Advice for mortgage payoff decision

[2017ish]

Quote:

Originally Posted by jonat 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.

Many roads to Dublin! From someone whose spouse persuaded him to go the other route and refinance to 15 year 2.75 A.P.R. (within the next few weeks), congrats on being in a position to pay it off.

[Montecfo]

Quote:

Originally Posted by rayvt 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.

If you have substantial home equity, you also probably want to have a standby HELOC.

I think it is a bit of a false economy to assume payoff of a home mortgage comes from money invested in equities. MOST folks hold equities, debt and cash or near-cash. For your "safe" type money, paying down the mortgage makes a ton of sense in my view, because risk-free 4% returns are just not out there.

Also, we do not know the future. To assume the S&P will be rocketing skyward from here is not knowable, unlike the 4% risk-free return.

Good Investing!

[rayvt]

"For your "safe" type money, paying down the mortgage makes a ton of sense in my view, because risk-free 4% returns are just not out there."

Huh?
What's the purpose of "safe" money if not to be able to use it whenever you want/need to? Locking it into your house just means you can't get at it. (And, no, a HELOC is not the same thing as cash in the bank.)

"risk-free 4% returns are just not out there."
Screw that 4% return. I get 21% risk-free return on my money, I laugh in distain at 4%.


Where is such a risk-free 21% return to be found, you ask?
Simple. I pay off my credit card bill every month.


===============================
Actually, I am amazed at so many people who think getting rid of an expense is the same thing as making a return. They can see that my claimed 21% return is nonsensical, but don't apply that logic to the mortgage situation.

Eh, whatever. Less competion for stocks is better for me.

[Sunset]

Quote:

Originally Posted by rayvt .....Where is such a risk-free 21% return to be found, you ask? Simple. I pay off my credit card bill every month. ......Actually, I am amazed at so many people who think getting rid of an expense is the same thing as making a return. They can see that my claimed 21% return is nonsensical, but don't apply that logic to the mortgage situation........

Your issue is you simply think it's nonsensical because you don't spend enough !
Rack that spending up to 40K/month and it would seem like a good idea.

And yes, expense = income + tax on income.
So either get rid of the left side of the "=" sign or earn the corresponding other side guaranteed.

[Happyras]

A 5/5 Arm Refi with only third party closing costs is offered at 2.5%. We are jumping on it to pull $$$$ from our home to buy our kids their first home. We qualify using the rule that you can consider your retirement assets as a 30 year annuity (as well as other income streams). Without saying how much, I feel this approach is right for us to defeat the RMD in 7 years, I am 62. At that time the mort will be likely adjusted to 4.5%, and Uncle Sam can pay 30% of our mortgage interest as we take cash out to meet the RMD. While we have enjoyed an effective <2% cost of interest after tax for 5 years, and kept our investments growing keeping up with inflation.

Just a thought for folks, you need to leverage what you have. I would rather give my kids some now, than leaving it all to estate taxes in Washington State.

[Markola]

Update: Before advice from posters on this thread, I hadn't really considered a 15 year mortgage refinance. I contacted my mortgage broker and he said we'd qualify for a 2.75% rate. Incredible. That payment would cost us $500 more/month. I did all the projections with our taxable savings rate and, whether we go 15 year or keep the 30 year we have, the lines cross and our payoff opportunity emerges six years from now. I told the broker we'll sit tight with what we have for now. Doing nothing appears to provide the most options. Much appreciated to all here who helped me think this through for my personal situation and psychology.


Sent from my iPad using Early Retirement Forum

[jkern]

Quote:

Originally Posted by ivinsfan The biggest factor is after tax money, not the mortgage, each case is different. Remember, the interest can be both a tax deduction and lower your income for ACA. The net cost of borrowing money at a low rate and a double tax benefit is the total picture.

Mortgage interest taken as Itemized Deductions does not lower your MAGI for ACA calculations.

[ivinsfan]

Quote:

Originally Posted by jkern Mortgage interest taken as Itemized Deductions does not lower your MAGI for ACA calculations.

Right I should have said that it will lower your income taxes....and having a mortgage and not paying off your house with after tax money will help with ACA income..that's why everybody needs to check things out for themselves.

[UpAnchor]

Quote:

Originally Posted by Marita40 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.

Marita, since we live in the same metro area, i just did a cash-in refi of our Wells Fargo 30-yr 3.875% down to a 15-yr 2.875% through Wings FCU. Closed 3 weeks ago. Fees were $950 but of course there were still closing costs relative to the appraisal, title, etc.

[Marita40]

Thanks for the tip UpAnchor. I will look into this. I do plan on using a credit union.

[supernova72]

I've done several searches on the mortgage payoff and am leaning toward doing so myself in January 2017.

Stats:
Home value $565K
Mortgage balance $115K at 4% fixed, 6 yrs remaining, P&I $1530
Pension $43K annual
I ER'd in July of 2016 (corporate downsizing)
401K: $805K
Savings/stocks: $35K
Annual expenses: $55K

I would need to use ~ $100K of my 401K to pay it off : (

Peace of mind of not having a pmt upon unplanned ER would make me sleep better at night. Considering PT work in 2017 (former financial analyst/IT Project Management at Megacorp).

Cheers.

[LastOfTheBoomers]

I wouldn't pay it off if I was in your situation.

[jonat]

Use 401k to pay off mortgage? No way! You don't have enough savings to justify that. You do have a whopper of P&I, though! If it makes you feel better, throw some extra money at the principal each month, but I don't think you can afford much here.

[supernova72]

Quote:

Originally Posted by LastOfTheBoomers I wouldn't pay it off if I was in your situation.

I realize I opened myself up here to feedback and appreciate it. I never wanted to have a mortgage in retirement FWIW.

I also avoid the 10% penalty if that weighs in.

[supernova72]

Quote:

Originally Posted by jonat Use 401k to pay off mortgage? No way! You don't have enough savings to justify that. You do have a whopper of P&I, though! If it makes you feel better, throw some extra money at the principal each month, but I don't think you can afford much here.

It seems crazy yes but I'd still have $700K left in my 401K and increase cash flow by $1530 a month. My annualized pension is $43K. It's not easy to pay extra principle on ER income. Appreciate the feedback.

[jonat]

Have you considered downsizing your house? I assume that mortgage is a 15-year. Raiding your retirement savings to pay off a mortgage, penalty or no, is almost never a good idea. Yes, having no mortgage in retirement is great - I paid mine off last May but had the cash available to do it (also the balance was only $42K).

[supernova72]

Quote:

Originally Posted by jonat Have you considered downsizing your house? I assume that mortgage is a 15-year. Raiding your retirement savings to pay off a mortgage, penalty or no, is almost never a good idea. Yes, having no mortgage in retirement is great - I paid mine off last May but had the cash available to do it (also the balance was only $42K).

In Seattle WA this is an entry level home so downsizing not an option unless I move (which I really don't want to). Not ready for a condo type thing quite yet.

[Teacher Terry]

It would decrease his annual spend by 18k though so could live on his less then his pension alone.

[supernova72]

Quote:

Originally Posted by Teacher Terry It would decrease his annual spend by 18k though so could live on his less then his pension alone.

OP here, good point and I should have included that my pension would cover most of my expenses by decreasing costs by $18K a yr. Thanks for adding that.

[RockyMtn]

if your $55kin annual expenses included your mortgage payment of $18.3k I might consider it. If it doesn't I don't know that I would raid the 401k. Remember you're going to have to pay taxes on that 401k withdrawal as well.