I'm leaning on paying off a mortgage before this AI bubble pops. Thoughts?
It's the last debt that I have. The loan is 3.5% @ 25 years left, ugh. 🙁 But the payment is only $1k/mon.
A rare factor: it is a homestead loan at a farmer's coop, so I get a paycheck from them for being a member. It's $1k-2k / year, depending on the Coop's finances.
To pay it off, I'd need to sell all stock that are in this AI bull run. The Nasdaq is on fire this year. It won't last forever, so I'm considering this option.
These stocks are not part of any retirement fund … they were part of a cushy comp plan from a previous employer. I've simply held onto them because I detest trading.
Many of these stocks give dividend payments. I like dividend checks. 🙂 But they don't pay the bills.
I'm trying to remember the maths about deciding these things … Any links, readings?
The last gasp: a mortgage vs. this AI bull run
byu/vap0rtranz infinancialindependence
Posted by vap0rtranz
15 Comments
“Markets can remain irrational longer than you can remain solvent.” -Keynes
You mostly need to think of how this impacts you. You will pay taxes on the gains. Is that worth the $1k/month cash flow that frees up? What is your timeline to retirement with/without it?
I am in a pretty similar place. 2.875% mortgage and paying it off would free up $24,000/year from a cash flow perspective. But I’d rather leave it in the market. It might be a bubble and this could be a “lost decade” of gains coming up. But my investment thesis is that I can’t predict the future so this could just be the beginning of a bubble growing or it could be an ATH for the next 10 years. So I will continue to VTSAX and chill.
I’m sure there is more complex math taking taxes into consideration, but I just think of it as can you make more in the market than your 3.5% mortgage over 25 years?
The certainty with which people talk about the AI bubble popping is making me doubt it will happen at all. It’s like the inverse of the shoe shiner talking about stocks to ‘buy now!’
Why not just sell half, pay off partial mortage, let the rest keep going. If AI dumps the value of your house is gonna go down too, everything will.
So….timing the market.
I also like the “AI bubble before it pops” as if it being a bubble is a foregone conclusion.
are you ok with the stock market continuing to rip up another 10-20% over the next few years and you not agonize over the missed gains? because you will almost assuredly miss out on gains
That mortgage is a gift. People would sell much of their labor for that rate.
If you go forward with the plan, consider the impact / benefit of splitting the equity sales between Dec and Jan. Does the help keep you from bumping into a higher bracket in either year?
If you are concerned about the risk, sell some stocks and put the money in lower risk investments that yield more than the 3.5% you’re paying on your mortgage. With a rate that low it makes no sense to pay it off.
3.5% is some of the cheapest money we’re likely to see in the foreseeable future. I don’t know why anyone would give up such a cheap mortgage by paying it back early.
Don’t pay the mortgage off at that low rate. If you’re holding specific stocks or QQQ, you might want to trade that in for a total market index.
Here’s how I would split the difference. Pick when you want to be mortgage free – say 10 years. Then look at your amortization schedule and see what the balance is in 10 years. Then buy a 10 year US Zero coupon bond, preferably in a Roth. Math looks like this:
Current Balance – $200k
10 year Balance – $150k
10 Year Zero – 64.389
Current cost to pay off in 10 years = $150k x .64389 = $96,583
Sell $96k in stock and let the rest ride. You are guaranteed to pay off your mortgage in 10 years and still have 10 years to let the rest grow/diversify in your portfolio. You reduce your cap gains and keep your interest deduction for 10 years if you itemize.
If you do it in taxable you will have “phantom” interest to deal with, but not a big deal, just one additional tax form.
Alternative thought: diversify slightly into something lower risk than the stock market but higher return than the loan interest. I think there’s probably high yield savings accounts that earn a little more than 3.5% these days. You lower your potential up side and down side since it essentially sounds to me like you’re over exposed to one asset type.
Just because “AI bubble” is the new buzz phrase doesn’t mean it’s true. The market is going crazy because AI has the potential to be the most significant invention in human history. We could be in a bubble or at the bottom of the single greatest exponential we’ll ever see.
The key is to mentally prepare yourself ahead of time so that either decision you make you can look back on it without regret if it didn’t play out.