SeromaParticipantStatus: PhysicianPosts: 15Joined: 01/09/2016
Would like to know what you guys would do in this situation. I max out retirement accounts, Roth and 529 and I live in a state where primary residence is protected against creditors.
Would you invest in taxable (after maxing retirement accounts) or try to pay off the house ASAP? Maybe split the difference? To complicate things a little further I can title taxable accounts as “Tenants by entirety”
Im curious what people would doJanuary 14, 2016 at 12:15 pm MST #12608jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7737Joined: 01/09/2016
What are the terms on your mortgage? And how do you plan to invest the money?January 14, 2016 at 1:04 pm MST #12612SeromaParticipantStatus: PhysicianPosts: 15Joined: 01/09/2016
Mortgage is 15 years at 3.25%
no state income taxes and I’m in 33% federal
would invest primarily in stock ETF/funds according to my asset allocationJanuary 14, 2016 at 2:08 pm MST #12614JonezezParticipantStatus: PhysicianPosts: 6Joined: 01/08/2016
The “quick/dirty” response to this question that most will respond with is… do you think that you can earn a better return than your mortgage rate elsewhere in a taxable account?
Taking into account the tax deduction (but not accounting for some Pease limitations based on income… see: http://taxfoundation.org/blog/pease-limitation-itemized-deductions-really-surtax), your current mortgage rate is ~ 2.25%.
So can you beat 2.25% in the taxable account? If you carry it out to 15 years (the term of your mortgage) and have a reasonable allocation to equities, then that likelihood is yes and the answer is to invest in a taxable account.
But digging into this a bit more, realize that 2.25% is a GUARANTEED, no-risk return whereas taxable investing inherently involves risk. The 10 year treasure note is ~ 2% and equity returns have been about 7% real so the equity-risk premium that investors expect from equities is about 5%. If you were to apply this logic to your 2.25% mortgage, then you would require about a 7.25% return on your taxable account (real return) to factor in the risk of equities. When looking at it from this perspective, that is a tall-order to beat based on current valuations of equities.
That being said, I have a similar situation as yours and have decided to not overpay the mortgage and shuttle $ over to a taxable investing account mostly for personal satisfaction/psychological reasons…. i.e. I get more satisfaction seeing my taxable account grow than seeing my mortgage balance dwindle slowlyJanuary 14, 2016 at 2:39 pm MST #12615J.D.ParticipantStatus: PhysicianPosts: 7Joined: 01/08/2016
I personally decided to pay off my mortgage early and I’m glad I did. For me, being completely debt free gives me more satisfaction than a bigger taxable investment account.January 14, 2016 at 6:16 pm MST #12631PhysicianOnFIREModeratorStatus: PhysicianPosts: 1533Joined: 01/08/2016
I would split the difference. Pay off the mortgage in ten years instead of 15; put the remainder in taxable. One of my goals was to be debt-free by forty; paying down the mortgage quickly helped me make that a reality.
40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire
FIRE. Financial Independence. Retire Early.January 14, 2016 at 6:25 pm MST #12633docnewsParticipantStatus: PhysicianPosts: 391Joined: 01/09/2016
Very personal question that can be boiled down to what do you want your investment allocation to be like? Paying down your mortgage is similar to investing in bonds (unexciting but steady returns). I plan on paying off mortgage before taxable and then I feel as if my allocation will be much more conservative so that when I do open the taxable account I will be much more comfortable to be more liberal / risk-taking in my investments (aka equity heavy). Basically to what degree to believe in investing on leverage? Most people do not frown on investing despite having a mortgage (at current low rates) especially due to tax advantaged accounts, but once it is taxable it becomes more a personal choice.January 14, 2016 at 6:27 pm MST #12634asmallchildParticipantStatus: PhysicianPosts: 58Joined: 01/09/2016
I would split the difference. Pay off the mortgage in ten years instead of 15; put the remainder in taxable. One of my goals was to be debt-free by forty; paying down the mortgage quickly helped me make that a reality.Click to expand…
I am doing something similar.
Remaining mortgage of 365k with a 2.875% interest rate
I’m looking forward to my first hefty bonus this year. I’ve earmarked roughly 1/3 for the mortgage and the remainder in my taxable account (likely a total stock index fund)
I still expect the mortgage to be gone in under 5 yearsJanuary 14, 2016 at 7:57 pm MST #12641SajimoneParticipantStatus: Physician, Small Business OwnerPosts: 88Joined: 01/09/2016
I have been paying basically an extra mortgage payment per month while we have been in a bull market with the preference that I’d like to pay off the home as well before age of 40-45.. but now that the market is declining.. maybe perhaps switch gears and scoop up I guess some “cheaper” taxable mutual funds? Do I take the “guaranteed 2.25% interest savings” or invest in a “fire-sale” here or elsewhere.. i.e. china?!.. and pray for more market decline? Isn’t the market decline the best time to invest? Im sure someone will admonish me for timing the market.. but I’m not trying to sell for 15-20+ years? I’ll probably end up splitting the difference. Thoughts?ZaphodParticipantStatus: Physician, Small Business OwnerPosts: 5896Joined: 01/12/2016
Again, lets not compare simple and compound interest with bounded and unbounded terms as if the straight percentages are comparable. I would probably never put a lot of extra money towards such a low rate especially considering how favorable a mortgage is in all other regards. The dividend yield of spy and even some municipal bond funds (tax free) are similar or higher at this time. Dont put things that give large dividends in a taxable though unless its munis.
Youre basically asking to pay down a tax advantaged, exchangeable, and dischargeable debt for a fixed rate that is basically in line with inflation and will end relatively shortly. You may or may not realize this paydown if you sell, who knows. Your other option is to start incrementally buying into assets that in 15, 20, 30 years are nearly guaranteed to be magnitudes larger. A mortgage 2.25% is a one time deal, unless youre cranking it out in all other areas this would be the last place I put money. If you cant sleep, sure, but I find when you look at net worth from a 10,000 foot perspective and realize your collecting assets things naturally take care of themselves.
From a net worth perspective, its simply assets-liabilities=net worth. You can increase assets or decrease liabilities to make your net worth better. Only assets will appreciate considerably in value over time (assume you at least pay debts on schedule). At some point in the future its likely your assets have a great year or two and make the paydown a moot point and small retrospectively. Accumulate appreciating assets preferentially.January 15, 2016 at 8:01 am MST #12667jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7737Joined: 01/09/2016
Honestly, money you pay on your mortgage is “dead money” imo, but the emotional gratification can be more important than simply comparing returns. If you will sleep better with a debt-free house, then that is what you should do. otoh, if you are simply trying to make a financial decision, it doesn’t make a lot of sense to pay off your mortgage when you can invest for the long term in a well-balanced equity mutual fund/ETF portfolio, rebalanced annually. OTOH, if you don’t invest and manage properly, you might end up doing no better than your mortgage rate.
Emotion (feels good, scared, etc.) should almost never be involved in making a financial decision.ZaphodParticipantStatus: Physician, Small Business OwnerPosts: 5896Joined: 01/12/2016
Agree. I think that the “feels great” is a bit lazy of but an okay reason, but misses the underlying issues. Whats more important is why you feel great, is it because you just believe debt is the worst, or are afraid of the market, following the herd, believe its the accepted position, etc…? This is the same reason patients want and receive antibiotics when it isnt indicated. Feeling great should come from understanding and appropriate implementation based on the available evidence, etc…
My attitude and feelings changed when I looked at it long term and as a balance, and mostly…math. Just look at it mathematically. It should hurt you deeply in your rational side to consider paying down mortgage in excess when you could be investing it instead. Now Im not against paying your mortgage off faster, I myself pay a nominal amount more monthly because I have the money, and the same with my student loans, and while I could be crushing both of them instead of investing I put the vast majority into investments instead as it just makes financial sense.
Things have to be viewed probabilistically, and dont over allocate to the highly unlikely while ignoring the likely. Every dollar you put into compounding today is worth magnitudes more than in 10 years, etc…while the exact opposite happens with your mortgage.January 15, 2016 at 11:48 am MST #12685