Paying down mortgage with "bond money" and AA considerations
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Paying down mortgage with "bond money" and AA considerations
All these bond and mortgage threads have spurred some questions.
Let's just use rough numbers.
I have an 80/20 AA
I want to use half of the bond money and put it toward my mortgage.
This would leave me with a 90/10 AA (yes, I know it's 89/11, let's just use 90/10 for simplicity).
Moving forward, to keep the same level of risk as my original 80/20 AA, what do I do? How does rebalancing happen?
Do I:
1) Just move to a more aggressive AA altogether, and continue to invest new money into bonds, but at the 10% instead of 20%? This seems counterintuitive because I'd still be buying bonds and I'd be back asking the same question in a few years, which leads me to the next choice.
2) Do I somehow track mortgage paydown as a bond? How does rebalancing happen? How do I know when to rebalance? Do I rebalance at all? Where do I direct new contributions and how do I know whether to put that money into equities or the mortgage? Seems like overly complex mental accounting, leading me to the next choice.
3) Invest new money at 80% equities, 20% to the mortgage, and don't rebalance anything at all. The original 10% left in bonds is just there for liquidity and flexibility.
4) Something else?
Maybe "buy, hold, rebalance" doesn't work when people want to use bond money. Many will say just keep it at 80/20 and put money to the mortgage, but then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.
Let's just use rough numbers.
I have an 80/20 AA
I want to use half of the bond money and put it toward my mortgage.
This would leave me with a 90/10 AA (yes, I know it's 89/11, let's just use 90/10 for simplicity).
Moving forward, to keep the same level of risk as my original 80/20 AA, what do I do? How does rebalancing happen?
Do I:
1) Just move to a more aggressive AA altogether, and continue to invest new money into bonds, but at the 10% instead of 20%? This seems counterintuitive because I'd still be buying bonds and I'd be back asking the same question in a few years, which leads me to the next choice.
2) Do I somehow track mortgage paydown as a bond? How does rebalancing happen? How do I know when to rebalance? Do I rebalance at all? Where do I direct new contributions and how do I know whether to put that money into equities or the mortgage? Seems like overly complex mental accounting, leading me to the next choice.
3) Invest new money at 80% equities, 20% to the mortgage, and don't rebalance anything at all. The original 10% left in bonds is just there for liquidity and flexibility.
4) Something else?
Maybe "buy, hold, rebalance" doesn't work when people want to use bond money. Many will say just keep it at 80/20 and put money to the mortgage, but then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.
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Re: Paying down mortgage with "bond money" and AA considerations
I'd just put that future bond money towards paying off the mortgage, provided the mortage rate remains substantially higher than the bond yield (after any tax-related considerations).
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Re: Paying down mortgage with "bond money" and AA considerations
yes you should rebalance by buying bonds with new money until you achieve 80/20. i assume you include your house, net of mortgage, as part of the 80.
Re: Paying down mortgage with "bond money" and AA considerations
+1 ... sort of like dollar cost averaging until you hit your new target. That 90/10 target sounds a touch aggressive, but I do not know your circumstances. But keeping some bonds is good for rebalancing on occasion.itsmeagain wrote: ↑Sat Feb 27, 2021 4:58 pm I'd just put that future bond money towards paying off the mortgage, provided the mortage rate remains substantially higher than the bond yield (after any tax-related considerations).
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Re: Paying down mortgage with "bond money" and AA considerations
Do you believe mortgages are negative bonds?
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Re: Paying down mortgage with "bond money" and AA considerations
Here's what I plan to do:
In my 401k where I have all my bonds, my contributions to bonds will stay the same.
Roth contributions remain all stocks.
With my taxable account, which gets the lion's share of annual contributions, any money originally intended for bonds will be redirected toward my mortgage. I'll still buy stock funds as usual though. Once the house is paid off, that money will be used to buy bonds again.
If the stock market tanks, I'll temporarily scrap the above plan and make 100% of my contributions in all accounts to stocks as I've done in the past.
I haven't done the math, nor do I care to. It isn't perfect, but it's probably good enough.
In my 401k where I have all my bonds, my contributions to bonds will stay the same.
Roth contributions remain all stocks.
With my taxable account, which gets the lion's share of annual contributions, any money originally intended for bonds will be redirected toward my mortgage. I'll still buy stock funds as usual though. Once the house is paid off, that money will be used to buy bonds again.
If the stock market tanks, I'll temporarily scrap the above plan and make 100% of my contributions in all accounts to stocks as I've done in the past.
I haven't done the math, nor do I care to. It isn't perfect, but it's probably good enough.
Re: Paying down mortgage with "bond money" and AA considerations
OP,
Something else. Withdraw as per 80/20 to pay off the mortgage.
<<then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.>>
Your purpose is to lose money and pretend that your 80/20 portfolio cannot beat your mortgage interest. Why play the game and pretend that you are not doing it?
Money is fungible.
KlangFool
Something else. Withdraw as per 80/20 to pay off the mortgage.
<<then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.>>
Your purpose is to lose money and pretend that your 80/20 portfolio cannot beat your mortgage interest. Why play the game and pretend that you are not doing it?
Money is fungible.
KlangFool
Last edited by KlangFool on Sat Feb 27, 2021 6:37 pm, edited 1 time in total.
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Re: Paying down mortgage with "bond money" and AA considerations
If you do this, then you wouldn’t be using bonds to pay down the mortgage. You’d be using (mostly) stocks. TDGolfer did make this point in his OP.brooklynboy wrote: ↑Sat Feb 27, 2021 5:22 pm yes you should rebalance by buying bonds with new money until you achieve 80/20. i assume you include your house, net of mortgage, as part of the 80.
EDIT: I previously didn't see the words "new money" in your post. I see now. You are suggesting something different than what I previously interpreted (which was to immediately rebalance).
Last edited by absolute zero on Sat Feb 27, 2021 7:27 pm, edited 1 time in total.
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Re: Paying down mortgage with "bond money" and AA considerations
I asked this same question last year, in case you are interested in reading more responses.
https://www.bogleheads.org/forum/viewt ... p?t=324710
https://www.bogleheads.org/forum/viewt ... p?t=324710
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Re: Paying down mortgage with "bond money" and AA considerations
I think you have the wrong idea of my purpose here. I wouldn't put 80/20 toward the mortgage because I'm confident it will beat it.KlangFool wrote: ↑Sat Feb 27, 2021 6:34 pm OP,
Something else. Withdraw as per 80/20 to pay off the mortgage.
<<then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.>>
Your purpose is to lose money and pretend that your 80/20 portfolio cannot beat your mortgage interest. Why play the game and pretend that you are not doing it?
Money is fungible.
KlangFool
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Re: Paying down mortgage with "bond money" and AA considerations
Thanks! Some reading material for this evening.absolute zero wrote: ↑Sat Feb 27, 2021 6:38 pm I asked this same question last year, in case you are interested in reading more responses.
https://www.bogleheads.org/forum/viewt ... p?t=324710
Re: Paying down mortgage with "bond money" and AA considerations
Let's take a snapshot in time, using dollars instead of percentages:Triple digit golfer wrote: ↑Sat Feb 27, 2021 4:28 pm All these bond and mortgage threads have spurred some questions.
Let's just use rough numbers.
I have an 80/20 AA
I want to use half of the bond money and put it toward my mortgage.
This would leave me with a 90/10 AA (yes, I know it's 89/11, let's just use 90/10 for simplicity).
Moving forward, to keep the same level of risk as my original 80/20 AA, what do I do? How does rebalancing happen?
Do I:
1) Just move to a more aggressive AA altogether, and continue to invest new money into bonds, but at the 10% instead of 20%? This seems counterintuitive because I'd still be buying bonds and I'd be back asking the same question in a few years, which leads me to the next choice.
2) Do I somehow track mortgage paydown as a bond? How does rebalancing happen? How do I know when to rebalance? Do I rebalance at all? Where do I direct new contributions and how do I know whether to put that money into equities or the mortgage? Seems like overly complex mental accounting, leading me to the next choice.
3) Invest new money at 80% equities, 20% to the mortgage, and don't rebalance anything at all. The original 10% left in bonds is just there for liquidity and flexibility.
4) Something else?
Maybe "buy, hold, rebalance" doesn't work when people want to use bond money. Many will say just keep it at 80/20 and put money to the mortgage, but then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.
You own a house worth $150k
You have a mortgage of $100k
You own stocks worth $300k
You own bonds worth $75k
Ignoring the house and the mortgage, this is your 80/20. Including the mortgage and the house your net worth, or net exposure to risky assets, is $150 - $100 + $300 + $75 = $425k
Take $37.5k from the bonds and pay down the mortgage to get to the following place:
You own a house worth $150k
You have a mortgage of $62.5k
You own stocks worth $300k
You own bonds worth $37.5k
Your net worth is now $150 - $62.5k + $300 + $37.5 = $425k. From here, the only way to invest new money to maintain the same risk level (ignoring for a minute any price changes in the assets or liabilities) is to put 100% of the new money into either bonds or the mortgage*.
Investing any new money into stocks at this point will increase your net exposure to risky assets, which your question said you don't want to do. You would choose between buying bonds and paying down the mortgage based on expected return or, possibly, non-financial criteria.
* There's a nuance involving human capital that I'm glossing over.
Last edited by vineviz on Sat Feb 27, 2021 8:01 pm, edited 2 times in total.
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Re: Paying down mortgage with "bond money" and AA considerations
Sure thing. My memory is hazy but I think the thread drifted a bit off topic at times, but there were a couple good suggestions.Triple digit golfer wrote: ↑Sat Feb 27, 2021 6:57 pmThanks! Some reading material for this evening.absolute zero wrote: ↑Sat Feb 27, 2021 6:38 pm I asked this same question last year, in case you are interested in reading more responses.
https://www.bogleheads.org/forum/viewt ... p?t=324710
I think the answer to your question really depends upon what your planned glide path looks like before you decided to pay off the mortgage. You'll want to adjust it to reflect your newfound (accelerated) home equity. But if you try to adjust your glidepath by continuously keeping track of that money that you used to pay down the mortgage (and incorporating it into your asset allocation) then things get too complicated. Instead, to keep things simple, you should make an adjustment to your glidepath now that reflects the fact that you have paid down your mortgage ahead of schedule.
As an example - let's say you are planning to retire at 60/40 AA with a paid off mortgage. Well, you still want to end at that same point. But after paying down the mortgage tomorrow, you've suddenly shifted from 80/20 to 90/10. You would want to stay at 90/10 and keeping gliding towards 60/40. Your new (revised) glidepath would always have less bonds than your old glidepath, but it would get closer and closer to the old glidepath until they'd eventually meet at 60/40.
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Re: Paying down mortgage with "bond money" and AA considerations
I'm not sure I follow and I think you made some calculation errors. I got $425k and $425k. Or am I missing something?vineviz wrote: ↑Sat Feb 27, 2021 7:10 pmLet's take a snapshot in time, using dollars instead of percentages:Triple digit golfer wrote: ↑Sat Feb 27, 2021 4:28 pm All these bond and mortgage threads have spurred some questions.
Let's just use rough numbers.
I have an 80/20 AA
I want to use half of the bond money and put it toward my mortgage.
This would leave me with a 90/10 AA (yes, I know it's 89/11, let's just use 90/10 for simplicity).
Moving forward, to keep the same level of risk as my original 80/20 AA, what do I do? How does rebalancing happen?
Do I:
1) Just move to a more aggressive AA altogether, and continue to invest new money into bonds, but at the 10% instead of 20%? This seems counterintuitive because I'd still be buying bonds and I'd be back asking the same question in a few years, which leads me to the next choice.
2) Do I somehow track mortgage paydown as a bond? How does rebalancing happen? How do I know when to rebalance? Do I rebalance at all? Where do I direct new contributions and how do I know whether to put that money into equities or the mortgage? Seems like overly complex mental accounting, leading me to the next choice.
3) Invest new money at 80% equities, 20% to the mortgage, and don't rebalance anything at all. The original 10% left in bonds is just there for liquidity and flexibility.
4) Something else?
Maybe "buy, hold, rebalance" doesn't work when people want to use bond money. Many will say just keep it at 80/20 and put money to the mortgage, but then I'm essentially paying down the mortgage with stock money, which defeats the whole purpose.
You own a house worth $150k
You have a mortgage of $100k
You own stocks worth $300k
You own bonds worth $75k
Ignoring the house and the mortgage, this is your 80/20. Including the mortgage and the house your net worth, or net exposure to risky assets, is $150 - $100 + $300 + $75 = $475k
Take $37.5k from the bonds and pay down the mortgage to get to the following place:
You own a house worth $150k
You have a mortgage of $62.5k
You own stocks worth $300k
You own bonds worth $37.5k
Your net worth is now $150 - $37.5k + $300 + $37.5 = $450k. From here, the only way to invest new money to maintain the same risk level (ignoring for a minute any price changes in the assets or liabilities) is to put 100% of the new money into either bonds or the mortgage*.
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Re: Paying down mortgage with "bond money" and AA considerations
That last part about the glidepaths meeting up made a lot of sense and I read it in your thread too. Food for thought.absolute zero wrote: ↑Sat Feb 27, 2021 7:39 pmSure thing. My memory is hazy but I think the thread drifted a bit off topic at times, but there were a couple good suggestions.Triple digit golfer wrote: ↑Sat Feb 27, 2021 6:57 pmThanks! Some reading material for this evening.absolute zero wrote: ↑Sat Feb 27, 2021 6:38 pm I asked this same question last year, in case you are interested in reading more responses.
https://www.bogleheads.org/forum/viewt ... p?t=324710
I think the answer to your question really depends upon what your planned glide path looks like before you decided to pay off the mortgage. You'll want to adjust it to reflect your newfound (accelerated) home equity. But if you try to adjust your glidepath by continuously keeping track of that money that you used to pay down the mortgage (and incorporating it into your asset allocation) then things get too complicated. Instead, to keep things simple, you should make an adjustment to your glidepath now that reflects the fact that you have paid down your mortgage ahead of schedule.
As an example - let's say you are planning to retire at 60/40 AA with a paid off mortgage. Well, you still want to end at that same point. But after paying down the mortgage tomorrow, you've suddenly shifted from 80/20 to 90/10. You would want to stay at 90/10 and keeping gliding towards 60/40. Your new (revised) glidepath would always have less bonds than your old glidepath, but it would get closer and closer to the old glidepath until they'd eventually meet at 60/40.
Re: Paying down mortgage with "bond money" and AA considerations
You're right. I changed some numbers when building my example and didn't update it everywhere I needed to.Triple digit golfer wrote: ↑Sat Feb 27, 2021 7:56 pm I'm not sure I follow and I think you made some calculation errors. I got $425k and $425k. Or am I missing something?
The totals are $425k in both cases.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Paying down mortgage with "bond money" and AA considerations
I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
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Re: Paying down mortgage with "bond money" and AA considerations
Cool, thank you.vineviz wrote: ↑Sat Feb 27, 2021 8:00 pmYou're right. I changed some numbers when building my example and didn't update it everywhere I needed to.Triple digit golfer wrote: ↑Sat Feb 27, 2021 7:56 pm I'm not sure I follow and I think you made some calculation errors. I got $425k and $425k. Or am I missing something?
The totals are $425k in both cases.
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Re: Paying down mortgage with "bond money" and AA considerations
This makes a lot of sense to me. It is important to me to have an objective AA that I can monitor and rebalance to because otherwise I feel like emotions will get the best of me.adam1712 wrote: ↑Sat Feb 27, 2021 8:28 pm I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
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Re: Paying down mortgage with "bond money" and AA considerations
Very interesting. This seems like a precise way to go about things.adam1712 wrote: ↑Sat Feb 27, 2021 8:28 pm I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
If I were to use your formula, I would probably just use an AA of 80%stocks, 20% bonds+EHE. I would then give myself flexibility on how much the 20% was split between bonds and excess home equity (EHE), with the preference being towards building EHE instead of buying bonds (because of the difference in rates). But the flexibility would be nice because I may want to max out retirement accounts in some instances, in which case bonds may be preferred.
Anyways thanks for sharing, your AA formula is a cool approach.
Re: Paying down mortgage with "bond money" and AA considerations
Triple digit golfer wrote: ↑Sat Feb 27, 2021 9:35 pmThis makes a lot of sense to me. It is important to me to have an objective AA that I can monitor and rebalance to because otherwise I feel like emotions will get the best of me.adam1712 wrote: ↑Sat Feb 27, 2021 8:28 pm I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
How does that help you? You cannot rebalance the home equity. How does keeping the home equity that you cannot rebalance in your portfolio helps you at all?
You had a reason to keep an AA of 80/20. Paying down or not paying down the mortgage does not change that reason. The home equity is illiquid. By pretending that it is part of your portfolio, it gives you a false sense of security.
You are not going to sell your house in order to rebalance and buy the stock. That 10% in home equity does nothing for you.
Conversely, if your house price drops by 50% and wipes out your home equity, are you going to put more money into your house in order to maintain the 10% home equity?
Stop overcomplicating your portfolio by putting stuff into it that you cannot rebalance.
KlangFool
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Re: Paying down mortgage with "bond money" and AA considerations
I totally agree with everything you said.absolute zero wrote: ↑Sat Feb 27, 2021 9:52 pmVery interesting. This seems like a precise way to go about things.adam1712 wrote: ↑Sat Feb 27, 2021 8:28 pm I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
If I were to use your formula, I would probably just use an AA of 80%stocks, 20% bonds+EHE. I would then give myself flexibility on how much the 20% was split between bonds and excess home equity (EHE), with the preference being towards building EHE instead of buying bonds (because of the difference in rates). But the flexibility would be nice because I may want to max out retirement accounts in some instances, in which case bonds may be preferred.
Anyways thanks for sharing, your AA formula is a cool approach.
The method that Adam outlined is the most concise, logical, and easy to follow way to implement and maintain an AA while paying down the mortgage with fixed income.
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Re: Paying down mortgage with "bond money" and AA considerations
Choosing 80/20 was subjective. There's nothing special about it, but it is important to me to have a logical way to maintain so that I can still buy, hold, rebalance. The method above allows that.KlangFool wrote: ↑Sat Feb 27, 2021 9:58 pmTriple digit golfer wrote: ↑Sat Feb 27, 2021 9:35 pmThis makes a lot of sense to me. It is important to me to have an objective AA that I can monitor and rebalance to because otherwise I feel like emotions will get the best of me.adam1712 wrote: ↑Sat Feb 27, 2021 8:28 pm I just use the following formula:
AA = Stock % = 100x(stocks/(stocks + bonds + excess home equity*))
*excess home equity = Scheduled 30yr mortgage principal - Actual mortgage principal
I'm 80% stocks, 10% bonds, and 10% excess home equity
I keep some bonds to be able to rebalance and would use them and have a higher percent home equi6. But I always keep 80% of money I've invested in stocks.
How does that help you? You cannot rebalance the home equity. How does keeping the home equity that you cannot rebalance in your portfolio helps you at all?
You had a reason to keep an AA of 80/20. Paying down or not paying down the mortgage does not change that reason. The home equity is illiquid. By pretending that it is part of your portfolio, it gives you a false sense of security.
You are not going to sell your house in order to rebalance and buy the stock. That 10% in home equity does nothing for you.
Conversely, if your house price drops by 50% and wipes out your home equity, are you going to put more money into your house in order to maintain the 10% home equity?
Stop overcomplicating your portfolio by putting stuff into it that you cannot rebalance.
KlangFool
Home equity is not included. Excess home equity is. That is the important point. It isn't about including the home equity, but finding an objective way to measure the excess contributed to it and work it into the AA.
I would certainly be able to rebalance using this method, with bonds.
If I should not include something I can't rebalance, does that mean you should include something you can rebalance, such as your large cash allocation?
Re: Paying down mortgage with "bond money" and AA considerations
How is there such a thing as excess home equity? Is this the part that you can feed into a Coinstar machine and turn into an Amazon gift card?
Isn't home equity just home equity?
Isn't home equity just home equity?
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Re: Paying down mortgage with "bond money" and AA considerations
Home equity above what one would have had if no additional was paid on the mortgage.
Re: Paying down mortgage with "bond money" and AA considerations
Triple digit golfer wrote: ↑Sat Feb 27, 2021 10:14 pm
Home equity is not included. Excess home equity is. That is the important point.
Triple digit golfer,
A) If the house price drop by 50%, your excess home equity will be wiped out. Do you rebalance?
B) I do not rebalance my EF. Hence, I do not include my EF in my portfolio.
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Re: Paying down mortgage with "bond money" and AA considerations
It’s a way of paying down your mortgage ahead of schedule without reducing your stock exposure. It’s basically the most practical method that I’ve seen of paying off one’s mortgage with bonds.
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Re: Paying down mortgage with "bond money" and AA considerations
absolute zero,absolute zero wrote: ↑Sat Feb 27, 2021 10:31 pmThat’s incorrect. If you re-read the proposed definition of “excess home equity” then you will probably see why your statement is incorrect.
A) How does pretending that a person has excess home equity when the person has none helps the person? If the house price drops far enough, there is no home equity. Plenty of folks had learned that lesson in 2008/2009.
B) This calculation gives the person a false sense of security by pretending the liquidity risk does not exist.
C) How could the person rebalance with this excess home equity? By HELOC which could be canceled in the worst possible moment?
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Re: Paying down mortgage with "bond money" and AA considerations
There is no pretending involved - it’s an objective measure of how much a person has pre-paid their mortgage. It sounds like your confusion stems from the fact that you didn’t take the time to read what we were defining as excess home equity.
I didn’t get that impression at all. Given that you fear illiquidity more than anyone else on this forum, I’m not surprised that you are trying to steer the discussion towards the topic of liquidity.B) This calculation gives the person a false sense of security by pretending the liquidity risk does not exist.
That question has already been answered several times in this thread.C) How could the person rebalance with this excess home equity? By HELOC which could be canceled in the worst possible moment?
KlangFool
Re: Paying down mortgage with "bond money" and AA considerations
Are there any threads that explain this concept (the interaction between home equity, holding a mortgage, and asset allocation) well enough that even dummies like me can understand it? Every time it comes up it just makes zero sense to me.
I can't tell if it is as banal as "pay off your mortgage vs invest, which is better?" and this is some wordy, mathy twist on it, or if there is something else I'm not seeing here, because it sure seems like a thing that a lot of people on this site discuss with considerable confidence.
I can't tell if it is as banal as "pay off your mortgage vs invest, which is better?" and this is some wordy, mathy twist on it, or if there is something else I'm not seeing here, because it sure seems like a thing that a lot of people on this site discuss with considerable confidence.
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Re: Paying down mortgage with "bond money" and AA considerations
Absolute zero already explained it. Did you read how excess home equity was defined?KlangFool wrote: ↑Sat Feb 27, 2021 10:38 pmabsolute zero,absolute zero wrote: ↑Sat Feb 27, 2021 10:31 pmThat’s incorrect. If you re-read the proposed definition of “excess home equity” then you will probably see why your statement is incorrect.
A) How does pretending that a person has excess home equity when the person has none helps the person? If the house price drops far enough, there is no home equity. Plenty of folks had learned that lesson in 2008/2009.
B) This calculation gives the person a false sense of security by pretending the liquidity risk does not exist.
C) How could the person rebalance with this excess home equity? By HELOC which could be canceled in the worst possible moment?
KlangFool
Re: Paying down mortgage with "bond money" and AA considerations
Ah, so executing based on your previous thread and your wife's comment.
viewtopic.php?f=1&t=336744&p=5743892#p5743892
There are two main things to consider here 1) Risk/Reward 2) Liquidity.
AA is to maintain certain risk and reward. Investing in bonds is more risk compared to paying down the mortgage because return on the mortgage payment is guaranteed. By taking the bonds money and paying down the mortgage, you have reduced the risk. But, when you pay-down the mortgage then it is less liquidity compared to bonds. Hence, you have reduced your liquidity. It appears to be a change in AA such that stocks are more in percentage but risk wise it is less risk over-all.
You have decent EM and 10% already in the bonds which gives you good enough liquidity.
Therefore, to maintain the same risk/reward, any new money must be invested in the same ratio i.e. 80/20.
When mortgage is giving better return than bonds then one may say why buy bonds with the new money instead of paying down the mortgage? Risk/reward wise that would be good choice but it does reduce the liquidity.
viewtopic.php?f=1&t=336744&p=5743892#p5743892
There are two main things to consider here 1) Risk/Reward 2) Liquidity.
AA is to maintain certain risk and reward. Investing in bonds is more risk compared to paying down the mortgage because return on the mortgage payment is guaranteed. By taking the bonds money and paying down the mortgage, you have reduced the risk. But, when you pay-down the mortgage then it is less liquidity compared to bonds. Hence, you have reduced your liquidity. It appears to be a change in AA such that stocks are more in percentage but risk wise it is less risk over-all.
You have decent EM and 10% already in the bonds which gives you good enough liquidity.
Therefore, to maintain the same risk/reward, any new money must be invested in the same ratio i.e. 80/20.
When mortgage is giving better return than bonds then one may say why buy bonds with the new money instead of paying down the mortgage? Risk/reward wise that would be good choice but it does reduce the liquidity.
Re: Paying down mortgage with "bond money" and AA considerations
KlangFool wrote: ↑Sat Feb 27, 2021 10:38 pmabsolute zero wrote: ↑Sat Feb 27, 2021 10:31 pmThat’s incorrect. If you re-read the proposed definition of “excess home equity” then you will probably see why your statement is incorrect.
A) How does pretending that a person has excess home equity when the person has none helps the person? If the house price drops far enough, there is no home equity. Plenty of folks had learned that lesson in 2008/2009.
My house went down quite a bit in 2008, I don't really care. I only care about getting the mortgage paid off to get closer to retiring in a paid off home.
B) This calculation gives the person a false sense of security by pretending the liquidity risk does not exist.
This calculation should not be used to determine how much liquidity risk you have. It's important to assess how much of an emergency fund you need, how stable your job is, and how much bonds you need as backup before ever thinking of implementing this plan.
C) How could the person rebalance with this excess home equity? By HELOC which could be canceled in the worst possible moment?
I stopped making extra house payments in both 2008 and March of this year and threw it all into stocks to rebalance. Both moves paid off nicely.
I believe this plan has only worked for me because I bought a relatively inexpensive house and live within my means.
Re: Paying down mortgage with "bond money" and AA considerations
I have no regrets paying off the mortgage. Many people told me I could make more in the stock market. Yes, it is true that the house equity is illiquid. So keep that in mind if your cash flow is tight. However, your monthly expenses and lower and you can rebuild your cash or invest using the money that was going towards the mortgage. There are many paths to success.
"I started with nothing and I still have most of it left."