Another mortgage payoff scenario

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Triple digit golfer
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Another mortgage payoff scenario

Post by Triple digit golfer »

Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA

Scenario 2:
Sell equities and bonds from above 80/20 portfolio to pay off mortgage, in a ratio that would result in an ending portfolio value of 90/10.

Additional details:

-We hold an 80/20 AA, but not enough in bonds to pay off the mortgage. Thus, I have no interest in paying it DOWN, but would pay it OFF.

-If we did not have a mortgage, we would hold a 90/10 AA. I am not willing to hold less than 10% bonds in any situation.

-Thus, the question came up from my wife: Why not sell enough stocks and bonds in whatever ratio required (this happens to work out to 58/42) so that the mortgage is paid off and we end with a 90/10 portfolio?

-This will result in us being mortgage-free (she would be happy) and enough bonds to sleep at night (I would be happy).

How does one objectively look at this? Forget risk, I am well aware that the risk profiles are apples and oranges and I'm okay with that. From a mental standpoint, I'd sleep equally well at night in each scenario. I'm trying to determine which specifically has a higher expected ending value after the 29.5 years.

I look at it as selling equities and bonds to pay off the mortgage would be betting that a 58/42 AA (the ratio needed to be sold) won't return more than 2.99%. But I'm not sure how to factor in the higher expected future return of the 90/10 portfolio over 80/20. I assume it is pretty negligible.

The transaction would be:

Sell $177k in stock
Sell $128k in bonds
Pay off $305k, 2.99% mortgage with 29.5 years remaining
Silk McCue
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Re: Another mortgage payoff scenario

Post by Silk McCue »

You didn’t mention the tax implications of selling those assets which will have a significant impact on the analysis.

If your mortgage supports recasting you could do so and reduce the monthly payment rather than having to choose an all or nothing solution.

Cheers
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

Silk McCue wrote: Sun Jan 17, 2021 5:19 pm You didn’t mention the tax implications of selling those assets which will have a significant impact on the analysis.

If your mortgage supports recasting you could do so and reduce the monthly payment rather than having to choose an all or nothing solution.

Cheers
Assume no tax implications. We have some options in that department.

No recasting; this is a brand new refinance.
Hyperchicken
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Re: Another mortgage payoff scenario

Post by Hyperchicken »

What changed between 6 months ago when you got the mortgage, and now?
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sergeant
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Re: Another mortgage payoff scenario

Post by sergeant »

Who knows which scenario will have the best long term financial return, the best scenario for long term relationship return would be to go with DW's request.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
fallingeggs
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Re: Another mortgage payoff scenario

Post by fallingeggs »

You don’t think an 80 stock / 20 bond portfolio will return at least 2.999% over 30 years? That would result in the worst investment period ever, I think. Paying off the mortgage is for safety / good feelings, not to be richer.

I also have a 2.999% mortgage with 29.5 years left! Here is to pandemic buying!
manatee2005
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Re: Another mortgage payoff scenario

Post by manatee2005 »

Do not pay off a 2.99% mortgage.
yog
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Re: Another mortgage payoff scenario

Post by yog »

Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

yog wrote: Sun Jan 17, 2021 5:45 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
That was the recommendation. She said if we are earning less on them than the mortgage, just put those toward the mortgage (fair point from a mathematical perspective). Then I said I would pay it off, not down. Then she said fine, sell some stocks too and I said I am not willing to hold no bonds. Then it was, "I really couldn't care less either way, are you going to get us lunch or should I make something?"

Clearly she doesn't care what we do, she was just humoring me. She said I think about money too much. She's right.
yog
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Re: Another mortgage payoff scenario

Post by yog »

Triple digit golfer wrote: Sun Jan 17, 2021 5:53 pm
yog wrote: Sun Jan 17, 2021 5:45 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
That was the recommendation. She said if we are earning less on them than the mortgage, just put those toward the mortgage (fair point from a mathematical perspective). Then I said I would pay it off, not down. Then she said fine, sell some stocks too and I said I am not willing to hold no bonds. Then it was, "I really couldn't care less either way, are you going to get us lunch or should I make something?"

Clearly she doesn't care what we do, she was just humoring me. She said I think about money too much. She's right.

:mrgreen:

Personal finance is fun. So your challenge is safety, and ready access to what you consider stable value. If your job security is suspect, single earner, etc., I can understand your position. Otherwise, home equity & income usually provides this security while working.

Interest rates are currently low and will remain low for at least 2-3 years. If/once rates begin to increase, the principal value of bonds will decrease. Substantially. A 1% rise in rates will cause long treasuries to decline by almost 20%. This reality makes those of us who are either younger or more aggressive consider a higher equity allocation, and to pay off of debt with our bond allocation.

Given that backdrop, and reading through your AA thread, I'll share my thoughts. I'm a couple of years into a long ER, we paid off our mortgage last year, and our target AA is 90/10. Please feel free to ignore my advice, too - I'm more aggressive than most.

Nearly 100% AA is fine while working. I am not a fan of bonds while in accumulation. An alternative AA is 90% equities & 10% short term treasuries or cash. This is for liquidity. If you have a home base tilt, choose S&P or similar large cap for the 90% equities. This helps protect against a weakening dollar better, and the added safety is helpful. Otherwise stick to equities & bonds in the efficient frontier range: 70/30 to 30/70 for life. An AA of 80/20 is really not that good for anyone - not enough reward for too much risk.

Only after you get your personal AA figured out can we address debt, and how it works in an inflationary environment. An economist will suggest to borrow as much as you can whenever rates are lower than norm, and pay for it with inflation-fueled future dollars as a hedge against inflation. Of course this is dependent on job security, and assumes you aren't also putting spare cash in bonds which lose their value. Some of us have an aversion to debt of any kind, and will liquidate bonds and pay down extra to pay off a mortgage as soon as possible. It is not always financially "smart", but it does usually lead to better safety and enhanced decision-making.

In your situation, I'd personally either keep the mortgage and go to a 100% or 90%/10% AA, or pay it off and go to 100% equities. You could get a HELOC pre-approved if it makes you sleep better. No matter what, I personally wouldn't hold bonds with a mortgage.
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Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

yog wrote: Sun Jan 17, 2021 6:48 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:53 pm
yog wrote: Sun Jan 17, 2021 5:45 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
That was the recommendation. She said if we are earning less on them than the mortgage, just put those toward the mortgage (fair point from a mathematical perspective). Then I said I would pay it off, not down. Then she said fine, sell some stocks too and I said I am not willing to hold no bonds. Then it was, "I really couldn't care less either way, are you going to get us lunch or should I make something?"

Clearly she doesn't care what we do, she was just humoring me. She said I think about money too much. She's right.

:mrgreen:

Personal finance is fun. So your challenge is safety, and ready access to what you consider stable value. If your job security is suspect, single earner, etc., I can understand your position. Otherwise, home equity & income usually provides this security while working.

Interest rates are currently low and will remain low for at least 2-3 years. If/once rates begin to increase, the principal value of bonds will decrease. Substantially. A 1% rise in rates will cause long treasuries to decline by almost 20%. This reality makes those of us who are either younger or more aggressive consider a higher equity allocation, and to pay off of debt with our bond allocation.

Given that backdrop, and reading through your AA thread, I'll share my thoughts. I'm a couple of years into a long ER, we paid off our mortgage last year, and our target AA is 90/10. Please feel free to ignore my advice, too - I'm more aggressive than most.

Nearly 100% AA is fine while working. I am not a fan of bonds while in accumulation. An alternative AA is 90% equities & 10% short term treasuries or cash. This is for liquidity. If you have a home base tilt, choose S&P or similar large cap for the 90% equities. This helps protect against a weakening dollar better, and the added safety is helpful. Otherwise stick to equities & bonds in the efficient frontier range: 70/30 to 30/70 for life. An AA of 80/20 is really not that good for anyone - not enough reward for too much risk.

Only after you get your personal AA figured out can we address debt, and how it works in an inflationary environment. An economist will suggest to borrow as much as you can whenever rates are lower than norm, and pay for it with inflation-fueled future dollars as a hedge against inflation. Of course this is dependent on job security, and assumes you aren't also putting spare cash in bonds which lose their value. Some of us have an aversion to debt of any kind, and will liquidate bonds and pay down extra to pay off a mortgage as soon as possible. It is not always financially "smart", but it does usually lead to better safety and enhanced decision-making.

In your situation, I'd personally either keep the mortgage and go to a 100% or 90%/10% AA, or pay it off and go to 100% equities. You could get a HELOC pre-approved if it makes you sleep better. No matter what, I personally wouldn't hold bonds with a mortgage.
Thanks for the detailed post and your perspective.

We are indeed a single income household and my job is just average stability. Those are my reasons for holding the bonds.

I have thought a lot about it. I would probably feel fine at 90/10 with or without the mortgage, but my fear is that as soon as I do it, the market will fall. If I was going to do it, March would have been a great time. However, I didn't make any changes because I felt I needed the 20% bonds to sleep at night. Maybe in the next crash I won't feel that way. Hard to say.

So, while I realize that bonds won't return 2.99%, I also can't bring myself to put them toward the mortgage. I suppose I can split the difference and put some to the mortgage and get to 90/10 that way. If stocks tank I wouldn't have regret because I wouldn't have put any more dollars into them.

Currently, besides a couple months in checking, bonds are essentially an emergency fund. If I were to lose my job and the market tanks, I'd sell bonds until back to my AA. I would always sell the heavy asset class, so in a market decline that would be bonds.

Any other ideas/suggestions? You said you wouldn't hold bonds with a mortgage, so would you put all of them plus some equity to pay off the mortgage and then be 100% equity?
yog
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Re: Another mortgage payoff scenario

Post by yog »

Triple digit golfer wrote: Sun Jan 17, 2021 7:07 pm
Any other ideas/suggestions? You said you wouldn't hold bonds with a mortgage, so would you put all of them plus some equity to pay off the mortgage and then be 100% equity?
I understand and remember well the tradeoffs you're thinking through. I was a single earner with a lot riding on the outcome of my decisions all throughout my career, too. My ER was not our original plan and came about 6 years earlier than expected, but it worked out that way because I was prepared for anything.

In your situation, it may be helpful to focus on what safety number gets you to re-employment. You want to preserve that, and then figure out how best to deploy what's left. That safety number might be 100k, 150k, whatever makes you sleep well. Earlier in my career when my job situation was questionable to my wife, her number was 100k in the bank. I wasn't ecstatic about it, but that's what we did. My job was to earn enough to make it become pointless. We kept the rest in equities, and focused on paying down houses within 15 years or less.

What I meant by not holding bonds with a mortgage has to do with the benefit of the investment benefit you get with bonds. You're inherently using leverage in the form of the mortgage to buy safety of bonds instead of risk in equities. Home ownership is usually a safety play already. So, while working I'd rather go to an AA of 90%/10% (or at least your safety number) where the 10% was liquidly, not total bonds or similar, and put the remainder of bonds back into equities (or debt retirement). Holding a bond fund while working and paying down debt just runs counter-intuitive to my thoughts on risk/reward investing. It does not make my position right for you.

If that is out of the equation, then consider buying your way to a safer AA allocation of 70/30 and just plan to remain there for life. A lot of investing is about behavior patterns over long periods of time. The 80/20 AA is just kind of safe and kind of risky. It's kind of bad at both.
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Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

yog wrote: Sun Jan 17, 2021 7:42 pm
Triple digit golfer wrote: Sun Jan 17, 2021 7:07 pm
Any other ideas/suggestions? You said you wouldn't hold bonds with a mortgage, so would you put all of them plus some equity to pay off the mortgage and then be 100% equity?
I understand and remember well the tradeoffs you're thinking through. I was a single earner with a lot riding on the outcome of my decisions all throughout my career, too. My ER was not our original plan and came about 6 years earlier than expected, but it worked out that way because I was prepared for anything.

In your situation, it may be helpful to focus on what safety number gets you to re-employment. You want to preserve that, and then figure out how best to deploy what's left. That safety number might be 100k, 150k, whatever makes you sleep well. Earlier in my career when my job situation was questionable to my wife, her number was 100k in the bank. I wasn't ecstatic about it, but that's what we did. My job was to earn enough to make it become pointless. We kept the rest in equities, and focused on paying down houses within 15 years or less.

What I meant by not holding bonds with a mortgage has to do with the benefit of the investment benefit you get with bonds. You're inherently using leverage in the form of the mortgage to buy safety of bonds instead of risk in equities. Home ownership is usually a safety play already. So, while working I'd rather go to an AA of 90%/10% (or at least your safety number) where the 10% was liquidly, not total bonds or similar, and put the remainder of bonds back into equities (or debt retirement). Holding a bond fund while working and paying down debt just runs counter-intuitive to my thoughts on risk/reward investing. It does not make my position right for you.

If that is out of the equation, then consider buying your way to a safer AA allocation of 70/30 and just plan to remain there for life. A lot of investing is about behavior patterns over long periods of time. The 80/20 AA is just kind of safe and kind of risky. It's kind of bad at both.
Do I have this right:

So essentially, pick my minimum "safe" assets I need to sleep, put it in cash or short term Treasuries, and put the rest to either mortgage debt or equities. Put all new contributions to mortgage debt or equities as well.

For us, it is probably around $125k. We have $205k in bonds plus cash now. We would take $80k, put it into equities or mortgage or a mix, and direct new money to those two as well?
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JoeRetire
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Re: Another mortgage payoff scenario

Post by JoeRetire »

Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA
Of the two, this one, unless you don't think you can get 3% returns from your investments over the long haul for some reason.

Alternatively, since you don't seem to care about risk at all,
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Change to 90/10 AA

Even better.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

JoeRetire wrote: Sun Jan 17, 2021 7:53 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA
Of the two, this one, unless you don't think you can get 3% returns from your investments over the long haul for some reason.

Alternatively, since you don't seem to care about risk at all,
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Change to 90/10 AA

Even better.
I do care about risk.
PA_Boglehead
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Re: Another mortgage payoff scenario

Post by PA_Boglehead »

sergeant wrote: Sun Jan 17, 2021 5:26 pm Who knows which scenario will have the best long term financial return, the best scenario for long term relationship return would be to go with DW's request.
Smart man!
yog
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Re: Another mortgage payoff scenario

Post by yog »

Triple digit golfer wrote: Sun Jan 17, 2021 7:51 pm
yog wrote: Sun Jan 17, 2021 7:42 pm
Triple digit golfer wrote: Sun Jan 17, 2021 7:07 pm
Any other ideas/suggestions? You said you wouldn't hold bonds with a mortgage, so would you put all of them plus some equity to pay off the mortgage and then be 100% equity?
I understand and remember well the tradeoffs you're thinking through. I was a single earner with a lot riding on the outcome of my decisions all throughout my career, too. My ER was not our original plan and came about 6 years earlier than expected, but it worked out that way because I was prepared for anything.

In your situation, it may be helpful to focus on what safety number gets you to re-employment. You want to preserve that, and then figure out how best to deploy what's left. That safety number might be 100k, 150k, whatever makes you sleep well. Earlier in my career when my job situation was questionable to my wife, her number was 100k in the bank. I wasn't ecstatic about it, but that's what we did. My job was to earn enough to make it become pointless. We kept the rest in equities, and focused on paying down houses within 15 years or less.

What I meant by not holding bonds with a mortgage has to do with the benefit of the investment benefit you get with bonds. You're inherently using leverage in the form of the mortgage to buy safety of bonds instead of risk in equities. Home ownership is usually a safety play already. So, while working I'd rather go to an AA of 90%/10% (or at least your safety number) where the 10% was liquidly, not total bonds or similar, and put the remainder of bonds back into equities (or debt retirement). Holding a bond fund while working and paying down debt just runs counter-intuitive to my thoughts on risk/reward investing. It does not make my position right for you.

If that is out of the equation, then consider buying your way to a safer AA allocation of 70/30 and just plan to remain there for life. A lot of investing is about behavior patterns over long periods of time. The 80/20 AA is just kind of safe and kind of risky. It's kind of bad at both.
Do I have this right:

So essentially, pick my minimum "safe" assets I need to sleep, put it in cash or short term Treasuries, and put the rest to either mortgage debt or equities. Put all new contributions to mortgage debt or equities as well.

For us, it is probably around $125k. We have $205k in bonds plus cash now. We would take $80k, put it into equities or mortgage or a mix, and direct new money to those two as well?
Yes, that's it.
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JoeRetire
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Re: Another mortgage payoff scenario

Post by JoeRetire »

Triple digit golfer wrote: Sun Jan 17, 2021 7:55 pm
JoeRetire wrote: Sun Jan 17, 2021 7:53 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA
Of the two, this one, unless you don't think you can get 3% returns from your investments over the long haul for some reason.

Alternatively, since you don't seem to care about risk at all,
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Change to 90/10 AA

Even better.
I do care about risk.
Okay. Then I don't understand what "Forget risk" means in the context where you wrote it.

Anyway, of the two options you presented, #1 is more likely to have the best long term financial return.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

JoeRetire wrote: Sun Jan 17, 2021 7:58 pm
Triple digit golfer wrote: Sun Jan 17, 2021 7:55 pm
JoeRetire wrote: Sun Jan 17, 2021 7:53 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA
Of the two, this one, unless you don't think you can get 3% returns from your investments over the long haul for some reason.

Alternatively, since you don't seem to care about risk at all,
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Change to 90/10 AA

Even better.
I do care about risk.
Okay. Then I don't understand what "Forget risk" means in the context where you wrote it.

Anyway, of the two options you presented, #1 is more likely to have the best long term financial return.
By "forget risk" I meant that those two scenarios were both acceptable to me from a risk standpoint. I'd be able to stomach both equally, even if the risk profiles may be different.
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JoeRetire
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Re: Another mortgage payoff scenario

Post by JoeRetire »

Triple digit golfer wrote: Sun Jan 17, 2021 8:02 pm
JoeRetire wrote: Sun Jan 17, 2021 7:58 pm
Triple digit golfer wrote: Sun Jan 17, 2021 7:55 pm
JoeRetire wrote: Sun Jan 17, 2021 7:53 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm Gut checking after a conversation with my wife.

Which scenario is likely to deliver a higher long term return:

Scenario 1:
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Hold 80/20 AA
Of the two, this one, unless you don't think you can get 3% returns from your investments over the long haul for some reason.

Alternatively, since you don't seem to care about risk at all,
Hold mortgage with 2.99% fixed rate and 29.5 years remaining
Change to 90/10 AA

Even better.
I do care about risk.
Okay. Then I don't understand what "Forget risk" means in the context where you wrote it.

Anyway, of the two options you presented, #1 is more likely to have the best long term financial return.
By "forget risk" I meant that those two scenarios were both acceptable to me from a risk standpoint. I'd be able to stomach both equally, even if the risk profiles may be different.
OKay. So you care about risk, but not about the different risks in the two scenarios. Got it.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
babystep
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Re: Another mortgage payoff scenario

Post by babystep »

Triple digit golfer wrote: Sun Jan 17, 2021 5:53 pm
yog wrote: Sun Jan 17, 2021 5:45 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
That was the recommendation. She said if we are earning less on them than the mortgage, just put those toward the mortgage (fair point from a mathematical perspective). Then I said I would pay it off, not down. Then she said fine, sell some stocks too and I said I am not willing to hold no bonds. Then it was, "I really couldn't care less either way, are you going to get us lunch or should I make something?"

Clearly she doesn't care what we do, she was just humoring me. She said I think about money too much. She's right.
I agree with your wife above. If I don't want to go below 90/10 then let us say if I take 64k from the bonds and pay towards the mortgage then new AA will be like 89/11.

Looks like mortgage payment is about 1300. If total expenses are about $4,000 per month then remaining 64k in bonds is still 16months of expenses, still pretty conservative.

With this transaction, one has just bought themselves a 2.99% guaranteed after tax return for 30 years. This would be financially better than the current choice and I would hope it would pass the sleep test as well.
JBTX
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Re: Another mortgage payoff scenario

Post by JBTX »

I wouldn't pay it off.

I've seen others make the argument before that they don't want to pay it down, but only pay it off. That doesn't make any sense to me.
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dmcmahon
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Re: Another mortgage payoff scenario

Post by dmcmahon »

Here’s a thought: if you’re comfortable with 90/10, sell enough lower-yielding bonds to get down to that level and pay off part of the mortgage early. Sell no stocks at all. Revisit the decision in a few years. FWIW I agree with your wife, you are losing money holding bonds that yield less than the mortgage. Obviously maintain enough liquidity to ride out a protracted emergency situation. JMHO.
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Watty
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Re: Another mortgage payoff scenario

Post by Watty »

Triple digit golfer wrote: Sun Jan 17, 2021 5:09 pm How does one objectively look at this? Forget risk, I am well aware that the risk profiles are apples and oranges and I'm okay with that. From a mental standpoint, I'd sleep equally well at night in each scenario. I'm trying to determine which specifically has a higher expected ending value after the 29.5 years.
I doubt that you will actually keep the mortgage the full 29.5 years since you will likely move long before then for one reason or another. You may also pay it off when you retire. It can vary a lot but at least for me having a paid off house when I retired also made my retirement numbers work a lot better since I did not need the extra income to make mortgage payment. The lower income will help me to get an ACA subsidy, do Roth conversions in a low tax bracket, and take capital gains in the 0% federal long term capital gains tax bracket.

There are endless opinions and threads about the "Should I pay off the mortgage?" question but to me it always boils down to the question of "If you have a paid off house would you take out a new loan just to invest the money?" Most people would not.

Even though interest rates are low it may be harder to invest in a taxable account and come out ahead because of the sequence of returns risk. Here is a simplistic example of the sequence of returns risk that I have posted before. You can play with your numbers looking at it this way.

It does not seem to be a huge percentage of your net worth so I would just pay it off.

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://personal.vanguard.com/us/insigh ... llocations

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.
ryman554
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Re: Another mortgage payoff scenario

Post by ryman554 »

JBTX wrote: Sun Jan 17, 2021 11:08 pm I wouldn't pay it off.

I've seen others make the argument before that they don't want to pay it down, but only pay it off. That doesn't make any sense to me.
Cash flow.

Paying down (without recharacterizing) does not affect immediate cash flow, but does reduce liquidity. Paying off removes the mortgage payment from monthly expenses, so while liquidity is lowered, the ability to restore said liquidity is much improved.

Yes, paying down + recharacterizing is essentially going halfway, so I can see where it doesn't make sense, but recharacterizing also costs $$ and is a hassle, and for some that's an emotional step too far.
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

Triple digit golfer wrote: Sun Jan 17, 2021 5:20 pm
Silk McCue wrote: Sun Jan 17, 2021 5:19 pm You didn’t mention the tax implications of selling those assets which will have a significant impact on the analysis.

If your mortgage supports recasting you could do so and reduce the monthly payment rather than having to choose an all or nothing solution.

Cheers
Assume no tax implications. We have some options in that department.

No recasting; this is a brand new refinance.
What, exactly, are your "options in that department"? I assume you'll have to pay a hefty tax bill.
KlangFool
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Re: Another mortgage payoff scenario

Post by KlangFool »

OP,

It is very simple.


What do you think is the average annual return of an 80/20 portfolio over 10 to 20 years?

5%? 6%? 7%?

If your answer is significantly bigger than 2.99%, why would you pay off the mortgage?


I am not paying off my 3.49% mortgage.


KlangFool
KlangFool
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Re: Another mortgage payoff scenario

Post by KlangFool »

OP,

Unless you are Financially Independent now, I do not see how paying off your mortgage makes you financially safer.


KlangFool
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

KlangFool wrote: Mon Jan 18, 2021 11:10 am OP,

Unless you are Financially Independent now, I do not see how paying off your mortgage makes you financially safer.


KlangFool
I think what we're talking about in most of these cases of mortgage refinancing is the psychological comfort of having less or even no debt. I guess it's hard to quantify that feeling. It's a very personal choice, above and beyond the obvious point that the stock market is likely to go up by more than 3% a year in the future.
KlangFool
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Re: Another mortgage payoff scenario

Post by KlangFool »

mikejuss wrote: Mon Jan 18, 2021 11:16 am
KlangFool wrote: Mon Jan 18, 2021 11:10 am OP,

Unless you are Financially Independent now, I do not see how paying off your mortgage makes you financially safer.


KlangFool
I think what we're talking about in most of these cases of mortgage refinancing is the psychological comfort of having less or even no debt. I guess it's hard to quantify that feeling. It's a very personal choice, above and beyond the obvious point that the stock market is likely to go up by more than 3% a year in the future.
mikejuss,


1) OP is asking for an objective opinion.

<<How does one objectively look at this? Forget risk, I am well aware that the risk profiles are apples and oranges and I'm okay with that. From a mental standpoint, I'd sleep equally well at night in each scenario. I'm trying to determine which specifically has a higher expected ending value after the 29.5 years.>>


2) Psychological comfort does not pay the bills. Some folks pay off their low-interest rate mortgages and then co-sign a higher interest rate student loan for their kids.

KlangFool
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

KlangFool wrote: Mon Jan 18, 2021 11:21 am
mikejuss wrote: Mon Jan 18, 2021 11:16 am
KlangFool wrote: Mon Jan 18, 2021 11:10 am OP,

Unless you are Financially Independent now, I do not see how paying off your mortgage makes you financially safer.


KlangFool
I think what we're talking about in most of these cases of mortgage refinancing is the psychological comfort of having less or even no debt. I guess it's hard to quantify that feeling. It's a very personal choice, above and beyond the obvious point that the stock market is likely to go up by more than 3% a year in the future.
mikejuss,


1) OP is asking for an objective opinion.

<<How does one objectively look at this? Forget risk, I am well aware that the risk profiles are apples and oranges and I'm okay with that. From a mental standpoint, I'd sleep equally well at night in each scenario. I'm trying to determine which specifically has a higher expected ending value after the 29.5 years.>>


2) Psychological comfort does not pay the bills. Some folks pay off their low-interest rate mortgages and then co-sign a higher interest rate student loan for their kids.

KlangFool
Of course, on an objective level, I agree with you. But not all financial decisions are made in a completely objective light. Some people just like the feeling of being debt free, objectivity be damned. Look at what the OP said: "This will result in us being mortgage-free (she would be happy)." Some people would pay off zero-interest mortgages early in order not to be in debt. You won't convince those people to do otherwise with numbers alone.
Last edited by mikejuss on Mon Jan 18, 2021 11:51 am, edited 3 times in total.
Jack FFR1846
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Re: Another mortgage payoff scenario

Post by Jack FFR1846 »

It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
Bogle: Smart Beta is stupid
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

The crux of the issue here is two things:

1. We hate holding so much of an asset that is expected to return about 2% less than our mortgage rate for the foreseeable future.
2. We want to have some security in case of a job loss. So, we do value liquidity (via "safe" assets) to a modest extent. Probably $125k is our "safe" number.
2a. We would be able to tolerate lower liquidity if we did not have a mortgage obligation each month. As ryman554 stated a short while ago, "Paying off removes the mortgage payment from monthly expenses, so while liquidity is lowered, the ability to restore said liquidity is much improved."

So what are the options?

A. Keep everything the same and view portfolio as a whole (80/20) that should easily beat the 2.99% mortgage.

B. Hold a more aggresive portfolio (perhaps 85/15), thereby holding fewer bonds.

C. Pay off the mortgage with some bond and some stock money and then hold an even more aggressive portfolio (90/10). The logic here is that we could tolerate a more aggressive AA knowing that our monthly expenses are 20%+ lower without the principal + interest of the mortgage.

D. Forget a fixed AA. Leave $125k (my minimum "safe" number) in cash or bonds, but not pay off the mortgage. Use the other $80k that we have in bonds/cash toward the mortgage or into equities.

I guess essentially I'm trying to find the right balance between risk, AA, liquidity and best bang for my buck. Bond have an expected negative real return so I suppose I either pay down the mortgage and sacrifice liquidity, put them into stocks and take on more risk, higher expected return but sacrifice liquidity, or leave them where they are and have maximum liquidity. So, it's a give and take and I am just trying to figure out what is best for us.

A is what it is - status quo.

B is just a more aggressive AA. Not much to really discuss there.

C seems silly because I'm giving up $100k or so in stocks to pay off the mortgage, but then holding a more aggressive mix of what's left. So I'm pretty sure that's out.

D is a very clean, simple, easy to maintain approach, but results in portfolio getting more aggressive as time goes on. On one hand, it doesn't make sense because I get more aggressive as I get older. On the other hand, one could view it as not getting more aggressive because I have the same $125k safety net in all situations, and the invested portfolio is always 100% stocks. This is the Ferdinand2014 method. He holds 3 years in Treasury bills and plows 100% of everything else into an S&P 500 Index. I like this approach, but what is the end game? When does one shift some of the equity money to bonds?
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

Jack FFR1846 wrote: Mon Jan 18, 2021 11:42 am It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
This is sort of what I just got at in my post above. I like calling Dave Ramsey an idiot. I generally value higher liquidity, funds readily available, whether they're stocks, bonds, cash. I like knowing I can get $300,000 at any time.

The part that eats at me is that a sizeable chunk (nearly $200k) of our money is in something earning less than the mortgage. But I suppose it is what it is. It boils down to 3 choices, or a combination: One is to leave it in bonds and have highest liquidity and safety with lowest expected return, one is to put it in riskier equities and have the highest expected return, medium liquidity but highest risk, the other is to put it to the mortgage and get a guaranteed return, but lose liquidity.
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

Triple digit golfer wrote: Mon Jan 18, 2021 11:50 am
Jack FFR1846 wrote: Mon Jan 18, 2021 11:42 am It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
This is sort of what I just got at in my post above. I like calling Dave Ramsey an idiot. I generally value higher liquidity, funds readily available, whether they're stocks, bonds, cash. I like knowing I can get $300,000 at any time.

The part that eats at me is that a sizeable chunk (nearly $200k) of our money is in something earning less than the mortgage. But I suppose it is what it is. It boils down to 3 choices, or a combination: One is to leave it in bonds and have highest liquidity and safety with lowest expected return, one is to put it in riskier equities and have the highest expected return, medium liquidity but highest risk, the other is to put it to the mortgage and get a guaranteed return, but lose liquidity.
Hmm--you seem a little conflicted. If you value liquidity, then you have to accept lower returns. Yet you find the return on bonds at present a thorn in your side. You can't have it both ways, enjoying the comfort of instant liquidity while also reaping market-level returns (or, at least, a return higher than your mortgage rate). So what matters more to you? If liquidity is paramount, you should probably do nothing. If higher returns are paramount, I don't see why paying down your mortgage would even come into play; just sell some of your bonds (perhaps all of them) and buy some stocks.
Last edited by mikejuss on Mon Jan 18, 2021 12:10 pm, edited 1 time in total.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

mikejuss wrote: Mon Jan 18, 2021 12:00 pm
Triple digit golfer wrote: Mon Jan 18, 2021 11:50 am
Jack FFR1846 wrote: Mon Jan 18, 2021 11:42 am It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
This is sort of what I just got at in my post above. I like calling Dave Ramsey an idiot. I generally value higher liquidity, funds readily available, whether they're stocks, bonds, cash. I like knowing I can get $300,000 at any time.

The part that eats at me is that a sizeable chunk (nearly $200k) of our money is in something earning less than the mortgage. But I suppose it is what it is. It boils down to 3 choices, or a combination: One is to leave it in bonds and have highest liquidity and safety with lowest expected return, one is to put it in riskier equities and have the highest expected return, medium liquidity but highest risk, the other is to put it to the mortgage and get a guaranteed return, but lose liquidity.
Hmm--you seem a little conflicted. If you value liquidity, then you have to accept lower returns. Yet you find the return on bonds at present a thorn in your side. You can't have it both ways, enjoying the comfort of instant liquidity while also reaping market-level returns (or, at least, a return higher than your mortgage rate). So what matters more to you?
Therein lies the problem. I always held 80/20 because I wanted to prioritize long-term goals but also build up some cushion in "safe" assets like bonds. Now that our portfolio is large enough, we're left with almost $200k in bonds. When our portfolio was $400k, we had $80k in bonds, which was still below my desired sleep at night number. Somewhere around $125k in bonds is where I started to feel really safe and like the additional bond investments were a drag. Reading what I just wrote suggests I should just leave $125k in bonds and everything else in equities. But then I ask myself what's the glidepath? When do I add bonds?
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

Triple digit golfer wrote: Mon Jan 18, 2021 12:09 pm
mikejuss wrote: Mon Jan 18, 2021 12:00 pm
Triple digit golfer wrote: Mon Jan 18, 2021 11:50 am
Jack FFR1846 wrote: Mon Jan 18, 2021 11:42 am It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
This is sort of what I just got at in my post above. I like calling Dave Ramsey an idiot. I generally value higher liquidity, funds readily available, whether they're stocks, bonds, cash. I like knowing I can get $300,000 at any time.

The part that eats at me is that a sizeable chunk (nearly $200k) of our money is in something earning less than the mortgage. But I suppose it is what it is. It boils down to 3 choices, or a combination: One is to leave it in bonds and have highest liquidity and safety with lowest expected return, one is to put it in riskier equities and have the highest expected return, medium liquidity but highest risk, the other is to put it to the mortgage and get a guaranteed return, but lose liquidity.
Hmm--you seem a little conflicted. If you value liquidity, then you have to accept lower returns. Yet you find the return on bonds at present a thorn in your side. You can't have it both ways, enjoying the comfort of instant liquidity while also reaping market-level returns (or, at least, a return higher than your mortgage rate). So what matters more to you?
Therein lies the problem. I always held 80/20 because I wanted to prioritize long-term goals but also build up some cushion in "safe" assets like bonds. Now that our portfolio is large enough, we're left with almost $200k in bonds. When our portfolio was $400k, we had $80k in bonds, which was still below my desired sleep at night number. Somewhere around $125k in bonds is where I started to feel really safe and like the additional bond investments were a drag. Reading what I just wrote suggests I should just leave $125k in bonds and everything else in equities. But then I ask myself what's the glidepath? When do I add bonds?
This is even more confusing now. You seem to be suggesting a few things: you don't want to hold more than $125,000 in bonds. In that case, sell some bonds and buy some stocks. You also want to begin a glide path toward retirement that involves buying more bonds. That's reasonable too.

What does any of this have to do with your mortgage? Is the matter simply that you can't tolerate investing in something that doesn't beat your mortgage rate? You also seem to place a high value on liquidity. You're being pulled in various directions and need to figure out what matters most to you.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

mikejuss wrote: Mon Jan 18, 2021 12:17 pm
Triple digit golfer wrote: Mon Jan 18, 2021 12:09 pm
mikejuss wrote: Mon Jan 18, 2021 12:00 pm
Triple digit golfer wrote: Mon Jan 18, 2021 11:50 am
Jack FFR1846 wrote: Mon Jan 18, 2021 11:42 am It is nothing but a risk question. Paying the mortgage saves you a specific amount of money. The end. Putting it in the market RISKs potential underperformance or even loss. The experts are equally emphatic in their opinions which are all over the map. The 2 I follow:

Dave Ramsey: "You're putting extra money in the market and not paying off the mortgage? Then you're an idiot"

Ric Edelman: "You're paying off that mortgage with your extra money instead of putting it in the market? Then you're an idiot".

Decide who you want calling you an idiot and go that way.
This is sort of what I just got at in my post above. I like calling Dave Ramsey an idiot. I generally value higher liquidity, funds readily available, whether they're stocks, bonds, cash. I like knowing I can get $300,000 at any time.

The part that eats at me is that a sizeable chunk (nearly $200k) of our money is in something earning less than the mortgage. But I suppose it is what it is. It boils down to 3 choices, or a combination: One is to leave it in bonds and have highest liquidity and safety with lowest expected return, one is to put it in riskier equities and have the highest expected return, medium liquidity but highest risk, the other is to put it to the mortgage and get a guaranteed return, but lose liquidity.
Hmm--you seem a little conflicted. If you value liquidity, then you have to accept lower returns. Yet you find the return on bonds at present a thorn in your side. You can't have it both ways, enjoying the comfort of instant liquidity while also reaping market-level returns (or, at least, a return higher than your mortgage rate). So what matters more to you?
Therein lies the problem. I always held 80/20 because I wanted to prioritize long-term goals but also build up some cushion in "safe" assets like bonds. Now that our portfolio is large enough, we're left with almost $200k in bonds. When our portfolio was $400k, we had $80k in bonds, which was still below my desired sleep at night number. Somewhere around $125k in bonds is where I started to feel really safe and like the additional bond investments were a drag. Reading what I just wrote suggests I should just leave $125k in bonds and everything else in equities. But then I ask myself what's the glidepath? When do I add bonds?
This is even more confusing now. You seem to be suggesting a few things: you don't want to hold more than $125,000 in bonds. In that case, sell some bonds and buy some stocks. You also want to begin a glide path toward retirement that involves buying more bonds. That's reasonable too.

What does any of this have to do with your mortgage? Is the matter simply that you can't tolerate investing in something that doesn't beat your mortgage rate? You also seem to place a high value on liquidity. You're being pulled in various directions and need to figure out what matters most to you.
I want a good mix of liquidity, expected return, and a safety net.

Perhaps just a slightly more aggressive AA would do the trick. But, I won't do it now. I doubt I'll do it at all, actually. I have been holding the same 80/20 portfolio for my entire investing career, almost 14 years now. I consider tinkering and I always go back to the fact that my portfolio is good enough as is.

If the market drops 50%, I will be very tempted to go more aggressive, but I think rebalancing will take care of things if that were to happen. A 50% stock market drop today would have me exchanging $77k from bonds to stocks, which would then have me back to right around my "sleep at night" number in bonds.

A lot of pontificating, and the end result is I'll likely do nothing different. That is, invest a lot and hold my 80/20 AA.
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

Makes sense!

Still, to go back to your original question, about whether to pay off your mortgage, there is a case to be made for doing so if it would make you and your wife happy. I personally think that's a factor worth weighing.
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

mikejuss wrote: Mon Jan 18, 2021 1:54 pm Makes sense!

Still, to go back to your original question, about whether to pay off your mortgage, there is a case to be made for doing so if it would make you and your wife happy. I personally think that's a factor worth weighing.
It wouldn't make me happy. It would make her a little happy but overall, she doesn't care and trusts me with all the financial matters. So, unless there's a financial benefit, it wouldn't be worth it.
makeitcount
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Re: Another mortgage payoff scenario

Post by makeitcount »

I have struggled with the payoff the mortgage or invest question as well. After reading countless numbers of these threads I'm convinced there is no "right" answer. As has been said before, this is where the "personal" part of personal finance comes into play.
For what it's worth, we decided to wait till achieving 25x before paying extra towards our mortgage. Not correct/incorrect but more a sleep well at night decision.
I suggest you stick with your current plan for now. See: “The enemy of a good plan is the dream of a perfect plan.”
CurlyDave
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Re: Another mortgage payoff scenario

Post by CurlyDave »

manatee2005 wrote: Sun Jan 17, 2021 5:43 pm Do not pay off a 2.99% mortgage.
+100
lakpr
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Re: Another mortgage payoff scenario

Post by lakpr »

CurlyDave wrote: Mon Jan 18, 2021 3:23 pm
manatee2005 wrote: Sun Jan 17, 2021 5:43 pm Do not pay off a 2.99% mortgage.
+100
-100, if that is the rate one is paying on the mortgage AND also invested in bonds that are yielding no better than 1%. This is the case in the OP (post, not poster), with $128k invested in bonds and $199k in mortgage.
MathIsMyWayr
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Re: Another mortgage payoff scenario

Post by MathIsMyWayr »

KlangFool wrote: Mon Jan 18, 2021 11:09 am OP,

It is very simple.


What do you think is the average annual return of an 80/20 portfolio over 10 to 20 years?

5%? 6%? 7%?

If your answer is significantly bigger than 2.99%, why would you pay off the mortgage?


I am not paying off my 3.49% mortgage.


KlangFool
Should you keep borrowing (refinancing) as much as possible if a rate of 3.49% or better is available at no cost?
Topic Author
Triple digit golfer
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Re: Another mortgage payoff scenario

Post by Triple digit golfer »

lakpr wrote: Mon Jan 18, 2021 3:33 pm
CurlyDave wrote: Mon Jan 18, 2021 3:23 pm
manatee2005 wrote: Sun Jan 17, 2021 5:43 pm Do not pay off a 2.99% mortgage.
+100
-100, if that is the rate one is paying on the mortgage AND also invested in bonds that are yielding no better than 1%. This is the case in the OP (post, not poster), with $128k invested in bonds and $199k in mortgage.
This is where I have a hard time. By that logic, nobody with a mortgage should hold bonds right now. Do you think anybody who holds a mortgage should be invested 100% equities? Put another way, do you think anybody who holds bonds should not have a mortgage?

What about willingness, need, ability to take risk? What about someone who can't handle the volatility of a 100% equity portfolio? Bonds act as a ballast. Not having a mortgage doesn't help the investor when their stock portfolio tanks 50%.

Why not look at the entire portfolio, in my case 80% stocks and 20% bonds, and compare that rate to the mortgage?
mikejuss
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Re: Another mortgage payoff scenario

Post by mikejuss »

Triple digit golfer wrote: Mon Jan 18, 2021 3:45 pm
lakpr wrote: Mon Jan 18, 2021 3:33 pm
CurlyDave wrote: Mon Jan 18, 2021 3:23 pm
manatee2005 wrote: Sun Jan 17, 2021 5:43 pm Do not pay off a 2.99% mortgage.
+100
-100, if that is the rate one is paying on the mortgage AND also invested in bonds that are yielding no better than 1%. This is the case in the OP (post, not poster), with $128k invested in bonds and $199k in mortgage.
This is where I have a hard time. By that logic, nobody with a mortgage should hold bonds right now. Do you think anybody who holds a mortgage should be invested 100% equities? Put another way, do you think anybody who holds bonds should not have a mortgage?

What about willingness, need, ability to take risk? What about someone who can't handle the volatility of a 100% equity portfolio? Bonds act as a ballast. Not having a mortgage doesn't help the investor when their stock portfolio tanks 50%.

Why not look at the entire portfolio, in my case 80% stocks and 20% bonds, and compare that rate to the mortgage?
You are correct: as a matter of being able to sleep at night, you should be holding a certain percentage of bonds, regardless of whether you are in debt. The point is that the interest on that debt is very low, so needn't sweat paying it. It's a small price to pay for peace of mind.
KlangFool
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Re: Another mortgage payoff scenario

Post by KlangFool »

MathIsMyWayr wrote: Mon Jan 18, 2021 3:38 pm
KlangFool wrote: Mon Jan 18, 2021 11:09 am OP,

It is very simple.


What do you think is the average annual return of an 80/20 portfolio over 10 to 20 years?

5%? 6%? 7%?

If your answer is significantly bigger than 2.99%, why would you pay off the mortgage?


I am not paying off my 3.49% mortgage.


KlangFool
Should you keep borrowing (refinancing) as much as possible if a rate of 3.49% or better is available at no cost?
It is not worth my effort at this stage. If my portfolio hit 1.8 million, I may just pay it off.


KlangFool
Jacotus
Posts: 421
Joined: Sun Jun 14, 2009 2:07 pm

Re: Another mortgage payoff scenario

Post by Jacotus »

Triple digit golfer wrote: Mon Jan 18, 2021 3:45 pm This is where I have a hard time. By that logic, nobody with a mortgage should hold bonds right now. Do you think anybody who holds a mortgage should be invested 100% equities? Put another way, do you think anybody who holds bonds should not have a mortgage?

What about willingness, need, ability to take risk? What about someone who can't handle the volatility of a 100% equity portfolio? Bonds act as a ballast. Not having a mortgage doesn't help the investor when their stock portfolio tanks 50%.

Why not look at the entire portfolio, in my case 80% stocks and 20% bonds, and compare that rate to the mortgage?
I would pay off some of the mortgage with bonds. $125k is a large cushion -- How many years of expenses is that? I don't think there is anything wrong, necessarily, with keeping bonds while having the mortgage, but I don't think I would do it if the bond yield is lower than the mortgage rate. In the end it'll probably make a tiny difference to the net result of your portfolio, so if it helps you sleep better maintaining a larger safe portion of your portfolio, I would do it.

And to be honest, even for one who treasures liquidity, the money in stocks is liquid. You can sell stocks to get cash. Sure, the stocks can lose value, but in a true emergency you can access it. The risk of selling after they lose value is the flip side of the tradeoff of most likely coming out ahead.

At least, that's what I would do as long as I wanted my overall AA to be rather aggressive. If I were older and wanted to be more conservative, I would start building up bonds even if the mortgage were not paid off.
Ferdinand2014
Posts: 1908
Joined: Mon Dec 17, 2018 6:49 pm

Re: Another mortgage payoff scenario

Post by Ferdinand2014 »

Triple digit golfer wrote: Sun Jan 17, 2021 5:53 pm
yog wrote: Sun Jan 17, 2021 5:45 pm
Triple digit golfer wrote: Sun Jan 17, 2021 5:32 pm
Hyperchicken wrote: Sun Jan 17, 2021 5:25 pm What changed between 6 months ago when you got the mortgage, and now?
Our 3 year old was napping this morning, which is unusual, and my wife and I were forced to talk to each other for an extended period of time.

Should have just turned on the TV :wink:
She wanted to sell the bonds and go to 100% equities, didn't she...
That was the recommendation. She said if we are earning less on them than the mortgage, just put those toward the mortgage (fair point from a mathematical perspective). Then I said I would pay it off, not down. Then she said fine, sell some stocks too and I said I am not willing to hold no bonds. Then it was, "I really couldn't care less either way, are you going to get us lunch or should I make something?"

Clearly she doesn't care what we do, she was just humoring me. She said I think about money too much. She's right.
Sounds like my household. I am lucky if I can get 1 sentence responses to money questions.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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