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Old 08-23-2016, 07:19 AM   #21
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I admit to having been influenced by Dave Ramsey's Baby Steps, all of which we've accomplished except paying off the mortgage.
I like Dave Ramsey, but keep in mind much of his advice is for people without money dicispline so the message is pragmatic and simple to get people on track. He rarely, if ever, goes into the next level of money management often discussed here.
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Old 08-23-2016, 07:33 AM   #22
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I like Dave Ramsey, but keep in mind much of his advice is for people without money dicispline so the message is pragmatic and simple to get people on track. He rarely, if ever, goes into the next level of money management often discussed here.
Agree, according to Dave credit cards were invented by the devil which is absurd. He'll make fun of callers who have credit cards. In this day and age the only reason not to have use of the float, the card bonuses and the card protections is if you are addicted to spending money and have no control over yourself. Not everyone that call him has those problems, but the dude is so dogmatic I can't stand to listen to him.

I get incensed when he tells some with a few thousand dollars left on their car payments to dump that car and buy a 1000 dollar beater. Maybe they shouldn't have gotten the car but to trade off an almost payed off car that should continue to give you years of reliable service for a piece of junk with bad tires is crappy advice.
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Old 08-23-2016, 10:21 AM   #23
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We were in a similar situation 5 years pre-ER... large tax-deferred, modest taxable, and a big mortgage. We mainly focused on building the taxable account, while continuing to max out tax-deferred as well. Periodically, we also made large principal payments on the mortgage, but without any intent to pay it off.

By ER, the taxable account had grown from 5% of the total to 40%. The mortgage balance had dropped to around 6% of the portfolio. We had 9 years left and the payments were still quite high. We looked at whether to pay it off or refi at a low rate. Ultimately decided to pay it off.

As 52 year-old retirees, our main objective was to reduce reliance on portfolio withdrawals to pay the bills. We also bought two rental houses for cash and elected the annuity option on two DB pensions for same reason. Without the mortgage, we have significantly lower expenses and steady income to cover it all. We only withdraw from the nestegg for large discretionary spending. With SS still to come, and large tax-deferred balances waiting, we don't worry too much about the smaller taxable portfolio.

Later on, when we downsize, we might consider holding a mortgage on the smaller place if rates are still low. But this early in retirement, sequence-of-returns risk is our main concern. In our case, the retirement plan doesn't require a leveraged balance sheet to meet our goals. So we see it as just another way to reduce risk and uncertainty at the most susceptible point in early retirement.
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Old 08-23-2016, 08:35 PM   #24
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- paid off 4% mortgage in 2008.
At that time it was the most secure way to make 4% return - and in many ways tax free return.
Well, that's the thing. You were making a decision for a long-term investment based on a short-term timeframe. That is almost always a mistake, financially.

Sure, in 2008 4% was a good return. But by paying off the mortgage you locked that money in, and now that the market has doubled from then -- you missed out on all that.

Back of envelope figures:
Say you took out $100K from the S&P500 in 2009 to pay off your $100K mortgage. That saved you 4% * 7 yrs = 28% = $28,000.

If you had left in in the S&P500, it would now be around $200,000. Minus $28,000 of mortgage interest = $172,000.
You could now pay off the $100K mortgage and still have $72,000 remaining.

That short-term decision cost you $72,000 long term.

Everybody is different, but me -- I treasure having more money more than I treasure having no mortgage.
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Old 08-23-2016, 10:09 PM   #25
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I don't have the smarts to make a proper analysis, but the mortgage payoff dilemma is tied to many factors.
- interest rate declining or rising.
- timing of decision, such as where in the economic and market cycle are we
- benefit of deduction for mortgage interest, if any
- available cash on hand
- where in the payment schedule you are.

We paid off a mortgage early in 2005, I believe. The rate was in the area of 6-8%. We made double and triple principal payments when possible, say for 10 years. Then we made a lump sum payment to close the loan. It made tough times a lot easier.
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Old 08-23-2016, 10:57 PM   #26
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Well, that's the thing. You were making a decision for a long-term investment based on a short-term timeframe. That is almost always a mistake, financially.

Sure, in 2008 4% was a good return. But by paying off the mortgage you locked that money in, and now that the market has doubled from then -- you missed out on all that.

Back of envelope figures:
Say you took out $100K from the S&P500 in 2009 to pay off your $100K mortgage. That saved you 4% * 7 yrs = 28% = $28,000.

If you had left in in the S&P500, it would now be around $200,000. Minus $28,000 of mortgage interest = $172,000.
You could now pay off the $100K mortgage and still have $72,000 remaining.

That short-term decision cost you $72,000 long term.

Everybody is different, but me -- I treasure having more money more than I treasure having no mortgage.
You are cherry picking the dates in your example instead use Aug 1, 2008 since they paid it off in 2008 (not 2009) and they get a 70% increase.
Which would be 170K minus the 28K mortgage interest = 142K

So not quite as good.

While in general , what you say is true very often, sometimes it is not, take the case of 1929 when being in stocks was a killer.

I'm one without a mortgage, and although these low rates are tempting to lock in a large borrowed amount at low rates, I counter that with the fact that being mortgage free is a hedge against something that would make stocks or other investments worth much less.

Could even be as simple as 90% tax on any earnings.
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Old 08-24-2016, 06:51 AM   #27
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Well, that's the thing. You were making a decision for a long-term investment based on a short-term timeframe. That is almost always a mistake, financially.

Sure, in 2008 4% was a good return. But by paying off the mortgage you locked that money in, and now that the market has doubled from then -- you missed out on all that.

Back of envelope figures:
Say you took out $100K from the S&P500 in 2009 to pay off your $100K mortgage. That saved you 4% * 7 yrs = 28% = $28,000.

If you had left in in the S&P500, it would now be around $200,000. Minus $28,000 of mortgage interest = $172,000.
You could now pay off the $100K mortgage and still have $72,000 remaining.

That short-term decision cost you $72,000 long term.

Everybody is different, but me -- I treasure having more money more than I treasure having no mortgage.

I forgot to mention that we only owed 37K (3 years left) on the mortgage and the money came out of our emergency fund which lowered our fund to 1 year of spending. The money would never have been invested in the stock market. The amount of the old mortgage was spilt between money market and mutual funds.

If it was 100K - I don't think we would have paid it off either.




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Old 08-24-2016, 06:55 AM   #28
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Thanks again for everyone's suggestions. Rayvt, the debate never ends because this stuff is so psychological: I am now no longer spending mental energy figuring out how to pay off the house but whether I should refinance to 15 years.🙄
I think if you can pay off the mortgage then refinancing to 15 years is almost a no-brainer... 15 year rates are about the lowest fixed rate you can get and increase the change that you will come out ahead and earn a spread.
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Old 08-24-2016, 07:14 AM   #29
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Cash is king.
Paying off a mortgage is a one-way street. Once you put money toward principle, you can't get it back out again. It's locked in there forever (until you sell the house) -- you can't decide 5 years down the road that you see a better place to put the money.

I've always thought you should also look at it from an asset allocation standpoint, as well as getting rid of the interest expense.

How much of your net worth do you want to be locked in, not only real-estate, but residential real-estate and a single piece of illiquid real-estate? 50%? 99%? 5%?

From the Financial Independence viewpoint, a long-term fixed rate mortgage the best deal you can get. Non-callable, fixed payment, if interest rates drop you can ratchet the rate down by refinancing, if rates rise you are locked in at your original low rate.

I'm a serial refinancer. When rates were dropping in the mid 2000's I refinanced several times to a new 30 yr FRM at the new lower rate.
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Old 08-24-2016, 07:18 AM   #30
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We have no mortgage and still have enough to last us the next 40 years and then some. If we had not paid it, we probably would have less now based on our living standards and investment choices. As we will only live about 25 more at the most. I would say it was a good choice.
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Old 08-24-2016, 07:41 AM   #31
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I am also looking to refinance a small mortgage ($50,000) from a 4.3% 30 year to a 15 year. If anyone comes across a good rate with no or low closing costs please share. Just starting to do the research--before interest rates possibly rise this fall.
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Old 08-24-2016, 01:38 PM   #32
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I think if you can pay off the mortgage then refinancing to 15 years is almost a no-brainer... 15 year rates are about the lowest fixed rate you can get and increase the change that you will come out ahead and earn a spread.

Thanks. I did some calculations and it was pretty eye-opening, so I contacted my mortgage broker for an illustration on a 15 year for further study. I think you're right that we could easily handle the extra $500 or so/month and without decreasing our pretax savings.

I understand the commenters' sound argument that it is better to have less tied up in a home and more spread out over 30 years at a low interest rate. My own goal, however, is to FIRE in 5-7 years and I think it would cost me less money and position us sooner, if we didn't have that monthly payment to cover. I'll project all of the scenarios using some tools suggested above.

If I keep the 30 year mortgage, I have to add about $500,000 more to generate the mortgage payment sustainably, which tentatively looks like more time than I want at the yoke.


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Old 08-25-2016, 07:45 AM   #33
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l
If I keep the 30 year mortgage, I have to add about $500,000 more to generate the mortgage payment sustainably, which tentatively looks like more time than I want at the yoke.
Keep in mind that your true mortgage expense is only the interest, not the principal. The principal is just your own money that you are shifting from one account to another. Whether you pay $100,000 of principal in one lump sum or spread out over 20 years --- it's still $100,000. All you are doing is shifting the timing.

And whether you have a mortgage or not, you still have to pay tax & insurance.

The initial interest on a $100K 4% 30 yr mortgage is $333/mo. That is what your investments have to generate, not the entire $477 P&I amount.
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Old 08-25-2016, 08:02 AM   #34
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An anecdote, so take it as you will.....
In our neighborhood of mostly retired people, about half have a mortgage and half don't (yeah, these things get discussed when a bunch of retired people get togther to play cards, etc. -- we have lots of free time on our hands).

By observation, it appears that the richest fourth all have a mortgage.

Of the people that do have a mortgage, about half of them have said at one time or another that if one of them died , the survivor would have a hard time making ends meet without that second Social Security check.

I think it comes down to what you value most, having money or not having a monthly house payment. It's a personal preference and neither was is right or wrong.

Me, I prefer having my money working for me. In contrast, my neighbor's wife turned pale when my wife mentioned to her what our mortgage payment was.


If you retire with, say. $5,000,000, your lifestyle wouldn't be any different with or without a mortgage. And if you have that much money, you probably got there by letting your money work for you.
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Old 08-25-2016, 08:39 AM   #35
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...

If you retire with, say. $5,000,000, your lifestyle wouldn't be any different with or without a mortgage. And if you have that much money, you probably got there by letting your money work for you.
Unless that person chooses to retire to a new $5,000,000 house with 10% down. (Such a person is unlikely to be on this forum though.)
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Old 08-25-2016, 09:58 AM   #36
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Keep in mind that your true mortgage expense is only the interest, not the principal. The principal is just your own money that you are shifting from one account to another. Whether you pay $100,000 of principal in one lump sum or spread out over 20 years --- it's still $100,000. All you are doing is shifting the timing.

And whether you have a mortgage or not, you still have to pay tax & insurance.

The initial interest on a $100K 4% 30 yr mortgage is $333/mo. That is what your investments have to generate, not the entire $477 P&I amount.
Principal payments are still a cashflow obligation. Last time I checked, it's not optional whether or not to pay the principal portion. Therefore, investments have to generate sufficient cashflow to cover the principal portion as well as interest.

I think we all understand that if investment returns beat the mortgage rate, you come out ahead in the end. But cashflow requirements along the way are still an obligation that have to be paid from investments or some other source of income.
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Old 08-25-2016, 10:58 AM   #37
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We downsized about 3 years ago and faced the same dilemma-pay cash or finance the new place? Personally, since the mortgage lenders were crazy enough to lend me 3.5% money over a 30 year mortgage (I was 61 at the time), I took it.

As an example of "cash is king", later that same year (2013), we purchased a condo in FL (foreclosure) and paid cash when condo loans were nearly impossible to get. We could not have done that if we had paid cash for our new home earlier that year.

Since then, the condo in FL has gone up 40-50%, and we have a nice place to spend winters.

Because of the 3.5% mortgage, our payment on our house up north is laughable. We are not worried about paying it off. Not when it frees up cash for other opportunities.
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Old 08-25-2016, 01:14 PM   #38
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...

Because of the 3.5% mortgage, our payment on our house up north is laughable. We are not worried about paying it off. Not when it frees up cash for other opportunities.
This was DW's thinking. New mortgage (15 year) will constitute approx. 1/10 of our targeted monthly spending.

Big difference for many of us nearing or in retirement with a big accumulation versus those without a big pot or those (even our past selves) just starting out or midway down the path. Among the many reasons that this is not a one-size fits all decision.
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Old 08-26-2016, 12:09 AM   #39
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Keep in mind that your true mortgage expense is only the interest, not the principal........
The initial interest on a $100K 4% 30 yr mortgage is $333/mo. That is what your investments have to generate, not the entire $477 P&I amount.
If the interest portion is $333, then investments have to generate the $333 plus the income taxes on whatever is generated to end up at $333. From a cash flow perspective.
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Old 08-26-2016, 07:22 PM   #40
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We had a 4.875% 30-year mortgage that I had been paying down, balance was at around $42K. It would have been paid off in 2019. Decided to just pay it off in May so that when I retire we would be debt-free. I know all the arguments about investing the money instead, but psychologically it felt like a better choice. The money we used was a small part of our savings that had been in CDs.
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