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Did I do the right thing by paying off my mortgage?
Old 05-30-2012, 02:25 PM   #1
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Did I do the right thing by paying off my mortgage?

This week I paid off my $187,000 mortgage. This took a big chunk of my nest egg. I made this decision primarily because returns are so low on investments and my mortgage was at 6.5%. The alternative was to refinance $150,000 at 4%. Yes I know that mortgage interest is tax deductible but I was looking at less than $6000 a year in mortgage interest while the standard deduction is $5950 for 2012. Also, the standard deduction has been increasing with inflation while the mortgage interest would decrease year after year. I have no other deductions to itemize except for charitable contributions. I am now left with $185,000 in investable assets which is currently $60,000 cash and the rest 65% bonds, 35% stock. Some of the cash is in my 403b which is paying 3% in a fixed interest acct. I am a 61 year old single woman who hopes to retire next year at age 62. I have absolutely no debt of any kind and can live comfortably on $50,000/year (before tax) without the mortgage. Luckily I will have a few sources of income in retirement as follows:
Social Security - 19,884/year
Annuity (for life)- 16,740/year (increases with inflation)
Pension (defined benefit from my work) 8,448/year.
This totals just over $45,000 which leaves me with $5,000/yr to obtain from investments. That is under 3% of my current portfolio.

I keep second guessing my decision and would appreciate any of you weighing in on this. Thanks
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Old 05-30-2012, 02:37 PM   #2
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I think that you absolutely did the right thing. Congratulations.
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Old 05-30-2012, 02:38 PM   #3
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It's fine. Probably half the people here with an opinion here would say that you could do better investing the money, the other half would say you've locked in on a 4% return and can sleep easier so that's worth it. Few would say that one way or another is really wrong. Getting rid of the 6% rate is very good. You might've had to pay some closing costs to get that 4% rate so the effective rate would've been a bit higher. I wouldn't second guess the decision. There really wasn't a wrong decision to be made here, just whichever way you wanted to go. If you still feel uneasy about it, you should be able to go get a mortgage.
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Old 05-30-2012, 02:48 PM   #4
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sms60, I think you will sleep very well with what you have done. I know, at income tax time I always wish I would have a mortgage deduction so I could also deduct my property taxes, etc.,but I've never done a comparison to the standard deduction. So, I'm really happy I have no mortgage and I sleep good at night. You look like you'll be fine with the income you have. Just plan and enjoy your retirement.
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Old 05-30-2012, 03:07 PM   #5
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There really is no right or wrong. You did what you felt was best for you and who can argue with that?

The mental part of being mortgage free counts for something, no?

With a year to go and no mortgage, you should be able to add to your portfolio before you pull the plug. In many ways, my situation is similar in that my portfolio, which is small by most comparisons, is more of a cushion than a requirement for my retirement.

Relax and enjoy!
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Old 05-30-2012, 04:29 PM   #6
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Was wrong to do it? No. Was it the absolute best decision? Well you might not know that for 30 years, and at 91 you wouldn't care anyways I think the most important determining factor for most people when retiring concerning burning the note or not is are you financially liquid enough with a paid off house. The fact you have a decent amount of cash available, plus at least 2 of your retirement stool legs have cost of living increases makes your decision a fine one. The most important thing is you aren't paying 6% interest anymore. I personally went the other way and just refinanced to 3.75% for 30 years, but I still am focusing more on becoming more financially liquid and my mortgage payment is $500 a month so it isn't as much as yours was. My state has an income tax, so adding it to the interest, along with property taxes allows me to recover an extra $1000 that the standard deduction wouldn't.
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Old 05-30-2012, 04:50 PM   #7
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I think you did the right thing, too. You took into account the standard deduction which is good because it provides a floor which effectively guarantees a tax-deductible amount of "interest" even if you don't have any to deduct. Also keep in mind that when you turn 65 in a few years your (federal) tax liability will decline some more, along with SS being only 50% (or, 85%, perhaps) taxable, further reducing any net tax savings from keeping your mortgage around.

Your overall situation reminds me of some big decisions I made in the 1990s (I was only in my 30s at the time, but still). First, I chose to refi my mortgage only because the interest rate decrease was nearly 5% at first, so I would recover my closing costs in about 17 months. I don't think a 2.5% difference is big enough to go that route. Next, you used about 50% of your investable assets which was about the same percent of mine when I paid off my mortgage. Granted, I paid mine off in the late-1990s when nearly everything was going up up up (along with the interest rate on my 1-year ARM), but I did not want to drain my taxable accounts too much. And finally, the standard deduction (on just my state income taxes) acted as a backtop, preventing me from seeing my state income taxes rise from forgoing more mortgage interest.

Getting your expenses down while giving you more peace of mind without a mortgage are two more plusses. You did the right thing.
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Old 05-30-2012, 06:47 PM   #8
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I also feel there is no right or wrong on this decision--it's a personal decision. We had been getting hit with the alternative minimum tax for several years (living in a high real estate tax state kills us). So we ended up not getting back all we that we deducted anyway. For us it was a no brainer to pay it off.

As long as you can afford to do it, then it's your choice.

Congratulations, it IS a good feeling!
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Old 05-30-2012, 08:05 PM   #9
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I agree with the others that there is no right or wrong.

I paid my house off early then decided to move and pondered all over again as to whether to pay cash or take out a mortgage. What tipped it for me was realizing how much it would simplify my finances by not having debt. The cash flow is very straight forward now.

I plan to dial back my withdrawal rate if there is a long bear market, that would be harder to do with a mortgage.
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Old 05-30-2012, 08:16 PM   #10
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The only thing wrong is wasting energy second guessing. If someone is telling you it's a mistake, chances are they don't have two nickels to rub together.

I would listen to the person who saved and invested (yourself) to be able to pay off the note!
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Old 05-30-2012, 08:24 PM   #11
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As everyone before me, there is no right or wrong answer. For me, in September of 04' I paid off my 10 year fixed 4.75% mortgage (2 years into it) balance of $178K. I am completely satisfied with the decision and never regretted it. It is an intangible and the feeling of being 100% debt free year after year is wonderful.
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Old 05-30-2012, 08:30 PM   #12
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Your net worth hasn't changed. The money you've moved into the house you live in won't generate any income or grow much, if at all, but you won't need to generate enough cash flow to make those former mortgage payments, either. Six of one, half dozen....

So enjoy your much-lower expenses now and don't even think about whether you did the right thing. Congrats!
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Old 05-30-2012, 08:37 PM   #13
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Quote:
Originally Posted by Lakewood90712 View Post
The only thing wrong is wasting energy second guessing. If someone is telling you it's a mistake, chances are they don't have two nickels to rub together.

I would listen to the person who saved and invested (yourself) to be able to pay off the note!
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No doubt you feel great about it and it's a sound choice. Enjoy doing whatever you choose to do!
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Old 05-30-2012, 08:39 PM   #14
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In your case given the standard deduction approximates the itemized deduction I think that you absolutely did the right thing economically.
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Old 05-30-2012, 09:48 PM   #15
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Originally Posted by sms60 View Post
I keep second guessing my decision and would appreciate any of you weighing in on this. Thanks
If you're going to lie awake at night pummeling yourself for eliminating your personal debts, then you could always apply for a home equity line of credit. Since you're still employed, you could make it a really big one.

Then you could go into mortgage debt (and back out of it) at your own convenience.
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Old 05-30-2012, 10:42 PM   #16
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As Mulligan noted, the big question for those in your shoes is: If I pay off the mortgage, will I still have enough liquidity to comfortably handle things that might come up. As most of us have worked all our adult lives, we've become used to the idea (maybe just in the back of our minds) that we could get a loan if we needed it. Once our employment income stops that option is severely curtailed, and it's best to have funds available so we can be our own bank.

I think this liquidity question is more important than the well-worn "will I come out ahead by investing the money or paying off the mortgage?" question.

It sounds like you think the amount remaining in your investment accounts will meet any sudden short or long term need for cash you might have, so you made the right decision. It would probably be good to reconsider this issue if you are tempted to reduce your liquidity in the future (e.g. before considering purchase of an annuity, etc).
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Old 05-31-2012, 05:43 AM   #17
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Yes, you did the wrong thing!

(So what are you going to do about it, now?)

IOW, the decision and the action has been done. Don't beat yourself up over it; just move on ...
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Old 05-31-2012, 07:11 AM   #18
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We were just talking the other day about a difference between men and women. Namely, women are always seeking affirmation and support of their actions, while men really just don't care what others think about what they do.

I think no guy would have started this thread. A guy may have started an in-your-face, "I paid off my mortgage!" thread without really asking whether it was a good or bad decision.
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Old 05-31-2012, 07:18 AM   #19
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You absolutely did the right thing! Congratulations!
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Old 05-31-2012, 10:00 AM   #20
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Regarding the interest deduction, versus the standard deduction, the only thing I'd wonder about is how much property taxes and state/local taxes are in your area?

I'm in a somewhat similar situation, where my interest deduction is only around $5200 per year. But, last year I paid about $3200 in state/local taxes (plus owed another $2000 come April 15 ) Property taxes were around $3300. And I think charitable contributions came out to around $1500.

So, in my case at least, by the time you throw on the state/local tax writeoff, property tax writeoff, and charitable stuff, it definitely makes sense to itemize. Of course, your mileage may vary.

If I'm doing the math correctly, it looks like your old mortgage would've been running around $1182 per month ($187K, 6.5%), plus tax/insurance. Refinancing to a $150K/4% mortgage would drop you to around $716/mo, plus tax/insurance.

So, by paying off the mortgage, it looks like you've just freed up almost $1200 per month. Refinancing would have only freed up around $480 per month.

So, you might lose out a little bit in tax writeoffs, depending on how high your state/local and property taxes are. But, freeing up $1200 per month has definitely got to be great for the peace-of-mind!

If it was me, I would've refinanced, but I'm only 42, and still have a ways to go before I retire. If I were 61, I would probably be looking at it through an entirely different perspective.

I think you did just fine. And, if you ever find yourself in a bit of a bind, you can always go back and tap some of that home equity with an HELOC, or whatever.
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