Advice for mortgage payoff decision

[Sunset]

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.

 

[LastOfTheBoomers]

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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[pb4uski]

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.

 

[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.

 

[ShokWaveRider]

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.

 

[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.

 

[Markola]

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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[rayvt]

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.

 

[rayvt]

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.

 

[2017ish]

...

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.)

 

[Cobra9777]

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.

 

[brucethebroker]

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.

 

[2017ish]

...

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.

 

[Sunset]

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.

 

[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.

 

[2017ish]

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]

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]

.....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.


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[jkern]

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]

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]

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.