A new debate on paying off the mortgage (or not).

[rec7]

Originally Posted by TickTock

Money magazine regularly recommends pulling equity out of the house and investing it in the market on their 'One Family's Finances' (or whatever the proper title is) column.

Bleh. My suggestion - with $800,000 equity in your $1,100,000 home, sell the freaking home, buy a $300,000 home outright and invest the $500,000!

But that's just me.

On taking out a loan at 5.5% (or whatever) and investing it in a balanced AA - yes, the long-term math favors it... BUT! in the short term, you can't predict how markets will perform. If they underperform the expected return for the next ten years, how does it affect your plans? (Doesn't necessarily tip the decision one way or the other, but it should be considered.) For me, the certainty of lower monthly expenses via paying off the mortgage trumps the expected higher return of borrowing and investing. I'm fiscally conservative that way.

That's my thinking too sell the expensive home buy a cheaper one then but that money in the market. That way if the market tanks you still have a paid for home.

[cute fuzzy bunny]

Originally Posted by cjking

This illustrates why common sense should always be allowed to override Modern Portfolio Theory.

Indeed. A portfolio of half small cap value and half commodities can throw off a 6.something percent safe withdrawal rate, if you have the guts and future returns are similar to the past.

Enjoy the ride, and bring plenty of pepto bismol and dramamine.

It certainly isnt quite as simple as saying "Why, my mortgage is only 6% and I can make 8% annual returns, so I can make 2%!!!"...

[cjking]

It certainly isnt quite as simple as saying "Why, my mortgage is only 6% and I can make 8% annual returns, so I can make 2%!!!"...

Funnily enough, I have the option to do something like that. I could borrow at 6.1% to invest in a very safe REIT that's paying dividends of 7.8%.

If I didn't take into account the utility of money, I might be tempted. The fact is that the extra income I would earn would make no difference to my life. Since the extra income is of negligible value, it's not worth taking even a small risk of a significant loss to make it.

[cute fuzzy bunny]

I'd like the ticker of the very safe reit that pays out 7.8% because I would invest about two million in it.

Thats if it was safe and paid 7.8% that wasnt severely reduced by taxes or other fees/costs.

Heck I might put $3m into anything very safe that produced almost 8%.

[cjking]

It won't help you, as it's British. (Technically it's not a REIT either, even though it is an Investment Trust that invests in Commercial Property.)

If you are curious, Google Foreign & Colonial Commercial Property Trust, ticker FCPT.

If you look at figures over the last year, it won't look that safe. However I would say the current yield should make it safe. Mind you I would have said the same thing at the beginning of June, and the sector fell another 20% in the last two weeks of June.

It has relatively little borrowing and the dividend income is covered by rental income from leases that extend several years, on average.

(Actually the dividend yield is currently 8%, for my decision making purposes I like to use a slightly different figure, calculated from the accounts, which is where I got 7.8%.)

The following link shows the share price is down 52% on a year ago. (As I write I realise you might be starting to doubt my grasp of the meaning of the word "safe." Well it's safer at the current price than at its previous one!)

Details for F&C COMMERCIAL (FCPT) / Market data / Selftrade

The following link contains more information. (You can also use it to link to a list of other funds in the sector, which should demonstrate it's the sector as a whole that's fallen out of favour, the share price fall isn't a result of any particular problem with this fund.)

http://www.trustnet.com/it/funds/?fund=67920

[cute fuzzy bunny]

Originally Posted by cjking

I realise you might be starting to doubt my grasp of the meaning of the word "safe."

Quite perceptive of you. Not exactly US treasuries...

Dont feel bad, you're doing better than the guy that thinks a fund of commodities and foreign bonds is secure from loss and as safe as a money market acct.

Sounds like it has plenty of potential for loss and/or volatility but you think its all wrung out. I dont keep up with real estate in britain that much but I did see an article just a short while that said the RE bubble there in both residential and commercial RE was bigger than the US bubble and still potentially had a good ways to drop.

[Texas Proud]

Originally Posted by cjking

It won't help you, as it's British. (Technically it's not a REIT either, even though it is an Investment Trust that invests in Commercial Property.)

If you are curious, Google Foreign & Colonial Commercial Property Trust, ticker FCPT.

If you look at figures over the last year, it won't look that safe. However I would say the current yield should make it safe. Mind you I would have said the same thing at the beginning of June, and the sector fell another 20% in the last two weeks of June.

It has relatively little borrowing and the dividend income is covered by rental income from leases that extend several years, on average.

(Actually the dividend yield is currently 8%, for my decision making purposes I like to use a slightly different figure, calculated from the accounts, which is where I got 7.8%.)

The following link shows the share price is down 52% on a year ago. (As I write I realise you might be starting to doubt my grasp of the meaning of the word "safe." Well it's safer at the current price than at its previous one!)

Details for F&C COMMERCIAL (FCPT) / Market data / Selftrade

The following link contains more information. (You can also use it to link to a list of other funds in the sector, which should demonstrate it's the sector as a whole that's fallen out of favour, the share price fall isn't a result of any particular problem with this fund.)

Trustnet Investment Trusts / Fund factsheet

The problem is RENT is only as good as the underlying company that is paying it.... but once that company (such as Enron etc.) stop paying their over inflated rent... you are now back to market rent... or NO rent.... and that is the problem with commercial real estate.... and safe....

[Ultimate Cheapskate]

Golly. My advice: Just pay off your &^%#$# mortgage ASAP and get on with enjoying life and the home you OWN, rather than living your life in a spreadsheet.

It's always interesting to talk with people about this issue (and I do, a lot), as the ones who have never experienced the joy of life without a mortgage hanging over their heads generally seem preoccupied with the math, alternative investments, etc., while those without a mortgage seem to be smiling a lot, particularly lately. You only have so much time to worry about this stuff, so what's that time worth?

Stay Cheap!
-Jeff Yeager

[Nords]

Originally Posted by cute fuzzy bunny

If you went higher on the risk scale you'd have felt like an idiot and kicked yourself from 2000-2003, felt like a genius from 2003-2005, and you feel like an idiot again this year.
I hate plans like that.

We're keeping ours until 2034. How do we feel over the next 26 years?

Clearly we'll have to come up with enough deductions until then to overcome the standard deduction...

[cute fuzzy bunny]

I imagine you'll have some years where you feel like geniuses and some years where you're feeling alright because you're paying the bills with a COLA'd pension and have good investing discipline?

I cant come up with enough deductions to break even with the standard deduction. Even pushing it a little the best I can cough up is about 8k worth.

[Bestwifeever]

Question for those who are in the pay-off-the-mortgage campe--would you take the tax hit from a traditional IRA to pay off a $250K mortgage at one fell swoop?

[Frugality_of_Apathy]

Originally Posted by Bestwifeever

Question for those who are in the pay-off-the-mortgage campe--would you take the tax hit from a traditional IRA to pay off a $250K mortgage at one fell swoop?

Actually that's not a bad idea. Not putting it in an IRA, of course, but instead of paying extra on the principle just store up the money in other investments until you have enough to pay off the house. That way you get the maximum income deductions by having mostly interest and before the interest drops below the standard deduction you pay it off in full.

[Alan]

Originally Posted by Bestwifeever

Question for those who are in the pay-off-the-mortgage campe--would you take the tax hit from a traditional IRA to pay off a $250K mortgage at one fell swoop?

As we approached RE and started the re-allocation process of building cash/low risk buckets it was obvious (to me at least) that paying off the 6.5% mortgage was a good approach before I really started building the cash up.

We are still under age 59.5 so the tax hit of cashing a traditional IRA to pay a mortgage would not make sense to me and I wouldn't do it.

[cute fuzzy bunny]

I agree. I wouldnt take a big tax hit just to make the mortgage go away.

Before I er'd I kicked a little extra principal payment in every month and didnt worry about bond allocations. Shortly after I ER'd I paid off the dang mortgage like Jeff said and stopped worrying about a bunch of things.

7 years later, I'm still not worrying about a bunch of things.

If the little bit I could have arbed from having a mortgage would have made or broken my retirement, I'd have stayed at work another year.

If it didnt really make a difference, why worry about it?

[chinaco]

I intend to pay off our mortgage by the time I ER in 3 years.

We also have plans of downsizing... but that depends on how the housing market is in 3 years

[ls99]

Originally Posted by Ultimate Cheapskate

Golly. My advice: Just pay off your &^%#$# mortgage ASAP and get on with enjoying life and the home you OWN, rather than living your life in a spreadsheet.

what's that time worth?

Stay Cheap!
-Jeff Yeager

We did exactly that. Paid off mortgage 2 years ago. Looking at the real estate gyrations is now just amusing.
Of course if we had to sell then buy, it would not be amusing. Without a mortgage life is good.

[Ronstar]

Originally Posted by Ultimate Cheapskate

Golly. My advice: Just pay off your &^%#$# mortgage ASAP and get on with enjoying life and the home you OWN, rather than living your life in a spreadsheet.

It's always interesting to talk with people about this issue (and I do, a lot), as the ones who have never experienced the joy of life without a mortgage hanging over their heads generally seem preoccupied with the math, alternative investments, etc., while those without a mortgage seem to be smiling a lot, particularly lately. You only have so much time to worry about this stuff, so what's that time worth?

Stay Cheap!
-Jeff Yeager

Great advice! We paid our house mortgage off 10 years ago and it really made saving a lot easier - to the point where FI came faster. Its a great peace of mind knowing that I can quit work any time I want without a mortgage hanging over my head. I now work because I want to - not because I have to.

[Want2retire]

Originally Posted by Ronstar

Great advice! We paid our house mortgage off 10 years ago and it really made saving a lot easier - to the point where FI came faster. Its a great peace of mind knowing that I can quit work any time I want without a mortgage hanging over my head. I now work because I want to - not because I have to.

I know what you mean - - I can hardly believe how fast the money has been piling up since I paid off my mortgage.

Still, despite the fact that most of the retirees on this board do not have a mortgage (as I recall, according to a poll on that topic), paying off a mortgage is still a matter of contention and not something we all agree is best. Many on this forum feel they do better maintaining a mortgage, or even paying rent, to increase their available funds for investing.

We have had many threads on this topic and despite the fact that I still love to talk about how I paid off my mortgage, some of the long-time members of the ER board tire of posts about paying off mortgages pretty easily.

Originally Posted by Bestwifeever

Question for those who are in the pay-off-the-mortgage campe--would you take the tax hit from a traditional IRA to pay off a $250K mortgage at one fell swoop?

I wouldn't take money out of an IRA to pay off a mortgage, tax hit or not. I am in the accumulation phase, which to me means maximum contributions to my (Roth) IRA and 401K (TSP) while I paid off my mortgage. I did not, and would never take money from my tax advantaged accounts to pay off the mortgage. You will need that tax advantaged account after ER, as a place to keep funds that are not tax efficient. It is not easy to pay off a mortgage, but that is no reason to take a short-cut that will amount to shooting yourself in the foot (in my opinion).