested, windfall will become part of his portfolio like rest of his money. If he is not selling investments today to pay mortgage, why would he suddenly start an yearly sell now?
Having said that, I would also be in favor of getting rid of the mortgage as OP is 52 and said he wants to retire soon. But my point about the example still stands.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by shess »

Orange_Philosophy wrote: Mon Apr 12, 2021 1:43 pm On one hand, I'd be all done with any type of debt with about $50K in cash to deposit which I'd put in my taxable... either a 3-fund or life strategy moderate. That's very appealing from an ease of mind perspective. I know my rate of return is essentially locked in at 3.7% and I can invest my mortgage payments from both starting immediately and grow that way using more of a DCA. Given this is close to the 4% rule I'm leaning pretty hard in this direction.
I'm not entirely certain how to parse this, but if you mean "Pay off the mortgage, and redirect the previous mortgage payments into new investments in a taxable account", then you have my full support. IMHO that makes a lot of sense.

Personally, when I paid off our mortgage, I found it quite surprising and pleasant how nice it was to no longer have that payment to make. I mean, I paid it off by liquidating appreciated investments, so clearly we had the capability to do that, but if I'd have lost my job or something, having to make that decision would have been one more scary thing on top of various other scary things. Clearing out the mortgage when I was still working and the market seemed to be rising and rising just felt like prudent decision-making, and I could see that other plausible scenarios would have felt more like failure.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by steve r »

anon_investor wrote: Mon Apr 12, 2021 6:24 pm
marti038 wrote: Mon Apr 12, 2021 1:48 pm No right or wrong here really, but personally, I'd pay off the mortgage and invest whatever's left. I'd lean heavier in this direction the closer I was to retirement. Not sure when you're planning on taking that step, but if it's soon I'd say drop that mortgage.
+1.
+1
I might add that if you did so, I might bump up my equity holdings (reduce bond holdings) a touch perhaps half the $200,000 or $100,000). In my mind, you have a loan at 3.7 and likely hold bonds that pay roughly half that. This is sort of a middle ground.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

Again, thanks for all of the thoughtful responses.

A couple more quick notes as I know others will read this with interest.

The mortgage on an investment property most certainly can be tax deductible. Just as a primary home, a secondary/vacation home's interest, tax, closing costs, etc. is tax deductible. There are a few rules/caveats, but as long as those are followed, it's still deductible. I don't rent it out and I do go there frequently enough so I'm in the "qualified" category. That means I'll be losing a pretty big write off because the mortgage on my investment property is almost twice my home. Selling it puts a windfall in my pocket and about $30K/year new cash into my taxable that would otherwise pay two mortgages that I currently pay from my and my spouse's paychecks.

I pretty much have come to the conclusion that the reducing stress of debt is worth the opportunity cost of what I *might* make investing instead. I think I'll get really, really aggressive for a year at least and spend zero outside of basic living expenses and try to build my cash position as fast as possible.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Exchme »

Orange_Philosophy wrote: Tue Apr 13, 2021 7:30 am I pretty much have come to the conclusion that the reducing stress of debt is worth the opportunity cost of what I *might* make investing instead. I think I'll get really, really aggressive for a year at least and spend zero outside of basic living expenses and try to build my cash position as fast as possible.
Any actual $ difference depends on future unknowable events, but the peace of mind of getting out of debt is real and important to you, so I think you answered your own question!
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by grabiner »

todaysBob wrote: Tue Apr 13, 2021 1:25 am
Watty wrote: Mon Apr 12, 2021 2:05 pm Everyone is different but if I was in your situation I would just pay it off and then invest the freed up mortgage payment each month.
I am not sure this example is apples to apples. OP will not use the investment account to pay his mortgage. He will continue paying his mortgage from wherever he is paying it right now, most likely a paycheck. If invested, windfall will become part of his portfolio like rest of his money. If he is not selling investments today to pay mortgage, why would he suddenly start an yearly sell now?
Money is fungible. It makes no difference to your finances whether you pay your mortgage from your investment account and invest your paycheck, or pay your mortgage from your paycheck (except for any tax issues; it's better to pay a mortgage from a taxable brokerage account and invest a paycheck in a 401(k)).

What matters is which strategy gives you the best trade-off of return versus risk and other benefits. If you hold a bond yielding X% after tax, and have a mortgage with an after-tax rate of Y%, you lose Y-X% of the money every year, compared to selling that bond to pay down the mortgage. So that is only worthwhile if Y is close enough to X that the cost outweighs other benefits. For example, it is usually best to contribute more to a 401(k) rather than pay down a mortgage, because of the tax benefit of the 401(k). And if you need to keep funds liquid, that may be worthwhile as well. Finally, if Y is close to X, the fact that you might refinance your mortgage for a rate less than X if rates fall may make it worth keeping.
Exchme wrote: Tue Apr 13, 2021 7:46 am Any actual $ difference depends on future unknowable events, but the peace of mind of getting out of debt is real and important to you, so I think you answered your own question!
And that's why I suggest separating the decision, to get rid of the unknowable events. If you buy a bond portfolio which makes the same payment every year as your mortgage, you know exactly how much you will gain or lose compared to paying off your mortgage; it is the difference between the price of the bonds and the mortgage balance. If you buy a bond fund with similar duration, you have a very good estimate of what you will gain or lose. So this is the fair comparison.

Once you have decided whether the fair comparison justifies paying off the mortgage or keeping it, you can make a separate decision to take more or less risk, selling bonds to buy stocks for more risk, or holding shorter-term bonds for less risk.
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freckles01
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by freckles01 »

LittleMaggieMae wrote: Mon Apr 12, 2021 6:38 pm I guess I'd base my decision on why I was selling the Investment Property. (I'm assuming there was some over reaching goal or reason to sell....)

If I was close to retirement and my current nest egg (and pension and/or SS) wouldn''t cover my retirement expenses - I'd invest the money and keep paying on the mortgage.

If I was close to retirement (and had enough for retirement) AND I wasn't planning on downsizing/moving someplace else in retirement - I'd just pay off the mortgage and be done with it. If I had enough for retirement, was close to retiring AND going to move - I'd invest/bank the $$ - I'd need $$ for a DP, fixing up the house, moving, getting the new house up to snuff. The convenience of having the $$ available for this big move would be worth whatever 'returns' I wouldn't get by investing it.

If I wasn't close to retirement and planning to move soon anyway I'd invest/bank the $$. If I wasn't close to retiring and planning to stay put = I MIGHT decided to prepay the mortgage monthly to get the mortgage paid off by some "special to me" date. In the future if I had to I could reallocate the extra I was paying on the mortgage (life happens). Both of those options MIGHT get me to Financial Independence or Early Retirement in the future - if it's something I haven't thought about becasue I'm not old or experiencing job burn out right now.

How's that for an answer?
one point i'd add is if you are planning to sell your primary home in retirement, how much equity will you have when you sell if you pay off your home mortgage now?

you're 52 now and want to retire at 56.

i'm not that different from your age and possible retirement age. my home has appreciated a lot and goes over the 250k gain exclusion. i've considered paying off my mortgage many times but held off because i may sell it when i retire.

paying off my mortgage will add to the taxes i'll have to pay minus the 250k gain exclusion if i sell. so for now, i keep investing any extra funds and keep my 3.0% rate.

if your home hasn't appreciated more than your 250/500k gain exclusion this point doesn't matter.
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Orange_Philosophy
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

Selling my current home will probably happen at some point but I love where I am and would like to retire there as I'm on acreage and going back to a container in a cookie-cutter neighborhood is almost nauseating, lol. There are enough projects on my land to keep me busy for many, many years.

That said, if I listed my property today, I'd probably get somewhere close to or a little over $1M for it which would obviously be a huge windfall. If I did that, I could retire *today*. But then where would I live that would bring me the same level of happiness/satisfaction? That answer is not so easy. My cost basis is probably 475K or so all in.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by shess »

freckles01 wrote: Tue Apr 13, 2021 1:05 pm paying off my mortgage will add to the taxes i'll have to pay minus the 250k gain exclusion if i sell. so for now, i keep investing any extra funds and keep my 3.0% rate.

if your home hasn't appreciated more than your 250/500k gain exclusion this point doesn't matter.
Apologies, but how does a mortgage impact the exclusion? Gains are gains, regardless of whether you paid cash or used a mortgage to fund your purchase.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Wannaretireearly »

Watty wrote: Mon Apr 12, 2021 8:58 pm
Wannaretireearly wrote: Mon Apr 12, 2021 7:06 pm Following. Any gotchas to paying off early?
Will the mortgage company try to squeeze you somehow?
It is just a clerical transaction.

You need to call them to get the payoff amount and instructions and not just send them the loan balance. The exact amount can be a be a bit different depending on the day that the money is received and there may be something like a $100 processing fee by the county to record the mortgage lien release.

The amount they tell you to send may be a hundred dollars or so higher than is actually needed just so that there will not be a shortage if there is a glitch. They will send you a check for any extra amount.

If you had an escrow account you do need to be sure that your insurance and property tax is paid even if you do not get a bill that was due around the time when you paid off the loan. You should make sure that future bills are sent to you and not the lender.

You also need to call your home insurance company to take the lender off of your home insurance policy. Otherwise if there is a large claim any checks will be made out to you and your lender.

A few months after all the paperwork has had time to clear you should check with your county to make sure that the mortgage lien was correctly removed. Once in a blue moon there will be a glitch and it is not removed which will be a lot more difficult to fix in 20 years when you or your heirs are trying to sell the he house. In my county you can see the property liens online since it is a public record so it only took me five minutes to do this.
Thanks. Appreciate the tips
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Wannaretireearly »

LittleMaggieMae wrote: Mon Apr 12, 2021 8:10 pm
Wannaretireearly wrote: Mon Apr 12, 2021 7:06 pm Following. Any gotchas to paying off early?
Will the mortgage company try to squeeze you somehow?

I'm in a similar spot to OP. Expect a smallish windfall in the summer. Likely enough to pay off my remaining mortgage of around $50k @ 2.875% with 15 months left. Feel like it could be a good move, but not sure its worth it with just a year or so left?
The only gotcha I've ever encountered was that BoA (I hate that bank) sat on my escrow $$ for 20 business days before cutting the check and sending me the money. I got a nice snail mail letter letting me know my mortgage was paid in full, and BoA removed the loan from my online banking screen - and then it was about 4 weeks before I got the escrow account amount.

Ah, not really a "gotcha" but if you review your mortgage info on line - you might want to print out any documents/statements that you might find helpful (like how much your escrow amount is - and when the insurance(s) and property taxes are paid... you'll need to make those payments yourself in the future. Once your mortgage is closed/ended you might not have access to those documents. If you haven't given much thought to your Property Taxes and Insurance - nows a good time to figure out when and how much the bills will be. You can then prepare accordingly. I have allocate money "monthly" to the Property Tax sinking fund - so I can pay the twice a year bill.

I have paid off mortgages with a 10K or 15K - if I had cash on hand (mind you I had small mortgages under 100K...)

In your case I'd probably pay off the mortgage with your windfall. Or set it up so it pays off at a convenient time for you - there will be mail and paperwork you will want to keep.
Thanks! I don't have escrow or property tax paid thru the mortgage company. I'm hoping I'd save $1 or 2k by paying off the mortgage a year early. I.e. something close to 2.875% on the remaining $50k balance? That would sway me to pay it off. I take standard deduction now anyway, no itemizing...
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by TIAX »

Keep emotions out of it. Refi and 3-fund.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by digit8 »

marti038 wrote: Mon Apr 12, 2021 1:48 pm No right or wrong here really, but personally, I'd pay off the mortgage and invest whatever's left. I'd lean heavier in this direction the closer I was to retirement. Not sure when you're planning on taking that step, but if it's soon I'd say drop that mortgage.
+1. Rates aside, in the FI that I work at we’re in a particular sweet spot. A wave of new people were hired to deal with the influx of new applications and refinances, and these new hires have gotten seasoned enough that it’s a relatively quick and painless process again.

Also +1, there isn’t really a wrong answer here. You’ve gotten yourself in a good place, and whatever direction let’s you sleep at night is going work out fine.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by JupiterJones »

Orange_Philosophy wrote: Tue Apr 13, 2021 7:30 am I pretty much have come to the conclusion that the reducing stress of debt is worth the opportunity cost of what I *might* make investing instead.
Not so sure I'd call a $300K windfall "small" :D , but I'm with you on your strategy here. If you've got a big pile of "spare" money, why not use it to be totally debt-free? Leave all the leveraged speculation games to those folks who feel compelled to fool with them--I've never been one of them.

And hey, if you later decide it was a terrible mistake to get out of debt, you can always go back in. Banks will be more than happy to lend you money against your house for you to invest.
Stay on target...
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

JupiterJones wrote: Wed Apr 14, 2021 8:59 am
Orange_Philosophy wrote: Tue Apr 13, 2021 7:30 am I pretty much have come to the conclusion that the reducing stress of debt is worth the opportunity cost of what I *might* make investing instead.
Not so sure I'd call a $300K windfall "small" :D , but I'm with you on your strategy here. If you've got a big pile of "spare" money, why not use it to be totally debt-free? Leave all the leveraged speculation games to those folks who feel compelled to fool with them--I've never been one of them.

And hey, if you later decide it was a terrible mistake to get out of debt, you can always go back in. Banks will be more than happy to lend you money against your house for you to invest.
Ha! Great post and wise words. It's not small to me but it seems like everyone here is a multi-millionaire and 300K is pocket change relatively speaking, lol.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by shess »

Orange_Philosophy wrote: Wed Apr 14, 2021 9:04 am
JupiterJones wrote: Wed Apr 14, 2021 8:59 am And hey, if you later decide it was a terrible mistake to get out of debt, you can always go back in. Banks will be more than happy to lend you money against your house for you to invest.
Ha! Great post and wise words. It's not small to me but it seems like everyone here is a multi-millionaire and 300K is pocket change relatively speaking, lol.
Mortgages are only tax-deductible when used to purchase a home or fund improvements to same. So if you take out a mortgage to invest, it's not deductible.

Of course, you'll still get a 1098, so I'm guessing there are tons of homeowners out there in this situation who are deducting their mortgage payments anyhow.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by sciencewhiz »

Orange_Philosophy wrote: Mon Apr 12, 2021 10:06 pm Thanks for all the thoughtful replies. As mentioned in my post, I'm 52 and would like to retire no later than 56. FIRE number is somewhere about 2.0 but I can do better than that if I stick around just a little longer and hustle. I just don't know how much hustle I've got left in me. I'd like my post-retirement spending to be around 125K/year gross. I have a 10K/year pension that will adjust with inflation. 2.0 will get me 80+10+40 from wife and my SS. I just have to find something to do to keep my wife and myself busy to close the gap between FIRE age and SS. Surely we can find a "hobby job" that we both like and make 40K combined. She likes her job enough she may work a bit longer than me so that'd be a bonus as it covers us both.
How is your mortgage incorporated into your FIRE number? How much does the FIRE number change if it's paid off vs not?
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Mike Scott »

masha12 wrote: Mon Apr 12, 2021 1:57 pm IMO, there is a huge difference between paying down a mortgage, and paying off a mortgage. Paying down a mortgage with a windfall might not make sense because you still have the monthly payments. Paying off a mortgage with a windfall eliminates a monthly expense.
this; especially at that rate
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C4NT
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by C4NT »

I am surprised that so many comments are stating to pay it off. That is what I would do too. I can't wait to pay off my mortgage.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

sciencewhiz wrote: Wed Apr 14, 2021 11:46 am
Orange_Philosophy wrote: Mon Apr 12, 2021 10:06 pm Thanks for all the thoughtful replies. As mentioned in my post, I'm 52 and would like to retire no later than 56. FIRE number is somewhere about 2.0 but I can do better than that if I stick around just a little longer and hustle. I just don't know how much hustle I've got left in me. I'd like my post-retirement spending to be around 125K/year gross. I have a 10K/year pension that will adjust with inflation. 2.0 will get me 80+10+40 from wife and my SS. I just have to find something to do to keep my wife and myself busy to close the gap between FIRE age and SS. Surely we can find a "hobby job" that we both like and make 40K combined. She likes her job enough she may work a bit longer than me so that'd be a bonus as it covers us both.
How is your mortgage incorporated into your FIRE number? How much does the FIRE number change if it's paid off vs not?
My mortgage payment is not factored into my FIRE number as I expect, one way or the other, to be mortgage free before I retire. My FIRE number leaves me with enough discretionary, however, to make the mortgage payment if I had to. It's only $1K/month as I put a huge downpayment on it.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by Orange_Philosophy »

shess wrote: Wed Apr 14, 2021 10:49 am
Orange_Philosophy wrote: Wed Apr 14, 2021 9:04 am
JupiterJones wrote: Wed Apr 14, 2021 8:59 am And hey, if you later decide it was a terrible mistake to get out of debt, you can always go back in. Banks will be more than happy to lend you money against your house for you to invest.
Ha! Great post and wise words. It's not small to me but it seems like everyone here is a multi-millionaire and 300K is pocket change relatively speaking, lol.
Mortgages are only tax-deductible when used to purchase a home or fund improvements to same. So if you take out a mortgage to invest, it's not deductible.

Of course, you'll still get a 1098, so I'm guessing there are tons of homeowners out there in this situation who are deducting their mortgage payments anyhow.
I think we're splitting hairs here... If you buy a second home, say a vacation home, the interest, taxes, closing costs, etc. are tax deductible as long as you actually use it at least 14 days out of the year. Whether I buy it hoping that it will appreciate or just for the enjoyment doesn't change how it is deductible even if I buy it as an "investment" hoping for future gains. That said, may people buy a second home and rent it out as an investment. THAT is definitely an investment property and is a whole different set of rules. I bought my second property KNOWING it would appreciate and PLANNING on going there frequently to enjoy it. It just appreciated MUCH faster than anyone had a right to hope for so I'm exiting while the getting is good.

Further side note: if you purchase raw land and begin the process of building on it, you can claim it as a second home (standard deductions) for 24 months. By the end of 24 months it must have cooking, sleeping, and toilet/plumbing to qualify as "livable".
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by JupiterJones »

shess wrote: Wed Apr 14, 2021 10:49 am Mortgages are only tax-deductible when used to purchase a home or fund improvements to same. So if you take out a mortgage to invest, it's not deductible.
True, but with the standard deduction as high as it is these days, and interest rates as low as they are, you'd have to pull a pretty massive amount out of your house to even begin to start seeing any benefit at all from the tax deduction anymore.

Like $800K+ if I'm figuring it correctly and you don't have any other deductions to beef the total up.
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by manuvns »

will your portfolio beat 3-4% mortgage rate in long run ? if yes invest it in portfolio . if not i would split it between both .
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Re: Which would you do with a small windfall? Pay remaining mortgage or 3-fund it?

Post by grabiner »

JupiterJones wrote: Thu Apr 15, 2021 1:26 pm
shess wrote: Wed Apr 14, 2021 10:49 am Mortgages are only tax-deductible when used to purchase a home or fund improvements to same. So if you take out a mortgage to invest, it's not deductible.
True, but with the standard deduction as high as it is these days, and interest rates as low as they are, you'd have to pull a pretty massive amount out of your house to even begin to start seeing any benefit at all from the tax deduction anymore.

Like $800K+ if I'm figuring it correctly and you don't have any other deductions to beef the total up.
If you have a large mortgage, you are also probably at the SALT limit, from property taxes on the house with the mortgage, and income or sales taxes on the income that lets you get enough money to afford that expensive a house. Thus most $500K mortgages are partly deductible. (For singles, the standard deduction is halved but the SALT limit is not; singles who donate a moderate amount to charity may have enough deductions to itemize even without a mortgage, and deduct all their mortgage interest.)
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