Cash and Home Mortgage...

[tjt]

I have $250K in cash for my PP.  I owe $160K on my mortgage, which is at 3.2%.  It seems silly to sit on all this cash that makes nothing while I pay out 5K in mortgage interest every year (ignore deductions, I'm pretty close to the standard deduction).

So I was thinking about paying off my mortgage and treating that as "cash."  The argument I see against my idea is in the liquidity of the mortgage.  However, I would still have $90K in cash which should easily allow me to reallocate 25/25/25/25 when that time comes. 

Thoughts?  Am I missing anything fundamental?

[Bob]

I realize there are pros and cons to each Course of Action:  either pay off the 3.2% mortgage or keep the 250k cash.  This is just my "2 cents" worth:  I don't like debt.  If it was me, I would pay off the mortgage and eliminate the 5K of interest going out every year and then use the remaining 90k for your PP reallocation(s).  But we are all different.  We have different levels of emotional tolerance toward debt and our investments.  Only you can make the right decision for you.  There are worse things in life than having a "mortgage free" house. 

As a side note, an additional consideration might be how long you are planning to remain in your house.  If you are planning on moving in a couple of years, I would be less inclined to pay off the mortgage.  But if you are planning on living there for the foreseeable future, then paying of the mortgage would make more sense to me.

[smurff]

Cash is cash.  A home mortgage is not cash, it is debt, and a declining balance on a home mortgage is not equivalent to cash, under anyone's definition.

"Cash" in the Harry Browne Permanent Portfolio refers to Treasury bills (a maturity of less than one year), as well as mutual funds and ETFs made up exclusively from these Treasury bills.  Over time the definition has expanded to include other short-term federal government-issued and -guaranteed instruments, including Savings Bonds (I-Bonds and E-Bonds) with at least 12 months of age on them, and some definitions even consider FDIC-insured savings accounts and certificates of deposit.  The definition also allows for smaller amounts of physical currency held at home, to use for true emergencies.

How much cash to keep in the PP is a separate issue from the pros and cons of paying off a mortgage.  If you decide to use part of the $250,000 cash to pay off the $160,000 mortgage, your cash balance will decline to  $90,000. 

[KevinW]

Yeah.  Cash and home equity are different things and are not interchangeable.  The PP depends on cash to be perfectly stable and liquid during a tight-money recession.  Home equity doesn't necessarily do that, as shown in 2008.

If it were me, I'd probably follow bob's advice: use part of the cash to pay off the mortgage, and rebalance if necessary.

[tjt]

Thanks guys. It sounds like what I'm really proposing is a 25/25/25/(10/15) where the 10/15 is cash/home.  If I do this, I'm betting that my home price won't go down by ~3.2% per year. 

Not sure if I'm going to do it yet, but appreciate everyone's perspective.

[jackely]

I have $250K in cash for my PP.  I owe $160K on my mortgage, which is at 3.2%.  It seems silly to sit on all this cash that makes nothing while I pay out 5K in mortgage interest every year (ignore deductions, I'm pretty close to the standard deduction).

I don't have a cool million in my PP yet but if I did I don't think I'd feel any different about it than what I am now saying.

And I don't even have a 3.2% mortgage. Where did you even get that kind of rate? Mine is 6.25%.

Given the choice of cash in my PP versus paying off my mortgage I'll take the cash any day, hands down. As long as the cash is equal to or greater than the mortgage then my house is virtually paid for in my way of thinking. Seriously, if I'm thinking about paying off the mortgage with the cash I have on hand, then I can do that next week, tomorrow, next year, whenever it feels right, don't you think? Once I do it I bought the bullet. At a 3.2% mortgage rate, give me a break. Why should I even think about it that hard?

[MarySB]

It seems to me there are pros and cons to each. We were advised to pay off our house several years ago. My husband did not want to tie up so much cash in one investment. It turns out that the same advisor has changed her opinion.

Personally, I think my husband called it right. We put still have 1/3 of our house to pay off. We are paying extra to the principle every month. A few weeks ago, we were approached by our bank to reduce our interest rate to 4.375% with closing costs paid by the lender. We will continue to pay the same as we have been paying, pay off the house sooner than originally planned, and keep our savings intact.

Some people like the peace of mind of having their home paid off, some prefer to have the peace of mind of having more in savings, especially if their savings rate is greater than the loan's interest rate.

Now, if this was the 1970's and interest rates on mortgages was in the teens, I think that would be a whole different story

[magneto]

The mortgage rate of 3.2% is a nominal rate.  Bear in mind adjusted for inflation the real cost of the mortgage is 3.2% minus inflation which would be negative here in the UK and not much above zero I believe in the USA. 

If the 3.2% is a fixed rate with US inflation say at 3.2% then this could be considered free leverage for the PP portfolio.

All in all there is no need for haste in making a decision providing the PP cash can be made to earn a real rate above inflation, (I Bonds etc)

[jackely]

Didn't get that your house was in the UK. You have great rates.

Can't remember the name of the book I read a few years ago but the author made a very convincing case for why you should not only NOT pay off the mortgage but you should always keep the mortgage as close to 100 percent of equity as possible.

But again, this was in the U.S.A. where we probably have tax laws and mortgage rates that are probably a lot different.

The mortgage rate of 3.2% is a nominal rate.  Bear in mind adjusted for inflation the real cost of the mortgage is 3.2% minus inflation which would be negative here in the UK and not much above zero I believe in the USA.  

If the 3.2% is a fixed rate with US inflation say at 3.2% then this could be considered free leverage for the PP portfolio.

All in all there is no need for haste in making a decision providing the PP cash can be made to earn a real rate above inflation, (I Bonds etc)

[magneto]

Confusion reigns.

The responder (magneto) is in UK, not the OP (tjt).  We are therefore talking about a US rate of 3.2%.

Hope this clarifies.

Regards