Another "pay off mortgage early" question

[Lisa99]

To me it's an entirely personal decision.

Yes you can analyze it and figure out the best ROI, but if you can't sleep at night worrying about that really big monthly payment then it's not worth it to make it purely a financial decision.

We made paying off the mortgage the final step before determining a retirement date. Once we had enough in investments to meet our annual spending requirements we started funneling all extra cash to paying off the mortgage. We made the final lump sum payment of ~100k 6 weeks ago. The money came from the sale of our last rental house.

DH is now retired and I'm planning my escape no later than December of this year.

 

[Bamaman]

Only reason I can see keeping a low balance mortgage is to accrue the monies to pay the insurance and property taxes--and to get the mortgage company to pay'em. It removes some hassle.

That said, I paid off my $28k mortgage last year, and I'm debt free. House insurance is paid by automatic draft, and we have no Alabama property taxes since my wife is on social security disability.

My biggest expenses are car insurance and house insurance. I have a hard time remembering to pay little bills, like the cell phone and utility bills. I kind'a ignore the details of life.

 

[Unpaintedhuffhines]

Aren't you proud that you are in the position to ponder these two alternatives? Huge congratulations to you!

Given the relatively small financial impact, I would just do what your gut told you to do. If I were in your shoes, I'd call the mortgage company up, get the payoff amount, and write the check. To me, it would be more of a mental thing not to write the check every month to a mortgage company.

 

[rayvt]

Or Plan C: Refinance for 30 years (if you can get a low rate), and then invest the money for the long term.

It depends what gives you a 'nice feeling'.

I like the feeling of having my money liquid and working for me, rather than locked up as home equity.

-ERD50

This!

Noodling some numbers:

Current mortgage rate is around 4%. Over the next 30 years, the long-term stock market average is going to be more than this. Historic average is 10%, discount that by 20% and estimate you'll get 8%.

$450K mortgage @ 4% = $2148/mo payment Total payments = $773,412 in 30 years.

$450K earning 8% and withdrawing $2148/mo. Remaining balance after 30 years: $1,698,444.

Is the "nice feeling" of having no mortgage worth $1.7M to you?

Well, yeah ... 8%. But what if it's less?
At 6%, the remaining balance after 30 years: $541,672
Is the "nice feeling" of having no mortgage worth half a million dollars to you?

Set it up for automatic monthly withdrawal & payments to the mortgage company, and you never even have to touch anything.

 

[MooreBonds]

Although the mortgage interest is very little now, I can certainly use anything I can get in the way of a tax write off.

Unless you are right at a cliff, where $1 in extra AGI makes you pay a lot more in taxes (or you lose a subsidy), I'd pay it off. I never understand people who claim "But it's a tax write-off!".

Would you rather pay $1 in interest and reduce your taxes owed by $.35, and end up paying a net $.65.......or would you rather not have to pay the dollar at all and end up with $1 in your pocket?

I don't know about you, but I'd take $1.00 in hand versus paying out $.65, assuming that cash will just sit in an account earning essentially zero (after taxes).

There are other options available to reduce income, including funding an HSA (available to any income level), perhaps doing some self-employment work and deducting health insurance premiums and other self-employment costs, maybe a traditional IRA, etc.

Also, don't forget to make your investments tax-efficient. Put all qualified dividend payers in your taxable accounts, and put all non-qualified dividiend payers and higher yielders in your tax-advantage accounts. That move alone really slashed my taxes owed over the past 2 years as I woke up to that fact and adjusted my portfolio.

 

[jkern]

This!

Noodling some numbers:

Current mortgage rate is around 4%. Over the next 30 years, the long-term stock market average is going to be more than this. Historic average is 10%, discount that by 20% and estimate you'll get 8%.

$450K mortgage @ 4% = $2148/mo payment Total payments = $773,412 in 30 years.

$450K earning 8% and withdrawing $2148/mo. Remaining balance after 30 years: $1,698,444.

Is the "nice feeling" of having no mortgage worth $1.7M to you?

Well, yeah ... 8%. But what if it's less?
At 6%, the remaining balance after 30 years: $541,672
Is the "nice feeling" of having no mortgage worth half a million dollars to you?

Set it up for automatic monthly withdrawal & payments to the mortgage company, and you never even have to touch anything.

You are not taking into account Sequence of Return Risk.

 

[urn2bfree]

One thing that just occurred to me is that for most people the mortgage is one of the larger parts of their budget...For us the PI part is over 10% of our monthly expenses. But PI does not change with inflation. So carrying a mortgage over time becomes less a part of your withdrawal if you planned on inflating the withdrawn amount with inflation as classically calculated. Which means that you either have extra to spend or can withdraw less as time goes on.


Sent from my iPad using Early Retirement Forum

 

[ERD50]

You are not taking into account Sequence of Return Risk.

Over a 30 year period, I think he is. Look at the range of returns over 30 years.

Here's an article on 20 year returns:

Observations: Best & Worst 20-Year Returns in Stock Market History

Historically, the odds are pretty low that you would do worse than a good mortgage rate today. Even the 2nd, 3rd, 4th worst years were higher than current rates.

The worst years to buy were:
1928: the return was about 2.5% for the next 20 years
1958, 59 & 61: about 5-5.5% annual return

-ERD50

 

[eta2020]

Over a 30 year period, I think he is. Look at the range of returns over 30 years.

Here's an article on 20 year returns:

Observations: Best & Worst 20-Year Returns in Stock Market History

Historically, the odds are pretty low that you would do worse than a good mortgage rate today. Even the 2nd, 3rd, 4th worst years were higher than current rates.


-ERD50

Yea it is like buying equities on margin for people who have accounts of 1 million dollar and more and get great margin rates. Well a bit better since you can deduct mortgage interest....( I think you can deduct margin interest as well though)

I do not buy on margin . Why do it if you don't have to?

 

[ERD50]

Yea it is like buying equities on margin for people who have accounts of 1 million dollar and more and get great margin rates. Well a bit better since you can deduct mortgage interest....( I think you can deduct margin interest as well though)

I do not buy on margin . Why do it if you don't have to?

The obvious answer is "no, you don't have to. So don't if you feel that way". And you don't even have to answer to anyone for your decision.

But if people here are going to make questionable statements, well, they should expect (welcome even), the counterpoints. Isn't that how we learn?

-ERD50

 

[sengsational]

I'd do a cash-out refi and put that, and the 30k you might have used for the payoff on red. Wouldn't THAT be a rush? There would be no doubt that you're alive, win or lose.

 

[mathjak107]

the mortgage is a double edge sword.

keeping the mortgage and investing elsewhere is great when markets go up.

but paying for a mortgage you didn't need to carry by selling assets at a loss when markets cycle down is most un-good .

that can reduce or negate all or part of what you gained in the up cycle.

you hear folks brag about how worth it , it is not to pay off the mortgage when markets are going up, but that is only 1/2 the story. unless they repealed the business cycle which i don't believe they did , eventually we will cycle down. they may then be selling off those assets at a loss to pay that same mortgage.

 

[fishndad42]

My ER planning (58 and planning to get out in 1-1/2 years) is more budget driven, so I'm interested in what others will say about this. Seems to me that you could consider the current payment and what that means to your budget, and would not having the payment change anything? For example, let's say your payment is $2000 - without it, would you withdraw less from investments, and possibly lower your tax rate? (I.m guessing you aren't right on the edge of the tax rate, but worth considering if you are).

Or is there something else you might want to do with that - Maybe a bigger boat (somehow most of us with boats are always dreaming of a bigger one!). I'd be scheming with DW to pay off the mortgage on the house and then take on a new mortgage (tax deductible of course) on the new boat - LoL!

Congrats on being in a great position where you can have options and be comfortable in any case!

 

[pb4uski]

.....Would you rather pay $1 in interest and reduce your taxes owed by $.35, and end up paying a net $.65.......or would you rather not have to pay the dollar at all and end up with $1 in your pocket?

I don't know about you, but I'd take $1.00 in hand versus paying out $.65, assuming that cash will just sit in an account earning essentially zero (after taxes)....

while I agree with what your wrote if the choice is using cash that is earning cash returns, I don't think that is the decision in most cases. It depends on whether your AA changes depending on whether or not you have a mortgage. I would suggest that most people don't change their AA whether or not they have a mortgage so you should use the portfolio return rate rather than the return on cash.

In other words, the decision is to invest (or keep invested) money that would otherwise be used to pay the mortgage, not just use cash to pay the mortgage. If the decision was to use cash to pay the mortgage it would typically be a slam dunk to pay off the mortgage, even before income tax considerations because it would be rare that your earnings rate on cash would exceed your mortgage interest rate.

That would mean that you are earning $2 (or more) and paying taxes on that $2 at probably less than 35% because qualified dividends and LTCG are tax preferenced. So your choice is between 1) earning $1.30 or more after taxes and paying 65 cents and 2) earning and paying nothing.

Some people prefer the peace of mind of earning and paying nothing to trying to make a spread using leverage and that is fine, but from a pure financial perspective it is suboptimal.

 

[mathjak107]

You are not taking into account Sequence of Return Risk.

Yep ,sequence risk can make or breat any situation. In fact taking the same exact average return moishe milevsky found as much as a 15 year difference in how long the money would last just based on the sequence of returns.

At these valuations average returns are likely to be about 6% . dividends typically represent 1/3 of market gains and dividends and interest rates track each other . with dividends at 2% equity returns should average out for at least the next decade at around 6% .

could we do better ? sure we could but i would consider that an upside surprise as opposed to planning around 8% at this stage.


Add in taxes on gains and possibly not clearing the standard deduction to take the interest and that reduces it even more.

Throw in the fact a retiree will not be 100% in stock. A 50/50 mix may have stocks at 6% and bonds at 2.50%.

That may not beat the mortgage. Especially if you have to sell equities at a loss to pay that mortgage.

we are considering buying a co-op but if we do we will pay cash. there isn't enough spread in taking a mortgage at this point to try to make 2% difference between the mortgage and our 50/50 mix . especially since the bull is long in the tooth and investments would have to be sold off possibly at a loss to pay ffor a mortgage i didn't need.