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Another payoff mortgage post

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  • Avatar Bill Roentgen’s Beard 
    Participant
    Status: Physician
    Posts: 8
    Joined: 03/26/2018

    So here is the situation. 2 physician household, both early 40s. Wife is PT, husband is FT.

    Cannot figure out whether what to do with our mortgage. We have 18 yrs left on a 30 yr ARM. Previously our rates were reasonble however with the rising interest rates, our 2019 rate will be 5.2% and afterwards who knows.
    We made the mistake of buying in a M-to-HCOL during the bubble in the late 2000s. Bought a $900k home. We have about $575k left on it. Was going to refi into a fixed rate a couple years ago but didnt because didn’t want to pay the closing costs (which to me is $ down the toilet if you are staying) and we would have had to put more equity into the deal (comparables suggested we were under the LTV ratio bank wanted).

    Everything we’ve read informs us that paying off a mortgage early is an emotional decision that the math doesn’t favor. I’m ok with owing the money. However we are sitting on some cash and wife is telling me it’s better to pay it down.

    More more data points:
    Retirement accounts: $1 mil
    Taxable account: $800k
    Cash value of IUL policy:$400k (I know I know but no longer funding)
    529’s (3 kids): $270k
    Miscellaneous real estate: $2 mil
    No student loans
    No car loans

    Currently we have $250k in our bank account and it’s just sitting there. Was planning on funding $90k in all 3 529s for 2019. Wife is convinced that paying off at least $100k in our mortgage is a better idea. I feel paying the whole thing off is the only thing that makes sense from a cash flow perspective and anything is half-a$$ing it.

    Thoughts? I usually hate asking for advice but I feel you could make an arguement either way and am curious as to what folks think I should do with the cash.

    #190660 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3523
    Joined: 01/14/2017

    For a couple in your early 40’s you’re doing quite well.  Just like any 529 vs X post I’ll give the same advice I do for everyone:

    1.  Are you on track to comfortably meet your retirement goals (including debt payoffs)?

    Yes – Go to next question

    No – Stop.  Fund retirement goals.

    2.  Are you on track to meet your 529 goals?

    Yes – Stop.  Fund retirement goals.

    No – Fund 529 to the degree to which #2 becomes yes.  Then see “Yes”.

    #190664 Reply
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 569
    Joined: 06/23/2018
    Everything we’ve read informs us that paying off a mortgage early is an emotional decision that the math doesn’t favor.

    Click to expand…
    We have 18 yrs left on a 30 yr ARM. Previously our rates were reasonble however with the rising interest rates, our 2019 rate will be 5.2% and afterwards who knows.

    Click to expand…

    But when you run the numbers, at larger interest rate, it may favor paying is down/off. I have a similar mortgage although at a fixed 3.62% and only 5 years into it (value of the home nearly $1.6-2M) and was blown away with my interest for 2018. Talk about money that is down the toilet!

    I don’t like debt… so I’d pay it off.

    #190665 Reply
    Liked by adventure
    Avatar familydocPA 
    Participant
    Status: Physician
    Posts: 67
    Joined: 03/03/2017

    Do you hold any bonds in your taxable portfolio?  It would not make any sense to hold bonds while paying 5+% on your mortgage.

    Most people say not to pay off the mortgage when they are borrowing at a rate in the 3-4% range. I think that now that you are paying 5+%, that is a pretty good risk-free return on your money.  Personally, if it was me, I would make paying it down faster part of my investment strategy.

    Determine your long-term plan and stick to it, and you’ll be fine.

    #190668 Reply
    Liked by Seabass
    Avatar Bill Roentgen’s Beard 
    Participant
    Status: Physician
    Posts: 8
    Joined: 03/26/2018

    Regarding the 529’s: I should add that the older 2 kids (still over 5 yrs away from college) both have our state tuition prepaid program which covers tuition if they go to a in-state school and will cover the equivalent cost of an out-of-state or private school.

    As far as funding for retirement I think we are on track. I plan to go part time in 10 yrs. Never one of the those who dream of quitting completely. That’s one aspect of many of the subcultures of FIRE that I never understood; the absolute hatred they seem to have for their jobs. I can’t imagine my working life being so soul destroying that I need to re-wash ziploc bags or reuse tea bags to accelerate my “quitting” date. I actually enjoy working alot.

    #190675 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3088
    Joined: 09/18/2018

    575-200= 375 Mortgage
    That leaves $50k cash just sitting there.
    Build that cash back to $150, hit it again,
    375-100=275 Mortgage

    Regarding your preference for making “big impact decisions”, why make a mole hill a mountain? Chip away at it. Even monthly makes sense. At some point, you pay it off. Not big enough to screw around with any more.
    Implicitly in declining to refi to a fixed, you committed to paying it off. Your choice so do it. Time isn’t on your side with an ARM. From a cash flow perspective, you are mistaken waiting for the big payoff. I would love to see your spouse’s face “honey, we have 5.75 balance. Should I pay 1.00 or the WHOLE thing?” Move your decimals, it’s not worth the drama.

    #190683 Reply
    Liked by Seabass
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 617
    Joined: 08/30/2018
    Earnest refinancing bonus

    First, this is a question with no absolutely right answer. The 5+% range does get you in a yield range where paying it off makes sense. Partial payoff is less appealing to me, but it is in effect buying the mortgage interest rate as a bond. Payoff just comes much later.

    Now, second, if you are still itemizing deductions you should at least consider refinancing. My basic rationale here is that you are too young to tie up all that capital in a house. If you take a lower interest rate refi, you can put the capital to work in the market and expect a much higher rate of return.

    All that said, it is a family decision. We refinanced and kept a mortgage 10 years ago faced more or less with your scenario (no ARM though, which I would seek to get rid of of I were you). But that was at least in part to my wife’s aversion to tying up the money.

    #190684 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1863
    Joined: 02/11/2019

    If you are able to get it paid off before your kids go to college then you will have more cash flow at that point.  It makes you more flexible.  You pay for that flexibility by potentially losing by not having the money in the market but with a 5% mortgage probably not by much.

    Also if your wife wants it and it is reasonable just do it.  Happy wife happy life.

    “Never let your sense of morals prevent you from doing what is right.”

    #190686 Reply
    Avatar orthodds 
    Participant
    Status: Dentist
    Posts: 147
    Joined: 11/07/2017

    You are in your early 40s with a net worth of well over 4M (assuming 2M in real estate means equity) and you don’t have plans for early retirement.  Whether you pay down the mortgage aggressively or not will make little difference in the grand scheme of things.  If I were in your position I would throw more at the mortgage.  It’s over 5% and its an annoying adjustable.  I would get rid of it.  You already have a good chunk of money working for you in investments.

    My question is what is the 2M in real estate investments?  Do you mean 2M of equity or 2M total value?

    #190717 Reply
    Avatar Bill Roentgen’s Beard 
    Participant
    Status: Physician
    Posts: 8
    Joined: 03/26/2018

    Its $2M in equity.

    I get the sense that perfect is the enemy of good. I’m scratching for marginal efficiencies and like I suspected there is no “right” answer.

    You guys are making me feel better about throwing more $$ at the mortgage.

    #190735 Reply
    Liked by Seabass, adventure
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6193
    Joined: 01/12/2016

    Why dont you refinance? The idea of closing costs being money thrown down the drain was just poor accounting. Most refi’s from levels like yours were able to pay for themselves in 3-4 months. Theres no such thing as money down the drain in those types of concerns, its a relative comparison and opportunity cost question.

    From a quick look over at your finances, you guys appear to be doing great and its just whatever you decide to do. It wont make any crazy difference or change in your life to pay it down. I wouldnt even agonize about the rate is you’ve paid off a significant chunk of principal at a lower one than it will still be the better bet in the end, this higher rate is applied to a smaller balance and on net likely saved a lot of money. Try to see things as the big picture instead of a snapshot.

    Your wife wants to pay it off so theres that, but I’d seriously run the refinance numbers and see the overall costs, you could probably get a 15 year for little difference in monthly payment while increasing payoff, etc…

     

     

    #190740 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1485
    Joined: 12/07/2016

    So here is the situation. 2 physician household, both early 40s. Wife is PT, husband is FT.

    Cannot figure out whether what to do with our mortgage. We have 18 yrs left on a 30 yr ARM. Previously our rates were reasonble however with the rising interest rates, our 2019 rate will be 5.2% and afterwards who knows.
    We made the mistake of buying in a M-to-HCOL during the bubble in the late 2000s. Bought a $900k home. We have about $575k left on it. Was going to refi into a fixed rate a couple years ago but didnt because didn’t want to pay the closing costs (which to me is $ down the toilet if you are staying) and we would have had to put more equity into the deal (comparables suggested we were under the LTV ratio bank wanted).

    Everything we’ve read informs us that paying off a mortgage early is an emotional decision that the math doesn’t favor. I’m ok with owing the money. However we are sitting on some cash and wife is telling me it’s better to pay it down.

    More more data points:
    Retirement accounts: $1 mil
    Taxable account: $800k
    Cash value of IUL policy:$400k (I know I know but no longer funding)
    529’s (3 kids): $270k
    Miscellaneous real estate: $2 mil
    No student loans
    No car loans

    Currently we have $250k in our bank account and it’s just sitting there. Was planning on funding $90k in all 3 529s for 2019. Wife is convinced that paying off at least $100k in our mortgage is a better idea. I feel paying the whole thing off is the only thing that makes sense from a cash flow perspective and anything is half-a$$ing it.

    Thoughts? I usually hate asking for advice but I feel you could make an arguement either way and am curious as to what folks think I should do with the cash.

    Click to expand…

    Absolutely you need to refinance.  There is no reason for someone in your position financially to be holding on to a variable rate mortgage right now.  I would refinance to a 15 year fixed loan.  That would give you the best rates available and also give you an opportunity to pay down the balance slightly if you so desire (though you really don’t need to and I agree that paying off part of the mortgage makes no sense).  Either keep it or pay it all off.  But, otherwise that 250k is best used invested somewhere.  What kind of “miscellaneous real estate” are you referring to?  Is it profitable?  Do you have a lot of equity in that real estate?  You could always consider selling that and paying off your primary home that way.

    No matter what you decide, you guys are on track and doing very well at your age. (NW of $3-4 mil at 40?  Yeah, you’re fine).

    #190764 Reply
    Avatar adventure 
    Participant
    Status: Spouse
    Posts: 1186
    Joined: 10/24/2016

    Your wife wants to pay it off so theres that,

    Click to expand…

    So… what a great thing!! Pay some of it off!

    I don’t think you go wrong by:

    -Pay 100k off, fund 529’s, whatever is left for taxable. (and refi)

    -Pay entire house off today, use cashflow to load the 529’s and taxable starting tomorrow. You’ll catch up plent fast if you aren’t dealing with a mortgatge.

    … In both options, you listen and likely compromise with your spouse… and blah blah you’ll have plenty for retirement, not sure there is a perfect right financial answer (while one could model this or that, life has variables, and sometimes emotion and relationships are more important and valuable.)

     

    #190794 Reply
    Liked by Lordosis
    Avatar orthodds 
    Participant
    Status: Dentist
    Posts: 147
    Joined: 11/07/2017

    Unless I’m missing something it appears NW for OP is around 4.5-4.75M.  I would just pay off the mortgage and be done with it.  It’s simple and the return on that investment is decent. Keep maxing out tax sheltered each year and stuff the rest in an efficient taxable portfolio and you are done.  At some point OP will have to decide how much is enough and whether there are things worth spending money on in the near term.  Personally, when I hit a similar financial situation at a similar age I started spending a lot more money and time on travel and I have no regrets.  I also plan to keep working at least a little bit indefinitely.  It feels great to have no debt, enough to retire at any moment if desired/necessary and a job you like working at least on a part-time basis.  OP is almost there.  Congrats!!

    #190821 Reply
    Liked by Zaphod

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