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Should I pay off home with very low interest rate

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  •  jz 
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    Status: Physician
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    Now is the time to put that money in the markets.   YES. Timing.  The US stocks, international stocks, emerging market stocks, even bonds are slightly lower. Sure, they might all move lower short term, but in 3-5 years you will look back to savor your low entry point.

    #169108 Reply
    Liked by Zaphod, hatton1
     Peds 
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    Whats the downside to a large taxable?

    Click to expand…

    more vacations.

    newer cars.

    more to charity.

     

    its the pits.

    #169113 Reply
     familydocPA 
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    You can do literally whatever you want and be fine with that extent of savings.

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    Finally, a good piece of advice on this thread.  I often see people here being so dogmatic towards their belief of not paying off low interest debt that it borders on absurd.

    This doc is doing extremely well.  Money put into the mortgage over the next 2 years could easily outperform the market in that time period.  I assume this doc is going to far exceed their financial goals with this level of savings, and whether or not they invest or pay off the home is going to be literally a drop in their financial bucket in 30 years.

    Most people get some sort of psychological benefit from having no debt and an increase in take-home cashflow, so if you can get this thing paid off in less than 2 years while still maximizing all of your other investment vehicles, I say go for it.

    Congrats on your financial success!

    #169120 Reply
     StarTrekDoc 
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    Finally, a good piece of advice on this thread.  I often see people here being so dogmatic towards their belief of not paying off low interest debt that it borders on absurd.

    This doc is doing extremely well.  Money put into the mortgage over the next 2 years could easily outperform the market in that time period.  I assume this doc is going to far exceed their financial goals with this level of savings, and whether or not they invest or pay off the home is going to be literally a drop in their financial bucket in 30 years.

    Most people get some sort of psychological benefit from having no debt and an increase in take-home cashflow, so if you can get this thing paid off in less than 2 years while still maximizing all of your other investment vehicles, I say go for it.

    Congrats on your financial success!

    Click to expand…

    Most of us here, including the OP, are going to have first world problems.   Not a question of financial independence or a comfortable retirement.

    This IS a Financial forum, which would put the emphasis on the most optimal financial options available as the first choice.

    I would expect my FA do to this very thing, AND also offer tailor additional advice to the client’s preferences — like sleeping more soundly with no debt or less volatile portfolio that doesn’t swing % on any given news cycle.

    It probably would be safe to say that many here by end of career can put entire portfolio into a bond fund and call it a day without losing sleep, but it’s not the most financially savvy option either (nor need it be).

    #169139 Reply
     familydocPA 
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    Click to expand…

    Most of us here, including the OP, are going to have first world problems.   Not a question of financial independence or a comfortable retirement.

    This IS a Financial forum, which would put the emphasis on the most optimal financial options available as the first choice.

    I would expect my FA do to this very thing, AND also offer tailor additional advice to the client’s preferences — like sleeping more soundly with no debt or less volatile portfolio that doesn’t swing % on any given news cycle.

    It probably would be safe to say that many here by end of career can put entire portfolio into a bond fund and call it a day without losing sleep, but it’s not the most financially savvy option either (nor need it be).

    Click to expand…

    I get that, and to some extent agree completely. However, even when looking at things from a purely “finance” perspective, it’s not always the right move to put this money into 100% equities.  Taken to the extreme, this can mean that everyone should put all of their money in SCV or emerging markets because those are likely to give the best performance over time. Or, to another extreme, that we should leverage to 150% equities. I think most agree that such a financial plan, while on paper gives the best returns, does not make a whole lot of sense.

    For instance, one thing that has not yet come up on this thread is what the OP’s asset allocation currently is. Does he/she have a bond allocation?  If so, those allocations are likely making less than the guaranteed return of paying off the mortgage, thus making the mortgage the better financial play.

    So yes, leveraging an additional $180k into the market via a mortgage for the next few years might make for the best returns on paper (may or may not in reality), but those are not risk-adjusted return numbers and fail to take into account what the OP’s target allocation and investment timeline are.  Which is another way of saying I completely agree with your sentiment that a FA should take all of these things into account and offer the option, because at the end of the day there is no perfect answer.

    #169154 Reply
    Zaphod Zaphod 
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    Click to expand…

    Most of us here, including the OP, are going to have first world problems.   Not a question of financial independence or a comfortable retirement.

    This IS a Financial forum, which would put the emphasis on the most optimal financial options available as the first choice.

    I would expect my FA do to this very thing, AND also offer tailor additional advice to the client’s preferences — like sleeping more soundly with no debt or less volatile portfolio that doesn’t swing % on any given news cycle.

    It probably would be safe to say that many here by end of career can put entire portfolio into a bond fund and call it a day without losing sleep, but it’s not the most financially savvy option either (nor need it be).

    Click to expand…

    I get that, and to some extent agree completely. However, even when looking at things from a purely “finance” perspective, it’s not always the right move to put this money into 100% equities.  Taken to the extreme, this can mean that everyone should put all of their money in SCV or emerging markets because those are likely to give the best performance over time. Or, to another extreme, that we should leverage to 150% equities. I think most agree that such a financial plan, while on paper gives the best returns, does not make a whole lot of sense.

    For instance, one thing that has not yet come up on this thread is what the OP’s asset allocation currently is. Does he/she have a bond allocation?  If so, those allocations are likely making less than the guaranteed return of paying off the mortgage, thus making the mortgage the better financial play.

    So yes, leveraging an additional $180k into the market via a mortgage for the next few years might make for the best returns on paper (may or may not in reality), but those are not risk-adjusted return numbers and fail to take into account what the OP’s target allocation and investment timeline are.  Which is another way of saying I completely agree with your sentiment that a FA should take all of these things into account and offer the option, because at the end of the day there is no perfect answer.

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    The right move will depend on your age, time til retirement, etc…more than anything.

    These things are not the same. Encouraging extreme concentration away from broad market participation would not be a good idea and no one but specialty shops think like this. I dont think SCV or EM even makes much sense on paper personally outside of specific conditions and wouldnt over weight them myself. Maybe would do 5-10% EM as part of a diversified portfolio in the international section. All these ideas are backwards looking and overlook important statistical reasons why certain sectors may have outperformed, or the fact anomalies once known can be eliminated, and a large increase in volatility can still ruin what could be better returns. However, there are often very good reasons why things are ‘cheap’. Going to mexico for medical care may be cheaper as well, but theres risk you may get what you pay for.

    Your mortgage is a dollar/inflation hedge that is backed by an asset. You can sell it and be rid of it, its not even like student loan debt, let alone margin debt so conflating them so easily (as is common on this site) is a huge stretch that cant be taken seriously. In 30 years even modest inflation will halve the true cost of your mortgage payment, while that money being in the market instead will most likely have grown by multiples even after accounting for inflation.

    There is no return in paying down debt. Zero. You can avoid future interest only. The total amount you can avoid is known exactly at any time for a fixed rate loan/mortgage/etc…It is not a % of return you get, definitely not the % of the loan, but a percentage of total interest left which if annualized, inflation accounted for etc…is going to be much smaller than it is made out to be.

    Intermediate and medium duration government bonds are returning far more than the mortgage, with none of the high transaction costs.

    None of that means paying off your mortgage is always a wrong thing to do. Its simply a choice. Trying to justify it by inappropriately framing it and the opportunity costs is wrong however.

    #169159 Reply
     StarTrekDoc 
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    I believe most of us find this forum from baseline work/searching and have a leaning toward Boglehead/Ramsey thinking of the 2-4 index fund concept and a balanced ratio 80/20 equities/bonds that moves toward less volatility (50/50 vs 30/30/30 or whatever blend) as we reach the retirement demarcation.   I use that as the baseline for discussions and assumptions where most of us are — few will argue for a heavily weighted portfolio outside these parameters as base recommendations and most here will point out to folk who are outside these standards — certainly if they go to extremes as mentioned above.

    As high income and probably high portfolio potentials, we should act like good bankers — plan and invest soundly for the long run, but ladder adequately for the stress test of life.  With that in mind – bankers would shriek in having a fixed asset not work for you.   Fiscally balanced and minded doesn’t necessarily mean taking unnecessary risks.

    The risk that most have is the temptation of using leveraged debt for spending.

     

    #169173 Reply
    Liked by hatton1, Zaphod
     Doc29 
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    Thank you all for the feedback.

    Btw I’m in my early 40s and my allocation is approx 75/25.

    #169178 Reply
     Bmac 
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    Is this your “Forever House?” If so and it feels good, pay it off. Or not. Whatever you prefer. Being mortgage free feels great. Personally we focused on taxable until we were late 40s before paying off. But no crime to do now with your finances.

    But if you are unsure if you will be staying in the house “forever,” I would not pay off and increase taxable investments.

    #169187 Reply
    Liked by hatton1
     Dont_know_mind 
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    early retirement for doctors

    I posted a reply to ‘thoughts on how to move forward’ which also may apply here.

    Ironically, you need to take more leverage earlier in your investing life because you have less assets and more human capital. If you have children it is more risky if you die unless you have adequate death and it actually pays out.

    Bernstein’s book ‘the ages of the investor’ is good. There are also other good books on lifecycle investing. It depends on your preferences and behavioural biases. Are you a wealth maximiser, wealth optimiser or do you just want to feel good about paying off debt ? What is your true risk tolerance ?

    #169201 Reply
    Liked by hatton1, Zaphod
     hightower 
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    Status: Physician
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    Hi everyone.

    I wanted to get the opinion of this forum. I am currently aggressively paying of my mortgage at 2.79%. Should be paid off in 20 months or so. My main rational is that I don’t know what else to do with my income.
    1. I am maximizing employer 401k W2 pre tax
    2. Maximizing solo 401k pre tax
    3. Approx additional 75 k in taxable a year
    4. Back door Roth

    All of these are in broad index funds

    After these 4 things I have supplemental savings that don’t have any other debts to pay so I’ve decided to pay off the house however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate.
    What else could I do?

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    I agree with others that have said that there’s not really a wrong answer here.  Paying it off is not a bad idea.  Letting it ride for the full term isn’t a bad idea either.  Personally, if it were me and I had the ability to pay it off that quickly, I would go ahead and do it.  I think we’re just starting to see the tip of a long downward trend of stock prices over the next few years or so.  So, getting rid of debt now while the market melts a little will leave you in a nice position when it’s time to start buying again.  It’s anyone’s call as to when we’ll actually see a bottom, but I would bet in 20 months when you’re done paying off your mortgage, you’ll be getting back into stocks at much cheaper prices then we are seeing now.

    Of course I realize I could be wrong and the market could continue to rise for another few years or more, who knows?:)  Either way, no matter what you do, you’ll be in a good spot.

    #169203 Reply
     angeladiaz99 
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    Status: Physician
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    If it helps, I did the same thing.

    Any extra money that I had, 50% went into taxable, 50% went towards the mortgage (also at <3%).

    I don’t regret it at all.

    #169209 Reply
    Liked by Firefly
    wonka31 wonka31 
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    You’re not wrong to do it, but I wouldn’t. I advocate to residents/newer attendings the 15 year fixed mortgage. You really are paying it off quite quickly and will be mortgage free by mid 40s/early 50s. Given the low rates now, I think that is plenty early.

    #169214 Reply
    Liked by hatton1, Zaphod
     Dont_know_mind 
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    If your allocation is 75/25 in retirement account, you maybe better off paying off your taxable debt and making your retirement allocation 100.

    Otherwise, I don’t see the point of paying off debt other than to market time. It is sort of an optical illusion – if your assets are double in 10 years then you can sell asses at any time and discharge debt. If there is a recession the debt will feel 2X more than what it is. The optimum for you may depend on your behavioural biases and how debt affects that.

    That being said, we are quite far into the cycle, so if you have to try out market timing, it might be a better time than say 5 years ago, although I think no one here would advocate market timing very much.

    #169220 Reply
    Liked by Zaphod
    Drop it into MD Drop it into MD 
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    You’re not wrong to do it, but I wouldn’t. I advocate to residents/newer attendings the 15 year fixed mortgage. You really are paying it off quite quickly and will be mortgage free by mid 40s/early 50s. Given the low rates now, I think that is plenty early.

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    I agree that  having a 15 year mortgage it already will be a pretty short loan compared to what most people do.  I plan to pay it off a little faster then 15 years but not drastically.  Maybe 10-12 years.  Mostly to free up some cash flow for college years.  You can make the argument that I could just pull out of the taxable I would have built up but then there is market timing and taxes and whatnot.  I would rather try to keep from withdrawing from my taxable account as long as possible and hopefully get a better tax rate.

    #169221 Reply
    Liked by wonka31

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