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Optimized mortgage reduction

Home Personal Finance and Budgeting Optimized mortgage reduction

  • Avatar dentoid 
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    Status: Dentist
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    alpha investing

    For those that have purchased a home on a 30 year ( or 15 year ) mortgage at 4% +/- a percent, what is the optimized time frame to pay the mortgage off including lost costs for time in the market? 7, 10, 15 (if on a 30 year mortgage) years? In other words, how do you hedge your bet against the amortization table verses the reality of a taxable fund for extra $ money. Curious to hear your thoughts.

    #213939 Reply
    triad triad 
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    the expected return of my taxable account is higher then the interest rate of the mortgage so if my goal is to maximize returns I would drag out the mortgage for the full 30.  I chose to pay it off early to free up more cash flow and allow me to work less hours.

    #213941 Reply
    Liked by ddswifey, wonka31
    ENT Doc ENT Doc 
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    Look at effective interest rate after tax considerations and compare to your alternative after-tax investment return. That helps decide the financially optimal move. Then there is the safety issue. If you are retiring or don’t like the idea of higher fixed costs then pay it off, regardless of what the rate comparison tells you. Both issues are personal.

    #213986 Reply
    Avatar Peds 
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    Status: Physician
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    Joined: 01/08/2016

    Optimal? Minimal to mortgage over 30 years.

    #213995 Reply
    Liked by Zaphod
    Avatar ZZZ 
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    Optimized for what?

    If you want to pay the least interest, pay off the mortgage as fast as possible.

    If you want to seek the highest expected returns, pay it off as slowly as possible and invest aggressively.

    Anything else is simply a blend of those two.

    #214049 Reply
    CordMcNally CordMcNally 
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    Status: Physician
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    It isn’t an easy answer because, as others have mentioned, it is personal. I don’t have the data in front of me but I would bet you could take any 30 year period of your choosing of the US stock market and the return would beat anybody here’s current mortgage rate.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #214084 Reply
    White.Beard.Doc White.Beard.Doc 
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    I would pay the minimum in the early years as the likelihood of the market beating the mortgage rate over the long haul is quite high.

    As you get older or closer to retirement, or if you are planning on early retirement, it is best to be debt free.  Also, while it is a lower return, when paying off the mortgage early the return is guaranteed.  Over the short term, when you get closer to retirement, market returns are uncertain and there may be periods of up to several years where market returns could go negative.

    Our path over the years has worked out quite well.  I paid the minimum towards the mortgage in the early years, and I maxed out the tax deferred investments and got the full match.  In the next phase, we started investing the extra in real estate, using more leverage.  Then later as excess income further grew, we did tax deferred, investment real estate, and also taxable investments.  More recently, we stopped investing in any more real estate and stuck with tax deferred, taxable, and rapid debt pay down until debt free.  As we now approach retirement, the real estate and investment income is quite high and the debt free status frees up even more excess cash to go towards taxable.  At this stage with FI, still working, plenty of extra, we are focused on increasing charitable giving and estate planning.

    Bottom line, I would advise not putting much money towards early mortgage payoff in your 30’s, maybe put some money there in your 40’s, and definitely plan to reach freedom from debt in your 50’s.  A good middle ground is to pay off the 30 year mortgage in 15 years, but maybe plan for extra payments in a stepwise fashion, with more going in that direction as time passes.

    One additional benefit from debt free status is the psychological well-being. However, pushing for this too early if it takes away from investing in the market could potentially limit the growth of your net worth.

    #214109 Reply
    Avatar Financial Naive MD 
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    Status: Physician
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    Joined: 05/05/2019

    I would pay the minimum in the early years as the likelihood of the market beating the mortgage rate over the long haul is quite high.

    As you get older or closer to retirement, or if you are planning on early retirement, it is best to be debt free.  Also, while it is a lower return, when paying off the mortgage early the return is guaranteed.  Over the short term, when you get closer to retirement, market returns are uncertain and there may be periods of up to several years where market returns could go negative.

    Our path over the years has worked out quite well.  I paid the minimum towards the mortgage in the early years, and I maxed out the tax deferred investments and got the full match.  In the next phase, we started investing the extra in real estate, using more leverage.  Then later as excess income further grew, we did tax deferred, investment real estate, and also taxable investments.  More recently, we stopped investing in any more real estate and stuck with tax deferred, taxable, and rapid debt pay down until debt free.  As we now approach retirement, the real estate and investment income is quite high and the debt free status frees up even more excess cash to go towards taxable.  At this stage with FI, still working, plenty of extra, we are focused on increasing charitable giving and estate planning.

    Bottom line, I would advise not putting much money towards early mortgage payoff in your 30’s, maybe put some money there in your 40’s, and definitely plan to reach freedom from debt in your 50’s.  A good middle ground is to pay off the 30 year mortgage in 15 years, but maybe plan for extra payments in a stepwise fashion, with more going in that direction as time passes.

    One additional benefit from debt free status is the psychological well-being. However, pushing for this too early if it takes away from investing in the market could potentially limit the growth of your net worth.

    Click to expand…

    I can’t agree more with your path to become financially independent.

     

     

    #214113 Reply
    Avatar dentoid 
    Participant
    Status: Dentist
    Posts: 86
    Joined: 02/08/2016

    I would pay the minimum in the early years as the likelihood of the market beating the mortgage rate over the long haul is quite high.

    As you get older or closer to retirement, or if you are planning on early retirement, it is best to be debt free.  Also, while it is a lower return, when paying off the mortgage early the return is guaranteed.  Over the short term, when you get closer to retirement, market returns are uncertain and there may be periods of up to several years where market returns could go negative.

    Our path over the years has worked out quite well.  I paid the minimum towards the mortgage in the early years, and I maxed out the tax deferred investments and got the full match.  In the next phase, we started investing the extra in real estate, using more leverage.  Then later as excess income further grew, we did tax deferred, investment real estate, and also taxable investments.  More recently, we stopped investing in any more real estate and stuck with tax deferred, taxable, and rapid debt pay down until debt free.  As we now approach retirement, the real estate and investment income is quite high and the debt free status frees up even more excess cash to go towards taxable.  At this stage with FI, still working, plenty of extra, we are focused on increasing charitable giving and estate planning.

    Bottom line, I would advise not putting much money towards early mortgage payoff in your 30’s, maybe put some money there in your 40’s, and definitely plan to reach freedom from debt in your 50’s.  A good middle ground is to pay off the 30 year mortgage in 15 years, but maybe plan for extra payments in a stepwise fashion, with more going in that direction as time passes.

    One additional benefit from debt free status is the psychological well-being. However, pushing for this too early if it takes away from investing in the market could potentially limit the growth of your net worth.

    Click to expand…

    Thank you for your insightful post. It’s greatly appreciated!

    #214115 Reply
    Avatar dentoid 
    Participant
    Status: Dentist
    Posts: 86
    Joined: 02/08/2016

    The issue we have is that we took down over 600k of student loans in 2.5 years, and our mortgage is way less. That gazelle intensity is difficult to kill.

     

    #214116 Reply
    CordMcNally CordMcNally 
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    Status: Physician
    Posts: 2670
    Joined: 01/03/2017

    The issue we have is that we took down over 600k of student loans in 2.5 years, and our mortgage is way less. That gazelle intensity is difficult to kill.

     

    Click to expand…

    As long as you’re still meeting your retirement goals and it makes you feel better, go for it. There’s way worse financial decisions you can make besides paying down your mortgage.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #214122 Reply
    Liked by Tim
    White.Beard.Doc White.Beard.Doc 
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    Status: Physician
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    Joined: 02/06/2016

    The issue we have is that we took down over 600k of student loans in 2.5 years, and our mortgage is way less. That gazelle intensity is difficult to kill.

     

    Click to expand…

    You have done an incredible job to pay down that huge nut of student loans in rapid fashion.  Congratulations!!!!

    In your shoes I would keep going by investing the money that was previously going towards student loans in the taxable account, and in my mind say to myself that I could easily pay off the mortgage with that taxable account at will.

    And perhaps set up a plan to pay double principal payments on the mortgage each month to get on a 15 year track for the 30 year loan.  That is a fairly modest and slowly escalating extra payment plan that leaves a lot of extra cash available for the taxable account investments.

    #214145 Reply

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