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mortgage paydown and investing in taxable...my version of market timing

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  • mortgage paydown and investing in taxable...my version of market timing

    just doing some planning for next year. I'm wondering if anyone does this for their version of marketing timing. I realize investing in taxable will be a better investment long term compared to paying off mortgage early. Right now the mortgage balance is $590k, eight years into a 30-year at 3.375%. Plan is to get this below the jumbo amount and eventually refinance to a 15-year, hoping that rates will still be low in about 2 years (and the fed has said as much so I'm reasonably confident we can get a rate below 2.9%), and we'll be in this place at least for another 20 years.

    In 2021 we should have ~$75k extra and I'm trying to balance what to do. We want to pay off the mortgage before oldest goes to college, in 11 years. We save 25-30% for retirement already, and we have enough tax-protected space to get the 25-30% savings in there, so we don't have a taxable account. My initial plan was to take $75k and throw it all at the mortgage over the year. Maybe I should just stick to my original plan but....I'm wondering if people do this but perhaps make an exception for when there's a market correction? We do not time the market in our household. All I do when there's a dip is, sometimes, I'll convert some pre-tax money to roth at a "discount." Obviously I have no idea what the future will hold, and I prioritize paying off mortgage, but now I'm wondering if there's an especially bad month or few weeks (after all there's usually 1 correction per year) and when that happens, take a month or two of what would have gone to the mortgage and start a taxable account by buying on the dip?

  • #2
    have you checked on a refinance now? just curious.
    no taxable? then yes, fund taxable.

    we are poorer than you, our mortgage is a little less, but we have no plans to add anything extra to it, market highs or not.

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    • #3
      checked out rates, yes. given the balance is still a jumbo that means higher rates. the lowest I was given for a 30-year (I don't want to do the current balance on a 15 year yet....I want to get the balance down and then to a 15 year) was 3.1%, and I felt that wasn't sufficiently lower to justify paying for a refinance.

      yes probably could use some taxable...just hesitant because we already follow the "at least 20% to retirement" rule, and go above and beyond, and the same rule says you get to do whatever you want with the rest. in the end this is just another pay more to the mortgage or invest in taxable thread another answer could be "do both"

      appreciate the input!

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      • #4
        I would not wait too long to refinance.

        Interest rates are hard to predict. Stock Markets are hard to predict.

        I personally hate debt. i would personally pay down mortgage rather than buying bonds in taxable but realize this will probably decrease risk and return when compared to buying taxable stocks.

        If market drops, nothing wrong with allocating more to stocks.....timing , yes, but somewhat like rebalancing to keep AA constant.

        Do you have an IPS? How does it address market drops? while in the middle of a drop, it is nice to look at you IPS and feel like you are following a plan.

        Peds (as usual) is correct, don’t wait to look at refinancing (now might be a good time) and if thinking long term, the mathematicians will argue for more risk and more potential return with more taxable stocks and less towards the mortgage.

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        • #5
          I started with a 8% fix and a 10% equity loan with 5% down 20 years ago. Whenever I refinance(which has been many times over the last 20 years) it's so I can put more into the taxable account. Currently I have the ability to liquidate a portion of the taxable and get that "I'm free of a mortgage" sensation, but I'm too greedy(or stupid) and keep pouring into the taxable.

          You can climb to the top of mountain and do it quicker than others because you're faster. Or you can fly a plane and parachute to the mountain top whenever you want with the understanding that the plane can crash.

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          • #6
            I often have the same sorts of thoughts, so I get where you are coming from. In general, given that you have an 11 year timeline I would open the taxable account and put the money there rather than paying down the mortgage. The mortgage paydown is known, but also ties up the funds. The market gains are not known, and of course the market is high. If this were a shorter term situation, the arbitrage might make more sense. Over a decade money in the market should make you more, and you can put it towards payoff at that point. (My guess is that you will figure out how to pay off the mortgage then without pulling this money out of the market - but regardless, at least it will be there if you need it.)

            Now, having resolved the mortgage v. market issue (in my scenario) I would then turn to consider where the money goes as a different arbitrage issue. S&P 500 and U.S. Total Stock Market at historic highs. International and small cap value have been lagging. Not sure what I would do, but if you were worried about return from large cap in the next year (and CAPE is >30), consider one of those alternatives. Well, maybe I am sure - all my new investments in taxable go into TSM.

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            • #7
              to be clear, if we did a taxable account, at least for now no bonds will go there. It will be total stock market fund and total international fund, with a tilt towards total stock market. appreciate these answers!

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              • #8
                This appears to be a bit of a personal preference issue. Putting $75K towards your mortgage basically gets you to not needing a jumbo mortgage to refinance, (515k versus 510 being considered a jumbo). If the objective is to get a different rate/tenor on your mortgage then I would consider this a viable approach. A pre-payment on your mortgage provides a level of guaranteed return (mortgage rate minus tax rate) plus the refi/tenor is a good one two of potential savings.

                Your choice really depends upon your comfort/aversion to debt overall, and the priority (getting a lower rate / tenor) on your mortgage versus the long term potential returns associated with a taxable account.

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                • #9
                  Originally posted by JBME View Post
                  checked out rates, yes. given the balance is still a jumbo that means higher rates. the lowest I was given for a 30-year (I don't want to do the current balance on a 15 year yet....I want to get the balance down and then to a 15 year) was 3.1%, and I felt that wasn't sufficiently lower to justify paying for a refinance.

                  yes probably could use some taxable...just hesitant because we already follow the "at least 20% to retirement" rule, and go above and beyond, and the same rule says you get to do whatever you want with the rest. in the end this is just another pay more to the mortgage or invest in taxable thread another answer could be "do both"

                  appreciate the input!
                  You need to talk to a local bank for better rates. I have a fairly similar sized mortgage as you with the jumbo portion at 2.5% fixed 30 year and the remaining balance at 3.5% fixed. We closed in October 2020.

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                  • #10
                    good ideas all around. Few things: Yes if we pay down $590 to $515 because we put an extra $75 towards the mortgage that doesn't get us out of jumbo territory, but what's not considered is the principal is being paid down monthly with each payment as well. So in the end, roughly, the $590 goes down to $490-495 and we can get better non-jumbo rates. I just googled rates for a 30 year fixed and see 3.00 for the jumbo and 2.39 for a 15-year fixed and 2.88 for a 30-year fixed. Again current rate is 3.375. At what point do you find it's worth it to refinance? I don't want to refinance to a 15-year yet because then the payment will be too high but would be interested in a 15-year once we get the balance lower in a year or two.

                    current thinking is take into account the threshold for jumbo mortgage and the fact that we continue to make principal payments, and work to get balance to 510 by the end of the year and that extra $15-20 will start off our taxable account.

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                    • #11
                      A 15-year mortgage from a payment standpoint (P&I) will be about 20% more versus a 30 year mortgage of the same interest rate. Going from a 3.375% to 2.39% is a pretty good potential interest rate reduction. My rule of thumb is 50 bps or more interest rate reduction is when a refinance starts to make sense financially and putting up with the paperwork, with the assumption that you live in the home long term.

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                      • #12
                        I just split excess funds between taxable account and mortgage pay down. In your case it may make more sense to direct more to mortgage if you want to get out of the jumbo loan territory. Keep shopping around as it seems like there are deals to be had out there. Either way, I wouldn’t stress too much. As long as it’s not taxable or cocaine you should be good to go in the long run. Have you looked into a Tesla?

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                        • #13
                          Originally posted by JBME View Post
                          current thinking is take into account the threshold for jumbo mortgage and the fact that we continue to make principal payments, and work to get balance to 510 by the end of the year and that extra $15-20 will start off our taxable account.
                          “yes probably could use some taxable...just hesitant because we already follow the "at least 20% to retirement" rule, and go above and beyond, and the same rule says you get to do whatever you want with the rest.”

                          A little bit confusing strategy and tactics.
                          Your goal seems to be to get out of “jumbo territory”.
                          15 yr, 30yr, or taxable are all in the spending category. Purely tactical choice over one to two years (not the long term mathematical answer).
                          I don’t think there is a bad answer.

                          FOMO on interest rate or FOMO on returns. Not a thing wrong with tapping the taxable if needed.
                          Purely a personal choice, have no fear.




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                          • #14
                            Are the rates still lower enough for conventional vs jumbo loans to make a difference?
                            it was when I last refinanced. It was a cash in refi so I could go down to a 15 y conventional. The rate is high for today’s standards but I am too close to the finish line of this loan to care.
                            We have a minimum savings goal per year, so if we exceed that, we make principal reduction payments. Probably enough to take 3 years of the duration of the loan.

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                            • #15
                              Wait wait I am confused. Is this a taxable account vs mortgage paydown or are you going to not use tax advantaged space? I fully support tossing extra towards the mortgage if you don't have better use for it. But if you have tax advantaged space I would not waste it.

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