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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308782  
Subject: Why is Mortgage Debt "Different" Date: 3/4/2014 2:04 PM
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I have recently hit a point where I am investigating strategies to free up cashflow so I can work fewer hours. I'd REALLY like to pay off my mortgage because that is my largest monthly expense. I've worked out a payment plan and based on our current cashflow I can pay off the mortgage in about 7 years. However, if I could put a huge chunk of cash towards the principal right now (say about $50k or so), I could shave almost 2 years off the paydown plan.

I've noticed that most "experts" recommend paying down all non-mortgage debt and then saving or investing in lieu of paying off the mortgage. They especially recommend this when it comes to e-funds.

So here's my question. Right now I have about $50k in efund money, just sitting there in cash earning a piddly 1%. I could use that cash to pay down my mortgage and get a HELOC in case of emergencies.

The only arguments against it I've seen is that I may be "tempted" to spend the money on the HELOC. But wouldn't the same logic apply to the huge hunk of cash I have now? It's easier to spend the cash. With the HELOC it would very obvious I was going into debt for whatever I spent it on.

Plus, logic says that by keeping that cash around I am essentially in debt right now (via my mortgage) to fund my emergencies (via the efund). With the HELOC strategy, I wouldn't be in debt for emergencies until I actually had an emergency. That is, I'd borrow more against my house via the HELOC when an emergency actually came up.

On a side note, my mortgage is at 3%, my priority is to loosen up cashflow and I have no credit card debt. I've also got significant chunks in retirement accounts and am on track with those.

Thoughts?
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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307985 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 2:11 PM
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Lenders have been known to cut or cancel HELOCs without notice. That is why you don't want to rely on a HELOC for emergencies. What if you pay off the mortgage by draining your efund and then lose your job? There will still be bills that need to be paid but now you have no money. It's a gamble that's not worth taking. If your goal is to loosen up cashflow, what have you done to increase your income and decrease your expenses?

-Steph

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307986 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 2:20 PM
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So here's my question. Right now I have about $50k in efund money, just sitting there in cash earning a piddly 1%. I could use that cash to pay down my mortgage and get a HELOC in case of emergencies.

HELOCs are guaranteed to be there when you need it. Lenders track usage of HELOCs as well as other types of credit. When you pattern changes, they can reduce the credit limit on their whim with no notice. Credit card issues do the same thing.

Don't tell me this can't happen. My sister had her HELOC reduced to only slightly above the existing balance. At least, they allowed a little buffer to prevent interest from causing over limit charges but that it.

The only arguments against it I've seen is that I may be "tempted" to spend the money on the HELOC. But wouldn't the same logic apply to the huge hunk of cash I have now? It's easier to spend the cash. With the HELOC it would very obvious I was going into debt for whatever I spent it on.

There are other reasons:
1.) Liquidity
Efunds are for situations where you need to access savings immediately.

2.) Cash Flow
Paying down a fixed payment mortgage does decrease interest, but doesn't change cash flow until the mortgage is paid off.

3.) Mortgage interest rates are low
Paying ahead on a mortgage does decrease the amount of interest paid, but rates are at historical lows.

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307987 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 2:24 PM
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HELOCs are guaranteed to be there when you need it. Lenders track usage of HELOCs as well as other types of credit. When you pattern changes, they can reduce the credit limit on their whim with no notice. Credit card issues do the same thing.

Another person mentioned this too, but I just got off the phone with the lender and they said as long as payments are made on time, they do not adjust the limit. It's USAA, not sure if that makes a difference. Are they lying? I have not applied so have not seen the actual loan documentation yet. Just exploring options.

I think that answers the main problem with HELOC's, though. Thanks.

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307988 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 2:27 PM
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I/ve picked up a few side jobs here and there to get extra income. And I just cut our cable, house alarm and lowered cell phone bills (we still have dumb phones). I can definitely tighten my belt more to throw more monthly income at the debt, but a cash infusion against the principle would speed things up significantly.

My biggest expenses are mortgage, day care and insurance in that order. It's not a necessity to pay the mortgage off quick, but it'd sure be nice to have that payment gone.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307989 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 2:50 PM
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I can tell you my thought process when life got bumpy. As long as I could pay the mortgage, I felt more comfortable with cash on hand. It was likely if things went the way it looked, no one would likely lend me money at that rate in the future.

Even a paid off house has costs. If those costs are not paid, you could lose the house anyway.

3% is very low. It is entirely possible that the rate you would be paid on savings would be higher than that in the next 7 years. The rate you are getting on savings now may go up but unless you have an ARM, you mortgage rate is set.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307990 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 4:05 PM
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HELOCs are guaranteed to be there when you need it.

ARE NOT guaranteed

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307991 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 4:19 PM
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Are they lying? I have not applied so have not seen the actual loan documentation yet. Just exploring options.

That could be USAA's current rule.

Lying would be too strong of a term, but that doesn't mean the company rules aren't subject to change. Insurance companies manage risk. If they start taking losses on HELOCs, they will review their risk and current rules.

I understand the desire for a mortgage free life, and I don't want to discourage you from it. There needs to be a balance between liquid and illiquid assets. Mortgage rates are very low and you may be receiving a tax deduction for it. Paying a limited additional amount each month, and routing the rest to investments or savings allows you to create a reserve sufficient to pay off the mortgage. Once you have enough to completely pay off the mortgage, then cash flow is reduced and your emergency fund can be smaller.

Since funds above the amount for an efund isn't immediately required to pay the mortgage, you can consider investing those funds. Only you can decide the trade off of risk vs reward.

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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307992 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 4:45 PM
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Since funds above the amount for an efund isn't immediately required to pay the mortgage, you can consider investing those funds. Only you can decide the trade off of risk vs reward.

Another thought if there are funds available above the efund amount, pay a lump sum and recast the mortgage. That would bring the payments down.

-Steph

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307993 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 5:09 PM
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Another thought if there are funds available above the efund amount, pay a lump sum and recast the mortgage. That would bring the payments down.

-Steph


It might also involve fees and an increase in the interest rate.

When my co-workers were discussing how they obtained refinancing for no cost, we tried. The first reason that we couldn't refinance was our mortgage balance was below the minimum for a no cost refinance. The fees for a small mortgage made refinancing impractical.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307994 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 5:35 PM
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yddeyma:

<<<HELOCs are [not] guaranteed to be there when you need it. Lenders track usage of HELOCs as well as other types of credit. When you pattern changes, they can reduce the credit limit on their whim with no notice. Credit card issues do the same thing.>>>

"Another person mentioned this too, but I just got off the phone with the lender and they said as long as payments are made on time, they do not adjust the limit. It's USAA, not sure if that makes a difference. Are they lying? I have not applied so have not seen the actual loan documentation yet. Just exploring options."

It almost does not matter what the reps tells you now, virtually all loan documents have integration clauses that recite that the loan documents are complete in and of themselves and you are not relying on any statement not contained in the loan documents, so likley that only thing that will matter is what the loan documents say. You need to see the documents to determine this one.

i have not seen many HELOC loans, but all the one I have seen can be reduced more or less at the will of the lender (or perhaps a deemed insecure clause or a material adverse change clause, or some other similar clause).

DW is a SAHM and loan documents once came to us with a callable upon death of either spouse provision. When I inquired, the lender's rep, denied that the loan would ever be called if payments were kept current, but then absolutely refused to delete the callable upon death provision, and had the temerity to suggest I was not being reasonable and could not understand why I was so irate.

Ultimately told them to stuff and went with a different, more reasonable lender.

The words of the rep. to you are worth less than the cost of the paper on which they were written.

Regards, JAFO

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307995 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 5:40 PM
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vkg: "When my co-workers were discussing how they obtained refinancing for no cost"

There is no free lunch - the costs were either rolled into the principal amount, or the interest rate was above par and generated a premium payment that covered the costs, or some covered the costs.

In my experience, plenty of people who discuss a no cost refinancing do not understand how the actual costs were covered.

Regards, JAFO

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307996 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 6:28 PM
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Another person mentioned this too, but I just got off the phone with the lender and they said as long as payments are made on time, they do not adjust the limit. It's USAA, not sure if that makes a difference. Are they lying? I have not applied so have not seen the actual loan documentation yet. Just exploring options.

You need to read the contract - there are lots of exceptions that allow lenders to freeze or cut HELOC credit lines, not just missing payments. I work in mortgage servicing, and I can tell you mortgage lenders CAN AND DO cut HELOC credit lines for reasons other than missed payments.

A lot of this occurred during the financial crisis, as property values dropped, but on an ongoing basis, regulators are requiring lenders to ensure that potential HELOC borrowing is supported by both the property value and the ability of the borrower to repay. That means if you lose your job, your HELOC could be cut because the lender is concerned about your ability to repay the loans.

Additionally, the ability to draw on a HELOC is generally only available for either 5 or 10 years, after which you enter a repayment period - often somewhere between 15 and 25 years long. After the 'draw' period expires, if you want to have the ability to pull additional funds from the HELOC, you need to apply for (and be approved for) a new HELOC. If your income has decreased, or you are no longer working, you may have a difficult time getting approval for a new HELOC.

Personally, I would never count on a HELOC as my 'emergency fund' any more than I am willing to count on credit cards as one.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307997 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 6:50 PM
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I have recently hit a point where I am investigating strategies to free up cashflow so I can work fewer hours. I'd REALLY like to pay off my mortgage because that is my largest monthly expense. I've worked out a payment plan and based on our current cashflow I can pay off the mortgage in about 7 years. However, if I could put a huge chunk of cash towards the principal right now (say about $50k or so), I could shave almost 2 years off the paydown plan.

I've noticed that most "experts" recommend paying down all non-mortgage debt and then saving or investing in lieu of paying off the mortgage. They especially recommend this when it comes to e-funds.

So here's my question. Right now I have about $50k in efund money, just sitting there in cash earning a piddly 1%. I could use that cash to pay down my mortgage and get a HELOC in case of emergencies.
.
.
.
On a side note, my mortgage is at 3%, my priority is to loosen up cashflow and I have no credit card debt. I've also got significant chunks in retirement accounts and am on track with those.


Depending on what type of risk you want to take, you could actually start investing in preferred stocks and other interest/dividend paying securities, using the money that you receive to make the mortgage payment. I have a 3.25% mortgage and currently have an account that has a balance of about 70% of the original principal balance of my current mortgage invested in preferred stocks, dividend paying ETFs and REITs. I am about $200 short of making my entire mortgage payment out of this account every month. (Before I moved, I had a smaller mortgage and I was able to make my entire mortgage payment every month - working on getting there with this mortgage.)

The big risk with putting additional money into paying off your low rate mortgage (either a large chunk, or small amounts over time) is that home equity is an illiquid asset. If you want to spend your home equity on something, you either have to sell your house or find a lender to lend you money based on the home equity again - possibly at a much higher rate than the 3% that you are currently paying. For people with sub 4% fixed rate mortgages, I strongly recommend not paying any additional money on your mortgage until you have enough saved up to pay the entire amount off, since it's not real likely that you'll be able to borrow at those type of fixed rates again.

AJ

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307998 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 7:44 PM
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Depending on what type of risk you want to take, you could actually start investing in preferred stocks and other interest/dividend paying securities, using the money that you receive to make the mortgage payment

See, this is when I start to get confused. Why does everybody treat mortgage debt differently? Yes, rates are low, yes I get a tax break, yes on "average" I will get more in the stock market over the long haul. But as long as I carry the debt haven't I essentially borrowed against my house to invest (buy cable, eat out and every other non necessity thing I purchase while carrying the debt)?

I truly do get the numbers part. Especially with a 15 year 3% mortgage, I understand why someone would invest it instead. Statistically, I will come out ahead over the life of the mortgage if I invest that monthly amount.

I will ponder this some more. Right now, according to Quicken, if I throw $1k/month at the debt I'll have the house paid off in less than 7 years. That's six years longer than I'd like. I will have to look at what my risk tolerance is and the likelihood I will earn more in the market (after fees and taxes) short term vs. just applying it to the principal.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308001 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/4/2014 9:45 PM
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See, this is when I start to get confused. Why does everybody treat mortgage debt differently? Yes, rates are low, yes I get a tax break, yes on "average" I will get more in the stock market over the long haul. But as long as I carry the debt haven't I essentially borrowed against my house to invest (buy cable, eat out and every other non necessity thing I purchase while carrying the debt)?

Several reasons.....

- If you have a fixed rate loan, it's a low long-term fixed rate, which is different than any other loan you, as a consumer, are likely to be able to get
- Because it's long term, you can invest in long term debt that can cover the payment for less than the principal balance For example - a $100k loan for 30 years at 3.25% has a payment of $435/month, or $5.2k/year. If one has a portfolio of long term income securities paying 6% annually, one only needs to invest $87k in order to produce enough income to cover the mortgage payment.
- It's secured debt (part of the reason it's a low rate)
- Many people can get a tax break, resulting in an even lower effective rate, or offsetting much of the taxes generated by the income securities

truly do get the numbers part. Especially with a 15 year 3% mortgage, I understand why someone would invest it instead. Statistically, I will come out ahead over the life of the mortgage if I invest that monthly amount.

Actually you should look not at 'investing that monthly amount' - you should look at what you could get an investment of the amount that you owe to pay. With a 15 year mortgage, it's harder to cover the monthly payment with less than the principal than it is with a 30 year mortgage.

Right now, according to Quicken, if I throw $1k/month at the debt I'll have the house paid off in less than 7 years. That's six years longer than I'd like.

How long would it take you to build up your e-fund to your mortgage balance plus an e-fund you would feel comfortable with if you didn't have the mortgage? Prepaying your mortgage without fully paying it off means that it's going to be difficult and/or costly to get that money back if you need it sometime in the future, but before you actually pay the mortgage off. It also doesn't provide you with any cash-flow relief on a monthly basis, because the mortgage still requires the minimum monthly payment to be made. With a 3% fixed rate on a declining debt balance and a 1% variable (possibly rising) rate on an increasing savings balance, it may not take as much longer as you think it will. And in the mean time, you may decide to take some additional risk, and invest part of the money instead of leaving it in your savings account.

AJ

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308003 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 1:05 AM
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See, this is when I start to get confused. Why does everybody treat mortgage debt differently?

The size of the deb,t and that it is an illiquid investment.

If you had sufficient assets to comfortably pay the mortgage and retain a good efund, most would not try to discourage you from paying off your mortgage. A few will, because they prefer investments over paying off a mortgage.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308004 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 8:24 AM
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Right now, according to Quicken, if I throw $1k/month at the debt I'll have the house paid off in less than 7 years. That's six years longer than I'd like. I will have to look at what my risk tolerance is and the likelihood I will earn more in the market (after fees and taxes) short term vs. just applying it to the principal.

To me, the biggest risk of putting your extra money towards the mortgage now vs. putting it into a separate account, whether that is just a savings account or an investment account, is that if you do have an emergency such as you lose your job, you will still owe that mortgage payment every month until it is completely paid off. So if you are 6 years down the road and only owe one more year on your mortgage, but you lose your job and have no income to pay that monthly mortgage payment, your house is still at risk of foreclosure.

If, on the other hand, you have squirrelled away that extra money and you lose your job, you just tap that money to make the monthly payments, and the risk of losing your house is less. Until a mortgage is completely paid off, you still owe that payment every single month, and it does not matter to the bank that you have shaved principal off with extra payments.

For that reason, I find putting the extra money aside until you have enough to pay off the entire balance to be the less risky action. And you'll probably still end up paying it off pretty close to the time you anticipate by prepaying the mortgage. You might even be able to pay it off sooner if you invest the dollars and make a better return than you are paying in interest, which is definitely possible especially given the low rate of your mortgage.

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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308005 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 8:44 AM
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Another thought if there are funds available above the efund amount, pay a lump sum and recast the mortgage. That would bring the payments down.

-Steph


It might also involve fees and an increase in the interest rate.

When my co-workers were discussing how they obtained refinancing for no cost, we tried. The first reason that we couldn't refinance was our mortgage balance was below the minimum for a no cost refinance. The fees for a small mortgage made refinancing impractical.


Recast, not refinance. They're two different things. If you get your loan recast, the interest rate and term remain the same. Only the monthly payment changes because it's been re-amortized.

-Steph

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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308006 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 8:55 AM
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<I.Depending on what type of risk you want to take, you could actually start investing in preferred stocks and other interest/dividend paying securities, using the money that you receive to make the mortgage payment. I have a 3.25% mortgage and currently have an account that has a balance of about 70% of the original principal balance of my current mortgage invested in preferred stocks, dividend paying ETFs and REITs. I am about $200 short of making my entire mortgage payment out of this account every month. (Before I moved, I had a smaller mortgage and I was able to make my entire mortgage payment every month - working on getting there with this mortgage.)

AJ,

Would you share more about your portfolio (you can PM me)? I'm interested in doing something similar now that I'm ready to start investing in taxable (vs tax-advantaged accounts). TIA.

-Steph

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308007 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 2:15 PM
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Thanks AJ, vkg and 2Gifts!

I think I get it now. From a numbers standpoint, I may come out ahead by paying extra on my monthly principal vs. putting the money in regular savings. But I assume the risk of having no extra cash and no way to get the cash out of the mortgage if I needed it....it's almost like putting money in a hole until the mortgage dies. Even though I'm saving money on the interest, I've got no flexibility.

This makes more sense now, because really what I am after is more cashflow flexibility. Paying the mortgage off was just my attempt at achieving that. I could achieve the same thing by investing money somewhere that generates income...or saving up enough to live off the balance until retirement. Using really simple math I ran the following scenarios for dates when I'd have enough to kill the mortgage:

Dec 2020 - Extra $1k towards mortgage
April 2022 - Invest $1k @7% with 15% tax on earnings, pay off balance
Oct 2023 - Savings @ 1%, income tax on earnings, pay off balance

The first I have high risk due to inflexible cashflow. The last my money won't be working very hard for me. Seems logical to pick the middle road, but then I have to figure out where to invest it. But that is probably a topic for another discussion.

Thanks for the help evaluating!

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308009 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 5:52 PM
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vkg,

You wrote, If you had sufficient assets to comfortably pay the mortgage and retain a good efund, most would not try to discourage you from paying off your mortgage. A few will, because they prefer investments over paying off a mortgage.

Boiling it down, its an argument of a fixed return vs. an unknown opportunity cost (what you might or might not make while investing). The lower the return from paying off the mortgage, the more attractive the investment becomes.

For instance, if you could get a 30yr FRM with a 0% APY, would you pay it off? I mean it's interest free money for 30 years! Couldn't you find something to invest in that would be certain enough to give you more than 0% APY that you could invest with enough confidence to sleep at night?

Once you accept that premise, just add a point (or some fraction of a point) to the interest rate until you don't think you can sleep at night. There. That's your tolerance. As long as your mortgage rate would be above that figure, it might be better to try to pay it off. If at or below that rate, invest. For some people, CD rates might be their threshold. In that case, they're probably always going to favor paying off the mortgage.

Others might accept that the S&P500 has had an average annual total return for all calendar 20-year stretches of 11.2% and the worse-case calendar 20-year stretch has been 3.11%. In my opinion that would put a reasonable cut-off rate somewhere between those two figures. My own mortgage sits at 3.50%. My tolerance is probably somewhere in the mid 5s, so my current mortgage will not be getting prepaid.

- Joel

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Author: dianakalt Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308011 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 6:51 PM
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I found myself in a situation a few years ago where I had enough money to totally pay off my mortgage. I chose to do so, but if I was not going to have enough to pay off the mortgage AND have a healthy e-fund as well, I would not have done so.

If I were in your shoes and had 50K lying around, I would keep back whatever would add up to 6-12 months of an emergency fund - assuming you have no other debt besides the mortgage, that is.

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Author: legalwordwarrior Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308012 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 7:51 PM
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I will ponder this some more. Right now, according to Quicken, if I throw $1k/month at the debt I'll have the house paid off in less than 7 years. That's six years longer than I'd like. I will have to look at what my risk tolerance is and the likelihood I will earn more in the market (after fees and taxes) short term vs. just applying it to the principal.

Okay, I haven't read further ahead, but can you explain why 6 more years is so objectionable to you? You took out a 15 yr. mortgage, correct? Why do you want to pay it off so quickly?

I think the reason most people suggest that mortgage debt is good debt probably has to do with the house itself being worth significantly more than the amount owed against it, even with the interest, whereas unsecured debt is just debt. It could also have something to do with the fact that you are always going to have some sort of money being paid out for housing, whether it's for a mortgage or just for the insurance and property taxes on the house.

I do feel your pain. We owe less than $20K on our 15 yr mortgage principal and I would love to pay it off early. On the plus side, I know we have over #100K equity available if we decided to sell.


LWW

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308013 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 8:21 PM
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Okay, I haven't read further ahead, but can you explain why 6 more years is so objectionable to you?

If you read further you'll see the others enlightened me, so I get it now.

But, here's the gist. I've got enough money saved in retirement accounts that, even with conservative estimates, I'll have plenty for retirement. I do not like my job, my husband really likes his. If I can work out the short term cash flow I can either quit or find a different job or just work fewer hours. Since our mortgage is our biggest cashflow drain, I thought I'd try to finagle a way to make it disappear. Just looking at options.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308014 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/5/2014 9:41 PM
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I think the reason most people suggest that mortgage debt is good debt probably has to do with the house itself being worth significantly more than the amount owed against it, even with the interest, whereas unsecured debt is just debt.

Unlike credit card debt, a mortgage is used to buy a hopefully appreciating asset and it provides housing (imputed rent) in the process.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308015 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/6/2014 12:51 AM
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Would you share more about your portfolio (you can PM me)? I'm interested in doing something similar now that I'm ready to start investing in taxable (vs tax-advantaged accounts). TIA.

Here's some general information:

I use www.quantumonline.com They have some pretty comprehensive lists of preferred stocks, REITs, closed end funds, convertibles, ETFs, etc. They also provide lots of information about individual securities - coupon rates, call dates, links to the prospectus, etc. Be sure you understand call provisions and conversion provisions, as applicable.

Other good resources can be the REIT board here on TMF, Morningstar, the WSJ and www.seekingalpha.com In this post on the REIT board http://boards.fool.com/you-might-look-at-the-portfolios-belo... LordXot provides a link to a spreadsheet that can be used to screen securities and several Morningstar links with some portfolio ideas. Looking at what some of the preferred security ETFs/mutual funds hold in their portfolio can give you some ideas, too.

As a general rule, for securities that are callable, or have a call date in the near future, I will pay, at most, par plus accrued interest, and I try to buy under par. On the other hand, securities under par in the current low rate environment may have some significant risk factors, so you need to do due diligence on the underlying company. When looking at income paying securities, one of the big things to look at is cash flow - make sure the company has enough cash flow to cover the dividends they have committed to without having to dig into their capital.

If you are buying a callable security, make sure you understand what the YTW (yield to worst) is, as well as the current yield.

Beware of buying higher rate callable securities. If they haven't already been called, there's probably a reason - the company doesn't have the cash to call them, or can't issue more debt at a lower rate in order to call the higher rate security - which, in this low rate environment, can be a red flag.

Many of these securities are pretty thinly traded and can be volatile, so I buy using limit orders. Sometimes they take a while (days/weeks) to fill, so you have to be patient.

Understand that if rates go up, the value of income producing assets will fall, in line with the perceived risk. If you are comfortable with collecting the income, and don't plan on cashing in the security before it matures or is called, that can be okay. If you may need/want to sell before maturity/call, then you may have to eat a loss. To help protect against these losses, you can try to match security maturity dates with times that you anticipate needing funds - when you want to replace your car, pay for college for a child, buy your retirement home, pay off your mortgage, etc.

I try to not put more than 10% or so of my income producing portfolio in a single company, so that if something bad does happen, I don't take a really big hit.

Good luck - it can be very freeing to be able to say "I don't need to worry about where my mortgage payment is coming from - I collect enough money from my investments to pay it every month".

AJ

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Author: legalwordwarrior Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308016 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/6/2014 8:14 AM
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I do not like my job, my husband really likes his. If I can work out the short term cash flow I can either quit or find a different job or just work fewer hours. Since our mortgage is our biggest cashflow drain, I thought I'd try to finagle a way to make it disappear. Just looking at options.

Ah, I see. If you had led with that, you might have received different answers. Life is too short to work at a job you don't like if you can figure out a way to be able to do something you do enjoy. Hope you find a workaround for it.

LWW

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308019 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/6/2014 1:33 PM
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vkg,

You wrote, Unlike credit card debt, a mortgage is used to buy a hopefully appreciating asset and it provides housing (imputed rent) in the process.

And while this is the usual rational for calling a mortgage a "good" debt, it's an over-simplification. What you're purchasing has little to do with the value of the debt you're assuming. It is true you are saving yourself rent, but the buying of an appreciating asset is the same whether it is land, a stock, a mutual fund or art.

Whether or not going into debt for the purchase of such items is a good idea depends on the costs and risks associated with the debt. A mortgage puts the roof over your head on the line against your ability to repay - that's a pretty big risk. But its usually more than offset by generous terms - very low rate and long repayment period.

Its these generous terms that usually make taking a mortgage on a purchase worthwhile. Otherwise you might be better off renting ... or paying cash, if you have it.

In fact there are other frictional costs associated with purchasing real estate that make it impractical (or "good debt") for some people that can't afford to be tied to one location for long by owning a property. For those people, a mortgage probably wouldn't be practical even if it were a 0% APR.

I know we've discussed this topic on this board many times before, but I figure it bears repeating for any newbies that might be reading the thread...

- Joel

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308020 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/6/2014 2:18 PM
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In fact there are other frictional costs associated with purchasing real estate that make it impractical (or "good debt") for some people that can't afford to be tied to one location for long by owning a property. For those people, a mortgage probably wouldn't be practical even if it were a 0% APR.

or they have a reallocation package that pays the costs, but that doesn't help with risk associated with short term ownership.

I have seen irrational acts with real estate. Moving to California having bought at the high of their local real estate market and sold at a low, and then deciding they didn't want to stay in California. Again, having bought at the high and sold at a low.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308026 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/8/2014 4:41 PM
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The maximum tax-rate on dividends received is 15% in the highest income tax bracket.

Kahuna, CFA
Investment Professional
1974 - Present


That ship sailed beginning in 2013.

I would think that an investment professional who touts himself as such would be required to either not give advice on areas out of his expertise, or would have to do more diligence in keeping up with up with the laws that he is giving advice on.

From page 5 of the 2013 Form 1040 instructions http://www.irs.gov/pub/irs-pdf/i1040.pdf (bolding added):

Change in tax rates. The highest tax rate for 2013 is 39.6%. For details, see the 2013 Tax Computation Worksheet or the 2013 Tax Rate Schedules, later.

Tax rate on net capital gain and qualified dividends. The maximum tax rate of 15% on net capital gain and qualified dividends has increased to 20% for some taxpayers. The Qualified Dividends and Capital Gain Tax Worksheet in the line 44 instructions reflects this new, higher rate.


AJ

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Author: flounderlady Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308047 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 3/26/2014 7:55 PM
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Mortgage debt isn't any different than any other debt, it's just there for a longer period of time.

You want to leave your efund alone. You will need it for an emergency.
Don't take out an equity loan on your house they expire after 15 years and the bank can call the loan at any time. In order to get the equity loan you will have to pay for an appraisal, origination fees, and closing costs.

If you want to invest for long term appreciation, it's better to purchase a quality mutual fund, set up the dividends & capital gains as a drip and over a 15 year period you will have doubled your money. Mutual funds only require $2500 to start. You'll sleep better with mutuals rather than individual stocks.

In order to increase your retirement accounts, every time you and husband get a pay increase take half of the net and put it into your 401K which should be invested in stock funds and a minimum in money markets. Just remember the money you save on a pretax basis will be taxed when you start withdrawals after 59-1/2. If you can, set up another savings account that you contribute $40 a week to as an after tax retirement fund. Just don't go completely pretax on everything as when you get to retirement you will wind up in a higher tax bracket if you only make pretax investments.

Paying off your mortgage quickly to get out of debt really is a good thing as long as you save the monthly payment rather than spend it.

The one thing I found is to save a little bit every week and you will have a large amount over time.

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 308277 of 308782
Subject: Re: Why is Mortgage Debt "Different" Date: 6/19/2014 9:44 PM
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<<So here's my question. Right now I have about $50k in efund money, just sitting there in cash earning a piddly 1%. I could use that cash to pay down my mortgage and get a HELOC in case of emergencies.
>>


$50K is a lot of cash sitting around waiting for a need to arise.

I would carefully examine how much cash you really need to have on hand to protect yourself from unexpected problems. If you have more than you reasonably need, I think there's a good argument for using some of it to pay down the mortgage.

That would include considering what other assets you have that could be liquidated should a need arise. Perhaps you have stocks or life insurance that could be sold or borrowed against.

I consider ALL my assets as part of an "emergency fund." Some are highly liquid such as checking or savings accounts. Other are illiquid such as real estate that would take time and cost money to convert into cash, but could be done if a need was really there.

So look at your asset and income as a total scheme that can be manipulated in various ways to meet your varying needs.



Seattle Pioneer

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