Monday, May 23, 2016


Aka, why I will not be paying down my mortgage down (except to get to parity before I refinanced) anytime in the near future. Yep, I am addressing the holy war item of the personal finance world, "Should I pay down my mortgage?" In my case? No. *mostly

As a veteran (key since I have a 10% disability which allows for no cost refinancing) I have refi'd a number of times (and this is the third property that I have owned). I think I may be done for while now, since I am down to 3.25% APR. Now I love spreadsheets, so I spent quite some time crunching numbers. Because of the refinance I got back my escrow and skipped a payment, so I ended up with a fairly nice cash reserve (that I parked in a Betterment Safety Net account (40% stocks, 60% Bonds)) that I will slowly draw down over the next 4.5 years to get the principle down to the same amount I would have left on my old loan (and ends a month earlier than my previous loan). Did I mention that I really, really love using spreadsheets (and as a good husband I make sure that my wife has access to them and understands them)?

But then? I am going to stop (for a long time most likely). Why? Because mortgages are "good" debt. Right now even when I pull out the standard deduction and itemize, I come out ahead. And while the end result of an early paydown is nice (no payment other than insurance and Taxes!) you also have an asset that is mostly non-liquid (maybe a bit by HELOC, but those are tightening up like mortgages have) asset that, when you look at the historic return on property falls into the lowest category, below even bonds (note I said historically, this period seems to be an anomaly). I personally have set the goal of not letting my home equity represent more than 25% of my family's net worth (and at no point exceeding the amount I have in my cash/taxable accounts, like it does right now).

My "net" cost

  • P+ I + T + Insurance (no PMI, as a VA loan there is no PMI, even if I didn't already have 20%+ equity)
  • I + T is deductible (whatever your top marginal tax rate is, in my case that is ~33% for both Federal and State)
  • So gross cost is P + (I+T) * 2/3 + Insurance (but wait, if you look at it as I see it)
  • However, remember that P is increasing your share of the asset (increasing equity, lowering the overall loan... effectively an investment (a bad one, since in general property that you live in is among your worst asset classes historically)), so really, the big question is can you get similar housing for the cost of 2/3 * (I+T) + Insurance? In my area? You can probably hear my laughter from wherever you are reading this.
Now there are some additional costs. Maintenance is another factor (HVAC's die, Roof's rot, painting needs to occur) but relative to my mortgage payment (and like a good saver I even have a special account for home maintenance that I automatically stuff money into every month (I need to do more but what I have it at is barely twice the cost of the insurance... which is 1/60th of my payment)) it is fairly low. Because I have a townhouse there is an association fee (we have a shared garage so there is some value from that on top of landscaping and snow removal) and there is always the hidden risk of an assessment in the future.

On a final note there will be a point in the far (15-20 year range) that this situation changes. As your Interest component decreases there may come a point where the mortgage slips into the "bad" debt category, where the net cost makes a standard deduction viable again, which removes the tax advantage from the mortgage. And by that point, based on my portfolio it may make sense to start piling on to the mortgage again. 

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