mortgage payoff: let's make it a sticky!

behaviorkeltonOctober 11, 2007

I'm still fascinated with this topic. Especially as I am only a few months away from having the savings to just pay it off.

I wish we could leave the common this a "sticky"... meaning, it always stays near the top.

Just a re-cap:

1. I no longer get to deduct my mortgage interest because I'm not meeting the minimum. (My interest is 6.12, but I don't owe enough). So I don't have that advantage for just keeping the mortgage debt.

2. Once paid off, I would double my contribution to my 403b retirement.

Question: It has been said that it is better to not pay-it-off and, instead, let the money work for you. But by increasing 401k contribution, does this somewhat resolve that problem? (i.e. I'm using my former-mortgage payments to fill an investment account...and am able to do it tax free!).

Further: More and more, I'm getting the feeling that I don't have the stomach to invest with my free money in anything other than very, very safe accounts... paying 5% or so these days. So I can't really make the claim that I am willing to invest in stocks as an alternative to the mortgage payoff.

On the other hand, I can invest like a maverick in my 403b... for some reason, I don't worry at all about the ups and downs in my retirement account!

So, against the advice of the financial brainiacs in this forum, I have thought of yet another justification for paying off the mortgage early!

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Well, my opinion is that if you have enough money to keep investing AND pay off your mortgage too then go for it. I think the advice to never pay a house off works for many people because advisors are talking to the majority who are trying to save for retirement,college for their kids,paying off credit debt,paying off a car, AND paying a mortgage. If you are in a situation where you have no debts and are generously funding your retirement,then you get the chance to do other things--like paying off the mortgage.

    Bookmark   October 11, 2007 at 10:37AM
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The loss of a tax write-off is a common argument for keeping a mortage. But remember, the amount of tax you save is less than the interest you paid. So the tax write-off BY ITSELF is not a valid argument. Where it comes into play is when you compare it to other alternatives.

If you have an emergency fund, and you have your retirement adequately funded, then you can start to consider early mortgage pay-off. Many (including our financial advisor) do not recommend this, as we have other things like kids college to consider. But if you've got the essentials covered, and you feel better with no debt, then go for it!

    Bookmark   October 11, 2007 at 1:42PM
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Hi BehaviorKelton,

So, against the advice of the financial brainiacs in this forum, I have thought of yet another justification for paying off the mortgage early!

Listen, the "financial brainiacs" don't sleep in your bed at night... only you (and perhaps your SigO) do... so despite all the mathematics & financials of the issue, in the end you'll have a higher immediate quality of life if you just go ahead & do whatever it is you want to do.

You've heard the financially & mathematically justified advice.
You've heard the emotionally & hypothetically justified advice.

Nobody can make the ultimate decision for you, and nobody else will realize the benefits or pay the consequences... life is all your own private oyster.

Here's to finding a pearl!

Dave Donhoff
Strategic Equity & Mortgage Planner

    Bookmark   October 11, 2007 at 4:17PM
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Hi again, B K,

If you want to sleep comfortably, not worrying about the fluctuations in your invested assets, so putting your money where the number of invested dollars can't shrink ...

... don't forget that that number can't grow, either, apart from the rent on the money.

And, since the number of invested dollars can't shrink, don't forget that the *value* of each of those dollars has shrunk in every year of the most recent 70 - since late in the Dirty Thirties, when the Depression was hurting most everyone.

Here's a proposal for you.

How do you like the idea of forcing yourself to just about double the amounts that you save and invest?

If you won't give your invested dollars the possibility of increasing, you'd better set aside about double the number that you put to work for you. Because they'll almost certainly not grow very well, and you'll have to put away a lot more in the beginning to end up with a decent amount at the end.

On the other hand, here's an alternative suggestion.

Each time that you save $300. ready for investment, split the amount into 3.

Invest $100.00 into the best guaranteed principal situation that you can find, and learn how to manage that system most effectively.

Invest $100.00 into a mutual fund (probably not one of he bond-based ones, as you are investing into that type of situation on your own). Don't forget that the annual fees on such funds are, though lower than on equity-based funds, a higher percentage of the whole amount of growth on a historic basis each year, in most cases.

Put the remaining $100.00 into a bank account in a bank that has a link with a stockbroker, so that you can transer money back and forth easily. Find out the amount necessary to open an account with the stockbroker, I'd prefer a discount broker, as the costs of buying and selling are lower with them, but the downside is that you have to do mainly all of your own research.

During the next number of months, while the saved amount grows, learn how the stock market works.

When you have about $3,000.00 saved up in that account (for efficiency of amount invested relative to the cost of commission), buy some shares in a stock which is in a portion of the economy that stays stable through good times and bad, e.g. necessary consumer products, a bank (usually - maybe not now, with the housing debt crisis on us), a utility, such as a petroelum pipeline, a railroad, a drug, medical or senior-related issue (don't forget that the Boomer generation is getting older), etc. Possibly an oil and gas stock, for, though some of them may be somewhat overpriced at present, with the petroleum outloook being what it is, the good ones will almost certainly grow, over the years.

Some people have cried, recently, about how they've lost a large portion of their assets in a drop in the market, but usually such people ignored the sound advice, given by many advisors, to do your main investing in core stocks, solid, quality companies, with good dividends, that have developed a track record of growth not only in the price of the stock, but the amount of the dividends thrown off, over a number of years.

That's for one's basic, core investment system - the largest portion of the total amount.

Then to put only a small percentage of one's total assets, e.g. 10%, not over 20% (unless you're a sound sleeper), into glamour stocks, that have produced some spectacular growth ... but also have fallen flat on their face, at times. Money that, if you lose, you may sob a bit, but not outright shed tears.

After 5 years, take a look at those three branches of your investments, and keep on following that plan. Re-evaluate ongoing, but seriously again after 10 years. See which plan works best for you.

I'm nearly 80 years of age, and have about 80% of my assets in equity-based investments (mutual funds and individual stocks), built up over a period of about 50 years. Plus I have another 8% or so of cash ready to invest when I feel that the market has dropped some. But I think that was a mistake - I should have listened to the advice that many gave, that when you have some money ready to invest, invest it ... if the market goes up, you gain, and if it goes down, you lose ... over the short term. But, over a period of time, if you choose your stocks well, most of them will grow well, too.

And, while the value of the underlying asset grows, the amount of annual dividends grow nicely, as well.

In Canada, both of those types of investment produce income that is tax-advantaged.

Plus, for a stock that I bought 40 years ago for slightly over $4.00, that a few months ago could have been sold for $107., then for about $89., and more recently for nearly $98., I didn't consider selling them, even though the value dropped 20%, for it's done well for me over the years, and I expect that it will continue to do so in future.

Also, I haven't had to answer to the tax people for that increase, and won't until I sell them (or die - at which time it becomes an issue for the executor of my estate - and I hope that the executor will pass the shares to my beneficiaries intact). So I've deferred tax on that growth ... and when it becomes taxable, it's to be taxed at 50% of regular rate.

If you want to be really safe - don't walk across a street. And don't ride in a car - they're much less safe than riding in planes.

Successful living is about learning about how to identify, assess and manage risk.

Good wishes to you and yours.

ole joyful

P.S. I assume that your B K doesn't also identify as Burger King. Would you rather have lent money to the guy who originated that game to help get it started ... and have had him pay you back just the amount borrowed, plus interest ...

... or have taken your loan back in the form of a franchise (or two ... or three)?

Or ... suppose that you'd have agreed to take a percentage of the original company in exchange for your money, which, in that case, would have been invested, rather than loaned?

o j

    Bookmark   October 11, 2007 at 7:07PM
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Thanks for the responses. I guess I need to face it. Debt bothers me.
It's a very inexpensive house, so it's not like I'm tying up hundreds of thousands of dollars by paying it off.
Still, I understand that there is a high probability that this move may not be financially.
It's emotional.
Like buying a Porsche win you really should by a Camry.
It's a cool thing.
For me, it's even cooler to say that you don't anyone a darn thing. (except for the government)

Thanks again for the advice. Paying off the mortgage does not make me a financial genius... at least I know that much!

    Bookmark   October 21, 2007 at 1:21PM
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Hi again behavior kelton,

Well, you suggested that this thread be kept back at the top occasionally ...

... so, instead of being a "stick-up" ("Your money - or your life!"), I guess this becomes a "sticky-up".

How are you feeling about the money business by now - have you learned a few things in the few months since you began coming here?

It's a poor day in which you don't learn something!

Good wishes for wiser use of income and more effective use of assets, as the months and years go by.

ole joyful

    Bookmark   February 26, 2008 at 4:45AM
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I recently posted another "pay off" thread because, this month, I have finally reached the point that I can pay it off completely.

One thing that I have learned is that when I type quickly, I make all sorts of odd typos! Like typing "win" for "when" or "by" for "buy". Good grief... how annoying for the reader!
I think Donhoff has taught me that I am not exactly using perfect financial reason as I consider a payoff.

I am fairly sure that I won't be brave enough to invest my savings as long as I carry mortgage debt, so if I don't pay off the 6% mortgage, the money will sit in an money market account.

I also envision buying another house before this housing "crisis" ends, so I want to accrue a good savings such that I can jump when needed. In the mean time, I don't want to carry two mortgages... so I'd like to have this one paid off and rented. I'll sell it when the housing market gets a bit healthier.

I know that this isn't a flawless plan, but having two mortgages would freak me out. If I am going to need cash as a downpayment for a new place, I will be especially averse to investing it.

I'm a behavior analyst (kind of the opposite of a psychologist!), and "behaviorkelton" is one of my e-mail addresses designed to make it easy for my clients to remember my address. My name is Kelton.

I thoroughly enjoy this forum and have learned quite a bit. In your recent post, you have suggested a plan of action for my savings, and I'm sure it's reasonable. All of my risky savings is going into my IRA (into stock mutual funds: Vanguard). Somehow, I am a much braver investor with my retirement funds!

I do think that this is a very interesting to time to invest, though. There is such a healthy dose of fear, that I tend to believe that this is a great time to start investing. In the past, I have only invested during times of happy market excitement... not good! In each case, I would have been much better off to invest when everyone was pulling out. Much better off.


    Bookmark   February 26, 2008 at 8:47AM
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>>In each case, I would have been much better off to invest when everyone was pulling out. Much better off. Absolutely. It's the "sheep", or if you prefer, the "lemmings" mentality that affects way too many people. One good way to counteract that: realize that anytime the media is screaming Financial Disaster, that the old saw will apply yet again - "This too, shall pass."

OJ's suggestion is actually quite a good one. It uses dollar-cost averaging which is to your benefit, especially if you have a 10-20 yr timeline before pulling those funds out. One note, BTW - ANY bank can set up electronic funds transfers to your stockbroker, insofar as I know. It's called an ACH form and the only requirement is that it must be done in the same amount, each transaction. The transactions can be weekly, monthly, quarterly or even annually - just as long as they can be set up once and not changed. To change an ACH, one has to resubmit new forms each time, so this is why the transactions need to be "automatic."

However, since you are leaning towards the idea of investing in RE, I would strongly urge you to at least maximize your retirement contributions. Yes, you may miss the absolute bottom of the RE market by a few months (since maximizing your retirement contributions may slow down your cash savings plan), but you NEED that diversification. You will be tying up a considerable chunk of net worth in very illiquid RE, which is rather like owning a huge bond allocation.

As you have seen, the return on money market funds and even TIPS has dropped considerably. At this point they are hardly keeping their eyebrows above the inflation rate. Use your own psychology against yourself - since you recognize that you are a bigger risk-taker in your retirement accounts, diversify that portfolio with at least an 80% equity spread, across at least five sectors of the market. Maximizing your contributions will allow you a diversified base for your total net worth, which is in the end even more important than just paying off one mortgage (or even two!).

    Bookmark   February 26, 2008 at 11:52AM
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I'm not interested in investing in real estate... sorry if I was misleading.

Really, I have a primitive financial philosophy. I don't like debt. If I can work hard and pay off my mortgage thereby *permanently* reducing my monthly cost-of-living: sounds good!

I'm involved in another thread here, now, about the risks of having equity in your home... which is fascinating and a topic that has never occured to me before.

Mr. Danhoff is schooling me on the logical perspective. I hope he's wrong, but he is extremely loud in his belief that paying down a mortgage is a serious risk.

    Bookmark   February 26, 2008 at 4:28PM
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I noticed his latest postings. I don't happen to agree with him, but it's always interesting reading his stuff.

In the end, you should do what is comfortable for you. You clearly have a low risk tolerance with your cash and a moderate risk tolerance with your deferred tax-advantaged contributions. I commend you for realizing that you have this "split of mind"; everyone has their own personality quirks about money but most people don't bother to analyze themselves.

The point I keep trying to make in various posts is that every single person has a very individual financial perspective. Getting free advice from anonymous people on the web is interesting, but it can leave you more confused than informed.

There is a logic to handling money, but there is NO logic to how people FEEL about THEIR money; people react on an emotional basis towards it. It's why money and finances are the #1 source of conflict in relationships. Your money is you, and you are your money.

One of the things a good advisor - or even just a good friend - can do for you, is help you define your goals. You want to get from where you are (Point A) to a certain place (Point B). There are many ways to get there, and none of them are exclusively right or wrong. Most of them need you to do some work, and quite often you need a good dose of luck as well.

In financial security, slow and steady can do just as well as fast and furious. Because your goals, simply put, are your own peace of mind, and nobody else's. It doesn't matter if logically, you would be financially better off with a nice big mortgage - when emotionally, it would only depress and upset you. Life is too short to live by somebody else's rules. And the first big rule in financial knowledge is, you can find any rules to fit any kind of situation you want to create!

In the end, all you are getting on these kinds of forums is opinions. What is important is what YOU are comfortable living with.

    Bookmark   February 26, 2008 at 8:10PM
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If you can receive a higher risk adjusted rate of return than your mortgage interest rate with some other investment opportunity, it makes sense to keep your mortgage and invest your excess funds in the investment opportunity. If you can't, pay off your mortgage. This assumes that you have a reasonable amount of liquidity (emergency savings). On a purely financial basis, it's that simple.

If you want to factor in emotions, pride of ownership, or other such things, only you can make the decision.

    Bookmark   February 27, 2008 at 12:07AM
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Hi deerslayer,

If you can receive a higher risk adjusted rate of return than your mortgage interest rate with some other investment opportunity, it makes sense to keep your mortgage and invest your excess funds in the investment opportunity. If you can't, pay off your mortgage. This assumes that you have a reasonable amount of liquidity (emergency savings). On a purely financial basis, it's that simple.

ACTUALLY... its not that simple. Your discretion completely focuses on the possiblity of upside, and completely ignores the risks of loss.

Here's a very simple example;

Decision 1;
Asset A offers 4% growth.
Asset B offers 6% growth.

No brainer, right?

Now let's try "real world" issues that have to be considered;

Decision 2;
Asset C offers 4% growth, 20% odds of 10% principal loss over 5 year periods due to volatility, no liquid access for 2 years without a penalty
(i.e. longterm CD or annuity,)

Asset D offers 9% average growth, 50% odds of 25% principal loss over 5 year periods due to volatility, complete liquidity
(i.e. indexed ETF or mutual fund,)

Asset E offers 8% average net growth, 0% odds of ANY principal loss (principal guaranteed, annual growth locked in & re-guaranteed,) zero downside volatility, reduced (not prohibited) liquid access for 7 years, tax free access for life
(cash value indexed life insurance contracts.)

Asset D offers 4% after-tax savings, 0% upside growth/returns, 25% odds of 10-15% principal loss over 5 year periods due to volatility, immediate but very expensive and slow liquidity access
(i.e. unleveraged real estate equity.)

Not quite such a "no brainer" anymore.... many more very real-world hard & cold variables that are unavoidable (though as we can observe... certainly "ignorable" by some.)

Hope that shines some light.
Dave Donhoff
Strategic Equity & Leverage Planner

    Bookmark   February 27, 2008 at 1:43PM
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Hey Dave, I wrote "risk adjusted rate of return". It is that simple if you know how to adjust returns for risk.

    Bookmark   February 28, 2008 at 12:26AM
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You are absolutely correct! I apologize if my response seemed to be a rebuke.

Hopefully it more completely illustrates what you accurately put into a single sentence.

Dave Donhoff
Strategic Equity & Leverage Planner

    Bookmark   February 28, 2008 at 8:10PM
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Dave, your examples illustrated the key considerations.

I suppose I should have explained to the OP how to calculate risk adjusted rate of return. Here's how:

Risk-adjusted rate of return
Used to identify investment alternatives that can be expected to deliver a positive premium, after taking into consideration the expected volatility. The risk-adjusted rate of return is defined as the expected rate of return of a given asset, less the expected return for T-bills, divided by the expected standard deviation of the returns for the assets.

    Bookmark   February 28, 2008 at 8:54PM
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