Should we put more toward our mortgage?

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camillus
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Re: Should we put more toward our mortgage?

Post by camillus »

I think there are two benefits to paying off a mortgage early that are overlooked:

1) Paying off the mortgage is a big fat goal that can be rallied around by all members of a household, thus increasing a family's savings rate while simultaneously orienting everyone around a satisfying, fun goal.

2) Once the mortgage is paid off, there is less mandatory monthly spending. Meaning, you can take more risks in your life or even work less. If you hadn't paid off your mortgage, you would still have to generate your full income. Yes, you might be more wealthy in the end, but you might be able to make better life choices in the present day.

This all being said, I'd wait until you have a good critical mass in a portfolio and pay a mortgage as scheduled in the meantime. I'm personally paying off my mortgage and reducing my bond position as I go. My mortgage balance is 1/5 of my portfolio. My portfolio is 15% bond.
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Drew31
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Re: Should we put more toward our mortgage?

Post by Drew31 »

Admiral wrote: Fri Jan 14, 2022 5:18 pm
Drew31 wrote: Fri Jan 14, 2022 3:26 pm I'm starting to really struggling with this question myself. We're presently maxing all retirement and putting a good chunk into taxable savings and still paying extra on our mortgage. We refinanced last year to a 30 year at 2.75% but I'm making payments to essentially turn it into a 15yr. I like the idea of having the mortgage gone at 55 and do not like the idea of having a mortgage to near 70, but also can't dislodge myself from the math that technically I'd be better off taking that extra into my taxable. I've not changed anything yet, but these threads are continuing to make me sit back and question what I'm doing.
What you should be doing is getting a 15 year mortgage, not paying a 30 as if it were a 15. Use the money that's going to taxable (or some of it) to make the larger payment. If you can afford it, a low-rate 15 year mortgage is usually a great deal.
I don't disagree necessarily and debated a 15 yr when I refinanced. In the end, I decided while I liked the idea to pay off in 15 years, I enjoyed the flexibility of having the lower payment if situations changed.
Ostrmat
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Re: Should we put more toward our mortgage?

Post by Ostrmat »

It sounds like you just refinanced or bought your home with still 30 years of payments to go.

Based on your age, you are a little light on retirement for your income, and since paying the mortgage saves 2.6% and you can earn on average 3 x that in the market, I would strongly recommend beefing up your retirement contributions to 15% or more and using Roth IRA or 401K to allow for long term benefit. It would be better to save up in your Roth for 20 years and then pay off your house from the growth without jeopardizing your retirement when you are ready. You can do it 3 times quicker that way vs paying it down sooner, also considering inflation and the value of the dollar going down.

Unless you can make double principle payments, I don;t see any real benefit to paying an extra $16 or $80 per month. It barely moves the needle and you need more retirement funds.

Good luck with whatever route you take.
7eight9
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Re: Should we put more toward our mortgage?

Post by 7eight9 »

Ostrmat wrote: Fri Jan 14, 2022 11:57 pm It sounds like you just refinanced or bought your home with still 30 years of payments to go.

Based on your age, you are a little light on retirement for your income, and since paying the mortgage saves 2.6% and you can earn on average 3 x that in the market, I would strongly recommend beefing up your retirement contributions to 15% or more and using Roth IRA or 401K to allow for long term benefit. It would be better to save up in your Roth for 20 years and then pay off your house from the growth without jeopardizing your retirement when you are ready. You can do it 3 times quicker that way vs paying it down sooner, also considering inflation and the value of the dollar going down.

Unless you can make double principle payments, I don;t see any real benefit to paying an extra $16 or $80 per month. It barely moves the needle and you need more retirement funds.

Good luck with whatever route you take.
Paying off the mortgage is a guaranteed return. Hypothetical returns are just that - hypothetical.
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Ostrmat
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Re: Should we put more toward our mortgage?

Post by Ostrmat »

Correct, but the average return of the S&P 500 over the last 10 years is just under 14%. In the last 20 it is 7.5%. Still triple the return vs paying off his mortgage. That includes 2 recessions. Nothing is guaranteed and paying off the mortgage only gives him equity and will force him to move or take on new debt to access it. Investing will allow him to have access to the capital 3 times faster based on historical returns, which are not guaranteed but worth the risk.
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Re: Should we put more toward our mortgage?

Post by 7eight9 »

Ostrmat wrote: Sat Jan 15, 2022 12:17 am Correct, but the average return of the S&P 500 over the last 10 years is just under 14%. In the last 20 it is 7.5%. Still triple the return vs paying off his mortgage. That includes 2 recessions. Nothing is guaranteed and paying off the mortgage only gives him equity and will force him to move or take on new debt to access it. Investing will allow him to have access to the capital 3 times faster based on historical returns, which are not guaranteed but worth the risk.
Now I'm curious. How do you calcuate what is worth the risk?
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ApeAttack
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Re: Should we put more toward our mortgage?

Post by ApeAttack »

I'm in a similar position. After a lot of thought I decided to focus on maxing out my tax deferred space before paying down the low interest rate mortgage early.

If my mortgage were 4%+, I think paying it off early would make more sense.

Once I've maxed out my tax deferred space, I will revisit the idea of paying down the mortgage early.
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nisiprius
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Re: Should we put more toward our mortgage?

Post by nisiprius »

We did; not in any extreme way, but paid off a 25-year mortgage in 22 years. Mostly by committing windfalls. I've never had any regrets.

But these are like arguments about what your risk tolerance "should" be. It's all about what you value, and what you want to do with your money. It's our money and that's how my wife and I wanted to do with it, and it made us happy to use it that way.

I hope they still send monthly statements showing how much of your payment is going toward principal. In the early years, we could see that almost all the payment was going toward interest, and maybe like twenty bucks was going to pay off principal, which was really disturbing. We were definitely aware when the payments got to be at least roughly half going toward principal, not a celebration day but definitely a lifting of the spirits. The statements showed us how much principal was left to go, so there was an obvious motivating factor--send 'em and extra $1,000 and knock another $1,000 off that number.

I've been perfectly aware all along of all of the supposedly smart reasons for staying in debt, and I think they are wrong-headed. Ric Edelman has an almost offensive web page given reasons for doing it and half the reasons are clearly distorted--the gem is "a mortgage lets you sell your house without selling," as if the bank were now a participant sharing in gracefully in declines in value. Three big categories of financial institution--banks, insurance companies, and investment firms--are all competing for your long-term serious money, and I think a lot of the talk about not paying down your mortgage is self-interested. The banks don't want you to pay it down, which is one reason I feel it must be the right move. And the others don't want to see money going for debt service that could be going to them.

The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.

Image
Last edited by nisiprius on Sat Jan 15, 2022 6:47 am, edited 1 time in total.
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Jags4186
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Re: Should we put more toward our mortgage?

Post by Jags4186 »

When we first bought out house our PITI was $2550. After refinancing several times over the past 4 years, our payment has dropped to $2220. I keep paying $2550. I already max out my tax advantaged accounts and I do not hold bonds because I already have a negative interest bond—my mortgage. I wouldn’t consider holding bonds until the mortgage is paid off or the balance is low enough that I’d want additional bond holdings.
HappyPappy
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Re: Should we put more toward our mortgage?

Post by HappyPappy »

2.65%?! Someone lent you hundreds of thousands of dollars fir 2.65% and you gave 30 years to pay that back?

That is some cheap money you got your hands on. Put that into some higher risk higher return investments (just something that tracks a broad stock index) and you’ll make money hand over fist over the course of thirty years because the appreciation on those investments will be quite a bit more than 2.65%.

Not all debt is bad. Businesses use debt all the time as a regular part of operations.

We have 3.5% on our mortgage, and that’s the last place I look to put any extra savings we have. Mybireder order of precedence for saving extra money has generally been: emergency fund till we had a year’s worth of net income there (then I backed off putting more money into that), then pretax retirement, then after tax retirement, then college savings.
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nisiprius
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Re: Should we put more toward our mortgage?

Post by nisiprius »

So there was a thread about this. Has anybody tried to score it?

Anyone regret paying off mortgage early?

Got my trusty pencil and ready to make tally marks... Oh, no, there are 26 pages. No, I'm not going to do all that. But within the first page I score 25 clear "no regrets" or equivalent, zero saying "I did it and I regret it, 2 (off-topic) "didn't do it and have no regrets," and the rest unclear or off-topic.

What I take from this is trust thyself. Deciding to accelerate mortgage payments appears to be an area where peoples' self-knowledge of what will make them happy is reliable.

The chief conclusion is that among people inspired to post in the first page of the thread, people were accurate in their judgement of what they wanted, and all the people who accelerated paying down their mortgage were happy with that decision (or lying).

A problem is that despite the clear initial post, posters began to wander into theory and pro-and-con arguments instead of simple declarations.


One poster said something I agree with. In my own words: you don't fully appreciate just how unhappy the mortgage payments are making you until you stop making them.

One of the more interesting responses I couldn't score was from "twinsdad":
Here is one negative I have found, although I am not sure it is a "regret," in fact I consider it a "relative" negative. I no longer have the desire to work harder, extra hours, and keep trying to make more money and increase my income like I did when I had debt and a goal. Having a large debt is good motivation to work hard and increase your income. However, when I do get home from work now, the beer in my backyard does taste just a little bit better since I own it not the bank.
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Admiral
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Re: Should we put more toward our mortgage?

Post by Admiral »

Regret is an emotional/psychological state and to a large degree responses are self-selecting, because most people don't like to report that they made bad (or sub-optimal) choices. I suspect people who invested in TSM over the last 15 years instead of pre-paying their mortgages are also likely to report being quite happy, because they've made a LOT of money.

The issue is not if I or anyone regrets paying off a debt--most people also don't regret paying off car loans or credit cards, either--but what is optimal mathematically or financially for each person, and whether that choice will make one subjectively "happier." I don't love my mortgage but having to pay $2,000 a month doesn't keep me up at night (especially when $1600 of that goes into my pocket as principal.) I prefer having a large taxable account which enables me to do other things (like take vacations) that make me happier than shortening my mortgage term would.

Since I don't have $200k laying around to pay it off anyway, pre-payment just knocks off some months in 10 years, when the balance will be so low that I'll be able to pay it off in full.

At 7% inflation, 2.25% is looking pretty sweet right now!
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JupiterJones
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Re: Should we put more toward our mortgage?

Post by JupiterJones »

But again, the OP has not yet maxed out their tax-advantaged space.

All the usual/predictable back-and-forth about early mortgage payment vs. (presumably taxable) investing is moot. I'd imagine that we're pretty much all in 100% agreement that the OP--in this particular case--should not being putting more toward their mortgage, aren't we?
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Admiral
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Re: Should we put more toward our mortgage?

Post by Admiral »

JupiterJones wrote: Sat Jan 15, 2022 9:02 am But again, the OP has not yet maxed out their tax-advantaged space.

All the usual/predictable back-and-forth about early mortgage payment vs. (presumably taxable) investing is moot. I'd imagine that we're pretty much all in 100% agreement that the OP--in this particular case--should not being putting more toward their mortgage, aren't we?
Yes.
danaht
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Re: Should we put more toward our mortgage?

Post by danaht »

I am in the camp that all debt is bad. If you ever watch the Dave Ramsey show - they always suggest paying off the mortgage as soon as you have an emergency fund saved and pay off all other debt (credit cards, etc). Having said that there are times when you will need to go into debt - I am taking a new mortgage on a new house so I can move to Las Vegas. I don't plan to keep that debt for long - hoping to get a 15 year mortgage - but planning to pay it off a lot sooner than 15 years. My advice is to make any extra payments you can to lower principal - even though your interest rate is only 2.6% (congratulations on that). Still try to max out out your HSA, Roth, 401k (to get employer match), and 401k rest of it (in that order). Afterwards make any extra payments that you can to the mortgage. Investing in taxable space should take a back seat to paying off the mortgage. At least that is my plan going forward after I move to Las Vegas.
chazas
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Re: Should we put more toward our mortgage?

Post by chazas »

Do what makes you happy, though I agree with others max out your tax advantaged space before considering it.

I started over with home equity from a recent divorce. I was splitting my excess cash between investments and extra principal payments, figuring that a lower mortgage balance would allow me to recast at retirement and lower my expenditures. But once I finished my second refi down to 1.875% I stopped doing that. It seems to make very little sense - I can cover that P&I from expected retirement cash flow easily, and can always pay down later out of my savings/investments if I change my mind.
capran
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Re: Should we put more toward our mortgage?

Post by capran »

nisiprius wrote: Sat Jan 15, 2022 6:40 am We did; not in any extreme way, but paid off a 25-year mortgage in 22 years. Mostly by committing windfalls. I've never had any regrets.

But these are like arguments about what your risk tolerance "should" be. It's all about what you value, and what you want to do with your money. It's our money and that's how my wife and I wanted to do with it, and it made us happy to use it that way.

I hope they still send monthly statements showing how much of your payment is going toward principal. In the early years, we could see that almost all the payment was going toward interest, and maybe like twenty bucks was going to pay off principal, which was really disturbing. We were definitely aware when the payments got to be at least roughly half going toward principal, not a celebration day but definitely a lifting of the spirits. The statements showed us how much principal was left to go, so there was an obvious motivating factor--send 'em and extra $1,000 and knock another $1,000 off that number.

I've been perfectly aware all along of all of the supposedly smart reasons for staying in debt, and I think they are wrong-headed. Ric Edelman has an almost offensive web page given reasons for doing it and half the reasons are clearly distorted--the gem is "a mortgage lets you sell your house without selling," as if the bank were now a participant sharing in gracefully in declines in value. Three big categories of financial institution--banks, insurance companies, and investment firms--are all competing for your long-term serious money, and I think a lot of the talk about not paying down your mortgage is self-interested. The banks don't want you to pay it down, which is one reason I feel it must be the right move. And the others don't want to see money going for debt service that could be going to them.

The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.

Image
It was exactly due to seeing that low amount of our payment going toward Principal that motivated us to make that extra principal payments. Maybe it was psychological, but when we paid an extra $25 principal payment, we crossed off that corresponding interest payment on the amortization schedule. So it advanced us to the next P&I ratio on the amortization schedule. Make a $50 and you were skipping two interest payments. Very reinforcing. (of course, that was during times of much higher interest rates, and the market returns were not as high as they have been.) Although did you see the recent article from Vanguard about the market valuations currently being higher than they were during the dot com bubble?
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Re: Should we put more toward our mortgage?

Post by CurlyDave »

Turtlemilk wrote: Fri Jan 14, 2022 9:28 am
...Should we pay off the home early? What factors should be considered?...
It is all a matter of probabilities.

1. The odds that you will ultimately build more wealth by investing the potential extra payments are very high. IMHO 99+%.

2. If you ever have a future financial crisis, having that money in your portfolio instead of as additional equity in your house will be very helpful. The mortgage holder will not give you credit for prior principal reduction and will want his payment every month.

3. We seem to be entering a time when interest rates will increase. This has happened previously in my lifetime and somewhere along the line mortgage companies may start to offer incentives (monetary bonuses) for early payoff. If you invest and wait this may happen again. I have personally received letters offering 15% to 20% credits for an early payoff. You won't get that if you have already paid your mortgage off.
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tvubpwcisla
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Re: Should we put more toward our mortgage?

Post by tvubpwcisla »

Pay as much as you can on your mortgage and try to pay it off as soon as possible is my vote.
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JupiterJones
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Re: Should we put more toward our mortgage?

Post by JupiterJones »

capran wrote: Sat Jan 15, 2022 9:48 am
nisiprius wrote: Sat Jan 15, 2022 6:40 am In the early years, we could see that almost all the payment was going toward interest, and maybe like twenty bucks was going to pay off principal, which was really disturbing.
It was exactly due to seeing that low amount of our payment going toward Principal that motivated us to make that extra principal payments.
What's nice is that the opposite happens when you do start getting to the end of the tunnel. That statement eventually starts showing a huge chunk of your payment going toward principal and a laughably small amount required for the interest.

My wife and I would get a real kick out of seeing what our past month's "rent to the bank" was compared to actual rents in our neighborhood. :sharebeer

(This is not an endorsement that the OP should put more toward their mortgage, because they currently should not.)
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HappyPappy
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Re: Should we put more toward our mortgage?

Post by HappyPappy »

danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad. If you ever watch the Dave Ramsey show - they always suggest paying off the mortgage as soon as you have an emergency fund saved and pay off all other debt (credit cards, etc). Having said that there are times when you will need to go into debt - I am taking a new mortgage on a new house so I can move to Las Vegas. I don't plan to keep that debt for long - hoping to get a 15 year mortgage - but planning to pay it off a lot sooner than 15 years. My advice is to make any extra payments you can to lower principal - even though your interest rate is only 2.6% (congratulations on that). Still try to max out out your HSA, Roth, 401k (to get employer match), and 401k rest of it (in that order). Afterwards make any extra payments that you can to the mortgage. Investing in taxable space should take a back seat to paying off the mortgage. At least that is my plan going forward after I move to Las Vegas.
Isn't some of Dave Ramsey's advice predicated on the assumption that, in general, people have a hard time saving? I mean, he is advocating paying off credit debt, car debt, etc. If someone was already savvy (and lucky enough to earn sufficient money to have some left over after paying for needs and basic wants) about saving, they wouldn't have credit card debt, car debt, etc. In my reading of Ramsey's view, the mortgage serves as a forcing function for saving. In other words, isn't Ramsey looking at as a choice between paying down a 2.65% debt versus spending money on discretionary spending, like eating out? In his recommendations, does he explicitly address situations where someone has a low interest mortgage and has a choice between paying down that cheap debt or else investing in a broad market ETF in a tax advantaged account?

I'm also curious, what happens if the OP were to move? Maybe to a more expensive area, requiring a new more expensive mortgage that pushes the final payment farther into the future. Then it will be like the OP made extra payments to the their current mortgage, at the expense of not investing in the market, for very little tangible benefit.
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Re: Should we put more toward our mortgage?

Post by Ron Ronnerson »

HappyPappy wrote: Sat Jan 15, 2022 1:21 pm
danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad. If you ever watch the Dave Ramsey show - they always suggest paying off the mortgage as soon as you have an emergency fund saved and pay off all other debt (credit cards, etc). Having said that there are times when you will need to go into debt - I am taking a new mortgage on a new house so I can move to Las Vegas. I don't plan to keep that debt for long - hoping to get a 15 year mortgage - but planning to pay it off a lot sooner than 15 years. My advice is to make any extra payments you can to lower principal - even though your interest rate is only 2.6% (congratulations on that). Still try to max out out your HSA, Roth, 401k (to get employer match), and 401k rest of it (in that order). Afterwards make any extra payments that you can to the mortgage. Investing in taxable space should take a back seat to paying off the mortgage. At least that is my plan going forward after I move to Las Vegas.
Isn't some of Dave Ramsey's advice predicated on the assumption that, in general, people have a hard time saving? I mean, he is advocating paying off credit debt, car debt, etc. If someone was already savvy (and lucky enough to earn sufficient money to have some left over after paying for needs and basic wants) about saving, they wouldn't have credit card debt, car debt, etc. In my reading of Ramsey's view, the mortgage serves as a forcing function for saving. In other words, isn't Ramsey looking at as a choice between paying down a 2.65% debt versus spending money on discretionary spending, like eating out? In his recommendations, does he explicitly address situations where someone has a low interest mortgage and has a choice between paying down that cheap debt or else investing in a broad market ETF in a tax advantaged account?

I'm also curious, what happens if the OP were to move? Maybe to a more expensive area, requiring a new more expensive mortgage that pushes the final payment farther into the future. Then it will be like the OP made extra payments to the their current mortgage, at the expense of not investing in the market, for very little tangible benefit.
I think you raise good points. Since most people don't save much of anything, paying down debt (even as low as 2.625%) is usually better than the alternative of just spending the money. It's a very different situation if the options are paying the debt or using the money toward investments.

Another thing that I think is sort of important to mention is about the interest rate on the mortgage. It is 2.625% nominal but it's the real rate that matters, though. We don't know what the rate of inflation will be in the future but if we assume it's similar to the average over the past 100 years, the OP could very well end up with a slightly negative (real) mortgage rate - meaning they are being paid money to borrow. At the moment, using the current 7% rate of inflation, the real mortgage rate is -4.375%.

Let's say that the OP has an extra $20k sitting around and they are not going to be spending this money on vacations and restaurants but instead want to use it to increase their level of wealth. Mathematically, they would be better off putting that money into something like I Bonds for the next year rather than paying down this debt.

The security that comes with not having a mortgage and improving cash flow by getting rid of debt are genuinely great things. At the same time, it's important to acknowledge that, in real terms, rates in the recent past have been low enough and inflation high enough that the interest rate could very well be negative for a lot of people. In the end, which option someone prefers is a personal decision but people should make this choice with open eyes and be honest about the math. Just looking at nominal numbers is problematic as it gets in the way of seeing the truth (aka the "real" rate).
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Re: Should we put more toward our mortgage?

Post by StevieG72 »

I payed an extra $100 to $250 on my mortgage. Nothing says you can’t do both invest extra cash flow and pay down debt. While the conventional wisdom is to invest vs pay down a low interest mortgage it is also behavioral.

If you hold bonds while carrying a mortgage that is another thing to review especially in this low interest rate environment.

I finally just paid of my mortgage and invest what once was my mortgage payment monthly. While a lump sum investment of this money in the stock market vs. dollar cost averaging would have performed better I did hold bonds which muddies the water a bit. I took money from my bond fund to pay off mortgage, and new investments go to stocks. And yes my AA has become a little more aggressive.

Finally my situation is unique in that I still live in my starter home, did a cash out refinance once to pay off a business loan and have since paid off all debt. Total debt was never very large to begin with.
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JoeRetire
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Re: Should we put more toward our mortgage?

Post by JoeRetire »

danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad.

Having said that there are times when you will need to go into debt
Nobody ever needs to go into debt if they feel that all debt is bad. You made a choice. Everyone makes a choice.
Had you actually felt that all debt is bad, perhaps you would have made a different choice.
Last edited by JoeRetire on Sat Jan 15, 2022 6:22 pm, edited 1 time in total.
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Admiral
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Re: Should we put more toward our mortgage?

Post by Admiral »

Ron Ronnerson wrote: Sat Jan 15, 2022 5:35 pm
HappyPappy wrote: Sat Jan 15, 2022 1:21 pm
danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad. If you ever watch the Dave Ramsey show - they always suggest paying off the mortgage as soon as you have an emergency fund saved and pay off all other debt (credit cards, etc). Having said that there are times when you will need to go into debt - I am taking a new mortgage on a new house so I can move to Las Vegas. I don't plan to keep that debt for long - hoping to get a 15 year mortgage - but planning to pay it off a lot sooner than 15 years. My advice is to make any extra payments you can to lower principal - even though your interest rate is only 2.6% (congratulations on that). Still try to max out out your HSA, Roth, 401k (to get employer match), and 401k rest of it (in that order). Afterwards make any extra payments that you can to the mortgage. Investing in taxable space should take a back seat to paying off the mortgage. At least that is my plan going forward after I move to Las Vegas.
Isn't some of Dave Ramsey's advice predicated on the assumption that, in general, people have a hard time saving? I mean, he is advocating paying off credit debt, car debt, etc. If someone was already savvy (and lucky enough to earn sufficient money to have some left over after paying for needs and basic wants) about saving, they wouldn't have credit card debt, car debt, etc. In my reading of Ramsey's view, the mortgage serves as a forcing function for saving. In other words, isn't Ramsey looking at as a choice between paying down a 2.65% debt versus spending money on discretionary spending, like eating out? In his recommendations, does he explicitly address situations where someone has a low interest mortgage and has a choice between paying down that cheap debt or else investing in a broad market ETF in a tax advantaged account?

I'm also curious, what happens if the OP were to move? Maybe to a more expensive area, requiring a new more expensive mortgage that pushes the final payment farther into the future. Then it will be like the OP made extra payments to the their current mortgage, at the expense of not investing in the market, for very little tangible benefit.
I think you raise good points. Since most people don't save much of anything, paying down debt (even as low as 2.625%) is usually better than the alternative of just spending the money. It's a very different situation if the options are paying the debt or using the money toward investments.

Another thing that I think is sort of important to mention is about the interest rate on the mortgage. It is 2.625% nominal but it's the real rate that matters, though. We don't know what the rate of inflation will be in the future but if we assume it's similar to the average over the past 100 years, the OP could very well end up with a slightly negative (real) mortgage rate - meaning they are being paid money to borrow. At the moment, using the current 7% rate of inflation, the real mortgage rate is -4.375%.

Let's say that the OP has an extra $20k sitting around and they are not going to be spending this money on vacations and restaurants but instead want to use it to increase their level of wealth. Mathematically, they would be better off putting that money into something like I Bonds for the next year rather than paying down this debt.

The security that comes with not having a mortgage and improving cash flow by getting rid of debt are genuinely great things. At the same time, it's important to acknowledge that, in real terms, rates in the recent past have been low enough and inflation high enough that the interest rate could very well be negative for a lot of people. In the end, which option someone prefers is a personal decision but people should make this choice with open eyes and be honest about the math. Just looking at nominal numbers is problematic as it gets in the way of seeing the truth (aka the "real" rate).
Yes, and the corollary is optionality: when you pre-pay you lock in a gain, but the gain is low (because most people have low mortgage rates) and the money is no longer available for investment. By not prepaying, you give yourself the option to invest (including in fixed income) when returns are more favorable. Or, you can invest and then pay off the mortgage in full later.
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Re: Should we put more toward our mortgage?

Post by mortfree »

Putting an extra 100 or less per month to the mortgage isn’t a big deal

I’d be more concerned if you plow 400k plus into the home in a shorter timeframe to pay it off and are only contributing 11% to retirement.

I’d rather have more of the 400k working for me in my investments.

Also you mentioned a net worth but I am guessing that a portion of that is the house.

I focus more on invested money and cash when I want to see how I am doing.

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Re: Should we put more toward our mortgage?

Post by willthrill81 »

nisiprius wrote: Sat Jan 15, 2022 6:40 am The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.
I'm inclined to agree.

For us, paying off our mortgage very early was partly about minimizing downside risk. We wanted to know that as long as we paid our property taxes, we wouldn't lose our home.
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Re: Should we put more toward our mortgage?

Post by grabiner »

7eight9 wrote: Sat Jan 15, 2022 12:30 am
Ostrmat wrote: Sat Jan 15, 2022 12:17 am Correct, but the average return of the S&P 500 over the last 10 years is just under 14%. In the last 20 it is 7.5%. Still triple the return vs paying off his mortgage. That includes 2 recessions. Nothing is guaranteed and paying off the mortgage only gives him equity and will force him to move or take on new debt to access it. Investing will allow him to have access to the capital 3 times faster based on historical returns, which are not guaranteed but worth the risk.
Now I'm curious. How do you calcuate what is worth the risk?
By your own risk tolerance in other financial decisions. If you hold some of your investments in bonds yielding 2% when you could buy stock, then you have decided that it is not worth the risk to buy more stock when you could earn a low-risk 2%. Conversely, it is worth the risk to hold the stock that you already hold, rather than buying more bonds to earn that 2%.

For paying down a long-term mortgage, the fair comparison is probably Vanguard Long-Term Bond Index, which has a 16-year duration, and a yield of 2.68%. If you are not maxing out your Roth IRA, and you put new money in a stock fund when you could buy this fund, you must believe that the return of the stock market is worth the risk when you can get a 2.68% long-term return. You can get a similar benefit if you are not maxing out your 401(k); the tax deduction on the contribution likely cancels out the tax on withdrawals, so you effectively get a 2.68% after-tax return, or even more if you retire in a lower tax bracket. And since 2.68% is higher than the OP's mortgage rate, it is not worth paying down the 2.625% long-term mortgage. (You might not hold this specific bond fund, but if you hold a different fund, you are also getting a fair trade-off between return and risk.)

But if you are maxing out your retirement accounts, a muni fund with the same risk level would yield about 2%. Unless the mortgage interest is deductible (so that the after-tax return on paying it down is also only 2%), there is a net dollar gain at the same risk level by paying down the mortgage rather than investing. However, there is also the loss of liquidity, which may be worth something.

So, in this situation, I would say that the math favors investing over paying down the mortgage if you are not maxing out your retirement plans, or if the interest you avoid would be tax-deductible. And the non-math favors investing over paying down the mortgage if you need the liquidity, since the cost of the liquidity is fairly low. Only if none of those apply would it make sense to pay down the mortgage.

(Paying off the mortgage, once you have accumulated the cash, is a better deal. It immediately improves your cash flow, and it also has a shorter effective duration.)
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Re: Should we put more toward our mortgage?

Post by danaht »

JoeRetire wrote: Sat Jan 15, 2022 6:20 pm
danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad.

Having said that there are times when you will need to go into debt
Nobody ever needs to go into debt if they feel that all debt is bad. You made a choice. Everyone makes a choice.
Had you actually felt that all debt is bad, perhaps you would have made a different choice.
I still feel that all debt is bad - but not moving to Las Vegas to be closer to family is a worse choice to me than having debt. Life is definitely all about choices. :sharebeer
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Re: Should we put more toward our mortgage?

Post by 1789 »

Never pay any penny more than required for this mortgage. You really need to ramp up the contributions to your retirement accounts. Pretax 401k, Roth IRA, and HSA. I don't think you are in a strong financial position to think to pay down this mortgage.
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Re: Should we put more toward our mortgage?

Post by FireSekr »

No. Pay the minimum. Let inflation eat away your debt
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Re: Should we put more toward our mortgage?

Post by Goal33 »

Once I was maxing both 401ks, mega backdoor Roth, both Roth IRAs, and plowing plenty into brokerage, I went for a 15 year down from 29.5 years left on my 30.
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Re: Should we put more toward our mortgage?

Post by 2Scoops »

Agree on maximizing retirement vehicles first before thinking about the mortgage.

I've had the same debate myself and my interest rate is 1.75% on a 15 year term. I know two things to be true: 1) I hate debt and want to be free of my mortgage sooner than later and 2) At such a low rate, pretty much any other investment is better than paying more to my mortgage.

To delay my decision I've opened up a separate brokerage account and any additional mortgage money goes in to that account. That way I keep the liquidity and allow it to grow (ideally). I"ll make the decision on when to pay off the mortgage in a few years. Life has a ton of twists so might be thankful to have the extra funds laying around.
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Re: Should we put more toward our mortgage?

Post by Admiral »

willthrill81 wrote: Sat Jan 15, 2022 8:56 pm
nisiprius wrote: Sat Jan 15, 2022 6:40 am The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.
I'm inclined to agree.

For us, paying off our mortgage very early was partly about minimizing downside risk. We wanted to know that as long as we paid our property taxes, we wouldn't lose our home.
A question, though. Once you've accumulated enough savings to pay off your mortgage, then paying it off (or not) is simply a matter of the interest savings. You know you can't lose the house. There is no increased cashflow, because you could always replace the cash from your mortgage payment with your savings.

So, did you consider a sinking fund, and if so how much longer would it have taken to accumulate the dollars needed for payoff versus the choice you made which was prepayment?

Viewed another way, I'm not sure people do the math when they look at how many years a small pre-payment (say a few hundred bucks) will save them on a 30 year mortgage vs. how long it would take to accumulate the payoff funds by investing. Clearly putting the money in the mattress won't save you any time because you're earning no interest. But certainly even a highly conservative sinking fund is likely to beat a 2.xx% mortgage. You don't need a lot of risk to earn 3%.

Another way to look at it is to view Roth savings as your sinking account. If you have the amount you owe on your mortgage saved in Roth (as contributions, not earnings) you could pay off your mortgage at any time. IOW, you cannot lose your home. While mathematically taking this route may not be wise, it does have the advantage of immediately increasing your cash flow--unlike small pre payments.

And further, even if you don't have enough, you might have half the balance. So, you could pay down say half, refinance, and then have a much lower mortgage payment--which would (hopefully) prevent you from losing your home (if this is your worry).
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Re: Should we put more toward our mortgage?

Post by Grt2bOutdoors »

HappyPappy wrote: Sat Jan 15, 2022 6:59 am 2.65%?! Someone lent you hundreds of thousands of dollars fir 2.65% and you gave 30 years to pay that back?

That is some cheap money you got your hands on. Put that into some higher risk higher return investments (just something that tracks a broad stock index) and you’ll make money hand over fist over the course of thirty years because the appreciation on those investments will be quite a bit more than 2.65%.

Not all debt is bad. Businesses use debt all the time as a regular part of operations.

We have 3.5% on our mortgage, and that’s the last place I look to put any extra savings we have. Mybireder order of precedence for saving extra money has generally been: emergency fund till we had a year’s worth of net income there (then I backed off putting more money into that), then pretax retirement, then after tax retirement, then college savings.
Businesses that use debt as part of their operations have levers available to them that an ordinary couple may not.

1. Perpetual life. Debt can be refinanced under varying conditions almost continuously. One only need look at the corporate bond markets to see.
2. Businesses don’t usually lose their sources of income abruptly. People lose employment and sometimes it takes years, or never to find a job again.
3. People live in their house as a place of shelter and stability. Businesses are agnostic to specific locations.
4. Most business debt is unsecured. People who hold a mortgage offer a lien to the lender. Failure to pay means the lender can enforce the lien and seize the property.
5. Lenders don’t refinance mortgages to unemployed people. Unless you have substantial sources of other income and assets. Rarified world where that occurs, beyond Bogleheads.

All of that said, OP should max out retirement and other savings first before prepaying the mortgage. Don’t bank on earning a specific rate on your accounts. You control savings rate and expenses paid, you don’t control rate of return. Focus on what you can control.
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Re: Should we put more toward our mortgage?

Post by bluebolt »

danaht wrote: Sat Jan 15, 2022 9:05 am I am in the camp that all debt is bad.
If I had mortgage at 2.6% and were able to earn a higher interest rate than that in a savings account or high quality government bond, it would be hard to argue that debt is bad.

When I've had 0%, 5 year car loans, that debt didn't seem so bad.

When I've had 0% credit card balance offers, that debt wasn't too bad.

When I have a nearly one month grace period on my credit card purchases, that debt isn't too bad either.

Debt is a tool. Intrinsically, it is neither good nor bad.
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Re: Should we put more toward our mortgage?

Post by guitarguy »

Someone brought up the point earlier:

What if the OP moves to a more expensive home?

Those of you that paid early, did you give much consideration to this? Is it smart to plunge more into your current mortgage if you’re planning to upsize in the coming years, or invest in taxable or increase cash and keep things more liquid? If it simply "depends on how far out" the move is...what would be the guideline?

Prior to maxing the tax advantage space I was pretty set against paying extra to the mortgage (as the OP should be based on all the advice here - which I agree with). But - we are now in a situation where we’re finally maxing our tax advantage space (401k, 2x Roth IRA, HSA) as of 2021 and I expect that will continue going forward. Now I'm wondering myself - with the caveat that moving to a larger home with better schools in the next 5-7 years is a near certainty - whether we should:

1 - Pay down the current mortgage quickly with any extra funds, and use a HELOC to supplement for the downpayment on the next house as needed
2 - Invest in taxable or just stockpile more cash with any extra funds so we have more liquidity

Our mortgage is a 15-year at 2.875% (currently in year 7), with a home value of about $250k and a mortgage balance of $55k. We do not have a taxable investment account yet, nor have we started 529s (kids are 2.5 yrs and 8 weeks). After just purchasing a new vehicle with cash, we're left with about $30k (6 months expenses).

Right now my thoughts are (a) we have enough cash, (b) it would be great to move without having any debt so we could buy and THEN sell to keep things as low-stress as possible, and (c) we could probably pay this mortgage off in 3 years. All pointing to just plunking more into the mortgage and getting it done with.

But with a 5-7 year time horizon how much does the math favor investing in taxable? Probably not as much as with a "forever home" that you're just looking to pay off before retirement, right?
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Re: Should we put more toward our mortgage?

Post by grabiner »

guitarguy wrote: Sun Jan 16, 2022 8:57 am Someone brought up the point earlier:

What if the OP moves to a more expensive home?

Those of you that paid early, did you give much consideration to this? Is it smart to plunge more into your current mortgage if you’re planning to upsize in the coming years, or invest in taxable or increase cash and keep things more liquid? If it simply "depends on how far out" the move is...what would be the guideline?
This shortens the term of the prepayment. If you make an extra payment on a mortgage with 20 years left, this is analogous to buying a 20-year bond, as you get nothing back until you eliminate the final payment you would have made 20 years from now. But if you get rid of the mortgage in 5 years (because you sell the house), you get the money back when you sell.

The downside is that you may have to make buying your new home contingent on selling your old one, or take out a bridge loan to get the equity out. The bridge loan reduces the interest benefit of a prepayment, as the interest rate on a bridge loan is likely higher than it was on the original mortgage.

Now, look at this in the context of your situation:
Prior to maxing the tax advantage space I was pretty set against paying extra to the mortgage (as the OP should be based on all the advice here - which I agree with). But - we are now in a situation where we’re finally maxing our tax advantage space (401k, 2x Roth IRA, HSA) as of 2021 and I expect that will continue going forward. Now I'm wondering myself - with the caveat that moving to a larger home with better schools in the next 5-7 years is a near certainty - whether we should:

1 - Pay down the current mortgage quickly with any extra funds, and use a HELOC to supplement for the downpayment on the next house as needed
2 - Invest in taxable or just stockpile more cash with any extra funds so we have more liquidity

Our mortgage is a 15-year at 2.875% (currently in year 7), with a home value of about $250k and a mortgage balance of $55k. We do not have a taxable investment account yet, nor have we started 529s (kids are 2.5 yrs and 8 weeks). After just purchasing a new vehicle with cash, we're left with about $30k (6 months expenses).

Right now my thoughts are (a) we have enough cash, (b) it would be great to move without having any debt so we could buy and THEN sell to keep things as low-stress as possible, and (c) we could probably pay this mortgage off in 3 years. All pointing to just plunking more into the mortgage and getting it done with.
Given these numbers, and the significant difference between the after-tax returns on a mortgage prepayment (presumably not deductible) and a low-risk investment of similar duration in a taxable account (say the 1.66% on Total Bond Market Index, reduced by your tax bracket), it makes sense to pay down the mortgage aggressively. Once you have paid off the mortgage, the money that was going to mortgage payments can be saved in CDs or a savings account, as a short-term low-risk investment until you use it as part of the down payment on your new home. You can supplement this down payment with HELOC money.
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Re: Should we put more toward our mortgage?

Post by Jack FFR1846 »

GP813 wrote: Fri Jan 14, 2022 3:18 pm I don't agree with the nobody ever regretted paying off their home line. A lot of real estate is a terrible investment. There are really only a few real estate markets that are constant winners. Also as wealth building assets home buying depends on your location, class, race, etc. I know people who have paid off homes in Pennsylvania, Ohio, Indiana in deindustrialized towns and those homes are essentially worthless. They're not worth the taxes and maintenance to upkeep them. You will see this if you drive around the country, abandoned homes everywhere many of which were fully paid off by a previous generation. Do you want to leave your family assets that produce income or potential headaches.
So is your recommendation to watch your own home value and if it goes down to stop paying the mortgage, become a deadbeat, tank your credit score and abandon the house?

Expanding this to other loans, if you buy a car, do you look at the value a year later and see that your car loan is more than the value of the car and decide that you're done paying on the loan and just wait for the repo man to take the car, tank your credit score and pin a "deadbeat" sign on your back?

When someone takes a loan or a mortgage, it's a commitment to pay the payments until they have been completed. The value of the thing has no bearing on what you owe or your commitment to pay it off. If someone will only continue paying if the value of the thing goes up, their credit score is going to be in the 300's and nobody's going to give them a loan anyways.

A question: Do you personally know a person who has paid off their mortgage and told you that they regret doing so? Perhaps you do. I suspect you're just thinking that perhaps these people exist. I know quite a few friends who have done so and not a single one of them have any regrets. We talk and as soon as the paid off mortgage subject comes up, we all light up as if someone just told us that everyone in the room has won $100k tax free.
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Re: Should we put more toward our mortgage?

Post by Admiral »

Jack FFR1846 wrote: Sun Jan 16, 2022 9:28 am
GP813 wrote: Fri Jan 14, 2022 3:18 pm I don't agree with the nobody ever regretted paying off their home line. A lot of real estate is a terrible investment. There are really only a few real estate markets that are constant winners. Also as wealth building assets home buying depends on your location, class, race, etc. I know people who have paid off homes in Pennsylvania, Ohio, Indiana in deindustrialized towns and those homes are essentially worthless. They're not worth the taxes and maintenance to upkeep them. You will see this if you drive around the country, abandoned homes everywhere many of which were fully paid off by a previous generation. Do you want to leave your family assets that produce income or potential headaches.
So is your recommendation to watch your own home value and if it goes down to stop paying the mortgage, become a deadbeat, tank your credit score and abandon the house?

Expanding this to other loans, if you buy a car, do you look at the value a year later and see that your car loan is more than the value of the car and decide that you're done paying on the loan and just wait for the repo man to take the car, tank your credit score and pin a "deadbeat" sign on your back?

When someone takes a loan or a mortgage, it's a commitment to pay the payments until they have been completed. The value of the thing has no bearing on what you owe or your commitment to pay it off. If someone will only continue paying if the value of the thing goes up, their credit score is going to be in the 300's and nobody's going to give them a loan anyways.

A question: Do you personally know a person who has paid off their mortgage and told you that they regret doing so? Perhaps you do. I suspect you're just thinking that perhaps these people exist. I know quite a few friends who have done so and not a single one of them have any regrets. We talk and as soon as the paid off mortgage subject comes up, we all light up as if someone just told us that everyone in the room has won $100k tax free.
See my previous post. “Regret” is a subjective feeling or psychological state. It has absolutely nothing to do with whether pre-payment is an objectively wise or unwise financial (or mathematical) decision that will create more or less absolute wealth. Your point illustrates selection bias, nothing more. (I do agree with your earlier comments about loans and real estate).
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Re: Should we put more toward our mortgage?

Post by willthrill81 »

Admiral wrote: Sun Jan 16, 2022 7:10 am
willthrill81 wrote: Sat Jan 15, 2022 8:56 pm
nisiprius wrote: Sat Jan 15, 2022 6:40 am The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.
I'm inclined to agree.

For us, paying off our mortgage very early was partly about minimizing downside risk. We wanted to know that as long as we paid our property taxes, we wouldn't lose our home.
A question, though. Once you've accumulated enough savings to pay off your mortgage, then paying it off (or not) is simply a matter of the interest savings. You know you can't lose the house. There is no increased cashflow, because you could always replace the cash from your mortgage payment with your savings.

So, did you consider a sinking fund, and if so how much longer would it have taken to accumulate the dollars needed for payoff versus the choice you made which was prepayment?

Viewed another way, I'm not sure people do the math when they look at how many years a small pre-payment (say a few hundred bucks) will save them on a 30 year mortgage vs. how long it would take to accumulate the payoff funds by investing. Clearly putting the money in the mattress won't save you any time because you're earning no interest. But certainly even a highly conservative sinking fund is likely to beat a 2.xx% mortgage. You don't need a lot of risk to earn 3%.

Another way to look at it is to view Roth savings as your sinking account. If you have the amount you owe on your mortgage saved in Roth (as contributions, not earnings) you could pay off your mortgage at any time. IOW, you cannot lose your home. While mathematically taking this route may not be wise, it does have the advantage of immediately increasing your cash flow--unlike small pre payments.

And further, even if you don't have enough, you might have half the balance. So, you could pay down say half, refinance, and then have a much lower mortgage payment--which would (hopefully) prevent you from losing your home (if this is your worry).
The problem is that unless interest rates have risen significantly between the time the mortgage was taken out and the current point in time, there is no potential for interest rate arbitrage, and paying down the mortgage early is superior to buying equivalent bonds (apart from tax considerations; significant tax arbitrage can easily change the equation). The only motivation for the latter is to retain greater liquidity, which I think some here highly overrate, but it's called personal finance for good reason.

We didn't use a sinking fund because we knew that we would be able to pay off the mortgage completely in short order, and we earned a higher return by paying down the mortgage than via a HYSA or something similar. But I do think that sinking funds can make good sense for most people who are interested in paying down their mortgage.
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Re: Should we put more toward our mortgage?

Post by Apathizer »

As usual, I think his perspective is the most practical.
https://www.youtube.com/watch?v=AKc01jo1qLw
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Re: Should we put more toward our mortgage?

Post by HappyPappy »

Apathizer wrote: Sun Jan 16, 2022 10:12 am As usual, I think his perspective is the most practical.
https://www.youtube.com/watch?v=AKc01jo1qLw
Hmm. Interesting twist but it KIND of felt like he set up a straw man, no? He’s assuming someone has a conservative portfolio allocation that they can make more aggressive if they eliminate the mortgage debt. I think that someone’s risk tolerance isn’t much impacted by the size of their mortgage . . . If I can tolerate 100% sticks than that’s my allocation, regardless of my mortgage. If I can tolerate only 50% stocks, then that’s my allocation, regardless of my mortgage. Just because I pay off my mortgage doesn’t mean I can go from 50/50 fixed income/equities to 100% equities.
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Re: Should we put more toward our mortgage?

Post by HappyPappy »

Grt2bOutdoors wrote: Sun Jan 16, 2022 7:25 am
HappyPappy wrote: Sat Jan 15, 2022 6:59 am 2.65%?! Someone lent you hundreds of thousands of dollars fir 2.65% and you gave 30 years to pay that back?

That is some cheap money you got your hands on. Put that into some higher risk higher return investments (just something that tracks a broad stock index) and you’ll make money hand over fist over the course of thirty years because the appreciation on those investments will be quite a bit more than 2.65%.

Not all debt is bad. Businesses use debt all the time as a regular part of operations.

We have 3.5% on our mortgage, and that’s the last place I look to put any extra savings we have. Mybireder order of precedence for saving extra money has generally been: emergency fund till we had a year’s worth of net income there (then I backed off putting more money into that), then pretax retirement, then after tax retirement, then college savings.
Businesses that use debt as part of their operations have levers available to them that an ordinary couple may not.

1. Perpetual life. Debt can be refinanced under varying conditions almost continuously. One only need look at the corporate bond markets to see.
2. Businesses don’t usually lose their sources of income abruptly. People lose employment and sometimes it takes years, or never to find a job again.
3. People live in their house as a place of shelter and stability. Businesses are agnostic to specific locations.
4. Most business debt is unsecured. People who hold a mortgage offer a lien to the lender. Failure to pay means the lender can enforce the lien and seize the property.
5. Lenders don’t refinance mortgages to unemployed people. Unless you have substantial sources of other income and assets. Rarified world where that occurs, beyond Bogleheads.

All of that said, OP should max out retirement and other savings first before prepaying the mortgage. Don’t bank on earning a specific rate on your accounts. You control savings rate and expenses paid, you don’t control rate of return. Focus on what you can control.
Those are all good points.
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Re: Should we put more toward our mortgage?

Post by bling »

no way. with inflation where it is now it's pretty much free money.
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Re: Should we put more toward our mortgage?

Post by Admiral »

HappyPappy wrote: Sun Jan 16, 2022 10:59 am
Apathizer wrote: Sun Jan 16, 2022 10:12 am As usual, I think his perspective is the most practical.
https://www.youtube.com/watch?v=AKc01jo1qLw
Hmm. Interesting twist but it KIND of felt like he set up a straw man, no? He’s assuming someone has a conservative portfolio allocation that they can make more aggressive if they eliminate the mortgage debt. I think that someone’s risk tolerance isn’t much impacted by the size of their mortgage . . . If I can tolerate 100% sticks than that’s my allocation, regardless of my mortgage. If I can tolerate only 50% stocks, then that’s my allocation, regardless of my mortgage. Just because I pay off my mortgage doesn’t mean I can go from 50/50 fixed income/equities to 100% equities.

Well, yes it kind of does. (Not that you have to.) The lower your expenses/fixed costs, the less "safe" money you need. If your social security covers 100% of your budget, you can afford to be 100% stocks because the risk is irrelevant (or relevant to your discretionary income or heirs.)
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Re: Should we put more toward our mortgage?

Post by JS-Elcano »

My payment is similar to yours. I decided to put a little extra towards principle every month and thereby pay off the mortgage in 12 instead of 15 years (I also started out with a 30-year, but then three years later refinanced to 15).

For me, this means being done at 54 instead of 57 (with the 30-year it would have been at age 66 :shock: ) and that prospect feels amazing. Being in your 50s is different emotionally than being in your 30s and I value financial security now even more than I did back then.

Also, I started with catch-up contributions this year and it will be a bit of a stretch to max everything out. But when my mortgage is paid off early, it'll be much easier.

Having the extra cash flow in my 50s and 60s is also a plus. I also considered that getting a better return in the market (instead of paying off the mortgage) is a hypothetical, not a given. So: A bird in the hand is better than two in the bush :happy

So, no regrets. One of the few things I did right financially in my 30s.
Admiral
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Re: Should we put more toward our mortgage?

Post by Admiral »

willthrill81 wrote: Sun Jan 16, 2022 10:05 am
Admiral wrote: Sun Jan 16, 2022 7:10 am
willthrill81 wrote: Sat Jan 15, 2022 8:56 pm
nisiprius wrote: Sat Jan 15, 2022 6:40 am The numerical arguments for not doing it seem to me to be like numerical arguments showing that you shouldn't fix a leak in a boat if the pumps can bail faster than the leak and you have better things to do. It ignores all considerations of fragility, and makes too-strong assumptions of predictability.
I'm inclined to agree.

For us, paying off our mortgage very early was partly about minimizing downside risk. We wanted to know that as long as we paid our property taxes, we wouldn't lose our home.
A question, though. Once you've accumulated enough savings to pay off your mortgage, then paying it off (or not) is simply a matter of the interest savings. You know you can't lose the house. There is no increased cashflow, because you could always replace the cash from your mortgage payment with your savings.

So, did you consider a sinking fund, and if so how much longer would it have taken to accumulate the dollars needed for payoff versus the choice you made which was prepayment?

Viewed another way, I'm not sure people do the math when they look at how many years a small pre-payment (say a few hundred bucks) will save them on a 30 year mortgage vs. how long it would take to accumulate the payoff funds by investing. Clearly putting the money in the mattress won't save you any time because you're earning no interest. But certainly even a highly conservative sinking fund is likely to beat a 2.xx% mortgage. You don't need a lot of risk to earn 3%.

Another way to look at it is to view Roth savings as your sinking account. If you have the amount you owe on your mortgage saved in Roth (as contributions, not earnings) you could pay off your mortgage at any time. IOW, you cannot lose your home. While mathematically taking this route may not be wise, it does have the advantage of immediately increasing your cash flow--unlike small pre payments.

And further, even if you don't have enough, you might have half the balance. So, you could pay down say half, refinance, and then have a much lower mortgage payment--which would (hopefully) prevent you from losing your home (if this is your worry).
The problem is that unless interest rates have risen significantly between the time the mortgage was taken out and the current point in time, there is no potential for interest rate arbitrage, and paying down the mortgage early is superior to buying equivalent bonds (apart from tax considerations; significant tax arbitrage can easily change the equation). The only motivation for the latter is to retain greater liquidity, which I think some here highly overrate, but it's called personal finance for good reason.

We didn't use a sinking fund because we knew that we would be able to pay off the mortgage completely in short order, and we earned a higher return by paying down the mortgage than via a HYSA or something similar. But I do think that sinking funds can make good sense for most people who are interested in paying down their mortgage.
But you're comparing your rate only to present rates on fixed income. My contention is that you could take almost no risk and get far superior returns on your pre-payment money. For example, a 20/80 (stocks/bonds) portfolio has had the following characteristics from 1926-2020:

Average annual return: 7.2%
Best year (1982): 40.7%
Worst year (1931): –10.1%
Years with a loss: 16 of 95
Source: https://investor.vanguard.com/investor- ... allocation

All the usual caveats apply, including lower recent returns on fixed income. And obviously if you're not willing to take any risk versus pre-payment (which would be odd for you, since you are 100% stocks) then the above does not apply.

It's also curious to me (and I'm not judging, I'm honestly interested) that if "losing your home" is a real worry for you, you'd rather put discretionary income into a sticky/illiquid asset rather than keep the dollars liquid so you could make your payments in the event of some catastrophe. And no, I am not a fan of the "well I'll just get a HELOC when I need it" line of thinking, because this itself carries risk (interest rate risk being only one of many.)
drk
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Re: Should we put more toward our mortgage?

Post by drk »

Folks, it's all well and good to continue talking past each other on this topic, but I think we lost the OP.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
Admiral
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Joined: Mon Oct 27, 2014 12:35 pm

Re: Should we put more toward our mortgage?

Post by Admiral »

drk wrote: Sun Jan 16, 2022 11:41 am Folks, it's all well and good to continue talking past each other on this topic, but I think we lost the OP.
Meh. So what. Still knowledge to be gained.
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