Mortgage Debt in Retirement article

[MN317]

Nothing we did not already know – but a good illustration of risk vs. gain.

http://news.morningstar.com/articlenet/article.aspx?id=691582

 

[pb4uski]

That link has a firewall but I was able to view it through this link. Same article?

Prepaying a Mortgage Has Its Payoff For Most, But Not All

 

[MN317]

Not sure if this is allowed - but here is a cut/paste of the article.

------------------------------------------------

[MOD EDIT] - - no, unfortunately copying the whole article is not allowed here for copyright reasons.
http://www.early-retirement.org/forums/f32/copyright-the-dmca-and-cut-and-paste-62748.html


From the above notice,

One still may make “fair use” of small snippets of copyrighted materials. The best way to do that is to link to the article, block quote perhaps a sentence or paragraph from the article, and then provide your own commentary on the quoted material.

So sorry!! [/MOD EDIT]

 

[bclover]

Nothing we did not already know – but a good illustration of risk vs. gain.

Morningstar Free Smartpage | News

couldn't read the article but usually this is one area I really don't comment on as I just think it's a personal choice.

I just downsized to a new house. 20 year mortgage of 200k, house value of 700k.

Retirement assets of 2 million (not including house)

1st. no way in hell am I working another 20 years . So that leaves me with the question of do I pull out of my taxable account (~480k) and pay off the loan. right now I'm in no rush to do so. next year when I actually retire, I'll reevaluate. currently the mortgage/property taxes/ insurance are easily handled.

I feel blessed that I'm able to have the options and in reality that's what savings and lbym brings, options

 

[rayinpenn]

As a guy with no mortgage for many years I have to take exception with this article. They make it sound as if it is one or the other - it isn't, Would you borrow to invest in the stock market? I hope your answer is absolutely no. Yet I managed to save, invest and prepay my mortgage. The solution as in all things is simply to find balance. Your firm offers a 5% 401k match - you take it! Put that 5% towards the mortgage and you are giving away 5%. Your firm offers an ESPP (employee stock purchase plan) at a discounted price - you participate! You feel comfortable putting $100 a month extra towards your thirty year mortgage and saving/investing $100 - do it. Put your mortgage on a spreadsheet and be amazed how much that $100 a month will save you in interest and how much sooner you'll be debt free.

Rays common sense rules to building a big pile.
1. Never leave money on the table.
2. Treat consumer debt like the enemy - it is
3 . Always buy less then you can afford.
4. Save 80% of windfalls... Tax returns, inheritances, bonus, OT
5. Mow your own lawn. This rule is a representation (see below).

Two days ago my 10 year old Sears lawn tractor died, i called Sears and made an appointment. I also went on YouTube and watched a couple of videos on diagnosing Briggs and Stratton electrical problems. I broke out the socket set (I invest in tools) and tore into that baby. The part ($60 magneto) is on order. If I get it fixed I'll bet I'll save $250. Guess what it was easy three bolts. You tube can save you a fortune.

Find a balance between debt pay down and saving that works for you...

 

[tulak]

Would you borrow to invest in the stock market? I hope your answer is absolutely no.

Yes, I would and I did. I borrowed a chunk of cash at 1.9% a few years ago and dumped it into Wellesley. In retrospect, a conservative choice, but at the time I knew the probability of making more than 1.9% was high. Wellesley was yielding about 4% at the time.

Not all debt is bad and leverage can make sense.

 

[bmcgonig]

Yes, I would and I did. I borrowed a chunk of cash at 1.9% a few years ago and dumped it into Wellesley. In retrospect, a conservative choice, but at the time I knew the probability of making more than 1.9% was high. Wellesley was yielding about 4% at the time.

Not all debt is bad and leverage can make sense.

I think by definition anyone who has debt and is also invested in the stock market is in effect "borrowing to invest in the stock market"


Sent from my iPad using Early Retirement Forum

 

[gcgang]

The difference is you're not going to get a margin call on your house when your stock goes down.


Sent from my iPad using Early Retirement Forum

 

[ERD50]

... Would you borrow to invest in the stock market? I hope your answer is absolutely no. ...

Why absolutely? Mortgage arbitrage has worked well for many people at these historically low interest rates.

The difference is you're not going to get a margin call on your house when your stock goes down. ...

That's not a difference. I have a mortgage, the mortgage balance is invested and I'm not going to get a margin call - I'm not on margin.

-ERD50

 

[nun]

I paid off my mortgage on a two family home and also invested in the stock market. Now I'm ERed and have no mortgage and get rental income and all my expenses are covered by that and fixed income. I have no worries about sequence of withdrawals or the ups and downs of the stock market and when SS starts I'll invest that rather than spending it

 

[nun]

Yes, I would and I did. I borrowed a chunk of cash at 1.9% a few years ago and dumped it into Wellesley. In retrospect, a conservative choice, but at the time I knew the probability of making more than 1.9% was high. Wellesley was yielding about 4% at the time.

Not all debt is bad and leverage can make sense.

Leverage is great until it isn't.

 

[tulak]

Leverage is great until it isn't.

And reducing your liquidity is great until it isn't.

This can go either way. As always, when you invest, know what you are doing and what you are trying to accomplish. There's really no right or wrong, only what you are comfortable with.

 

[nun]

And reducing your liquidity is great until it isn't.

This can go either way. As always, when you invest, know what you are doing and what you are trying to accomplish. There's really no right or wrong, only what you are comfortable with.

There are many paths to retirement success. I'm glad that I chose to split my money between liquid investments and mortgage payment and the only leverage I needed was a mortgage. It's left me in a good situation of getting positive income from rent and reduced my need for income so that fixed sources can easily cover my expenses

 

[daylatedollarshort]

So a mortgage at a tax deductible 2 - 4% or whatever is risky but paying off your mortgage and investing 50% of more of one's remaining portfolio in the stock market around here seems to get accepted as not risky. I don't really get that.

I have a fixed rate mortgage at a historic low rate offset by TIPS, 4% treasury bonds and non-COLA pension income. I can always pay it off at any time with no extra fees. I am just not seeing that as so risky compared to the average portfolio recommendations around here.

People might want a mortgage for liquidity, to keep a pile of after tax money to live off to keep tax rates low / obtain ACA tax credits, for asset protection, in case of an act of God wiping out the house value, when there are good odds they might make more having the money invested elsewhere and probably many other reasons for their particular financial situations.

 

[nun]

So a mortgage at a tax deductible 2 - 4% or whatever is risky but paying off your mortgage and investing 50% of more of one's remaining portfolio in the stock market around here seems to get accepted as not risky. I don't really get that.

For me paying off the mortgage before ER was about matching my debt load to income. I was fine carrying debt while I had a well paying job, but in ER my goal was to go in with zero debt and a much reduced need for income. I also looked at mortgage payments as a tax deferred fixed income investment, so included it in my asset allocation. Others will have different priorities, but mine was to not to have to worry about the level of the stock market at all once I retired and being mortgage free was the best way to do that for me.

 

[RetireAge50]

I used to borrow on a home equity loan to make sure I fully funded our Roth IRA's. Worked out well.

Also a mortgage along with a non-cola pension might might be good against inflation. But I'm probably wrong as I know nothing about economics.

 

[tulak]

Nun, I think you made the right choice for you. My only issue, and what I responded to, is that yes, I would borrow money to invest in the market.

Would I leverage against 80% of my investable assets? Nope. I realized that I'm comfortable around 10% of invested assets. If I can make a little more money with little risk, then that works for me. I realize others don't think it's worth the effort or risk and that's ok with me. Some day that might be me.

 

[daylatedollarshort]

Mortgage or not can be a complex decision. I am not smart enough to factor in all the variables in my head over a 30+ year retirement. I do crunch the numbers in my spreadsheets and the Fido RIP and the results were that what I thought was intuitively obvious were flat out wrong due to taxes, RMDs, ACA tax credits, home appreciation (assume keeping up with inflation), the offsetting non COLA pension, etc.

 

[athena53]

I agree that this is a personal decision with no right or wrong answer.


DH and I bought our house in 2003 and could have paid cash but put down 20% and borrowed the rest with a 15-year mortgage. It was a very good decision. The investments did very well, even with the financial meltdown in 2007/2008, and our house, it turns out, has appreciated very little. McMansions seem to be in less demand now as more baby boomers (like us) seek smaller places.


So now we've sold our house (subject to buyer getting financing) and have had an offer accepted on a smaller house. We're still taking out a mortgage for about 50% of the sales price. I'm comfortable with that mortgage payment but it still leaves money in our investments to grow.


I realized, though, that applying for a mortgage as a retired person is more complicated than I thought! Fortunately I have a year of retirement behind me (DH was already retired) so we have a good handle on expenses. I realized, though, that if I showed only our two major brokerage accounts, they'd see money going out of the Fidelity account that's actually going into a smaller account at a brokerage where we buy mostly individual bonds. So then I needed to show the balances on that account so that they could see where the money went. And then I decided to add the checking account because that's where the living expenses sit till we need them (occasionally replenished from the larger brokerage account). The good news is that our invested assets have actually increased by over $100K in the year since I retired. That should count for something!

 

[SumDay]

couldn't read the article but usually this is one area I really don't comment on as I just think it's a personal choice.

I just downsized to a new house. 20 year mortgage of 200k, house value of 700k.

Retirement assets of 2 million (not including house)

1st. no way in hell am I working another 20 years . So that leaves me with the question of do I pull out of my taxable account (~480k) and pay off the loan. right now I'm in no rush to do so. next year when I actually retire, I'll reevaluate. currently the mortgage/property taxes/ insurance are easily handled.

I feel blessed that I'm able to have the options and in reality that's what savings and lbym brings, options

Wow, I could have made this post with a very few tweaks. I just applied for pre-approval yesterday so we can downsize to a smaller home and pay 3X for the new one with what we'll get for our current home we've been in for 30+ years. Putting down ~70% - I thought the loan officer was going to plotz. Then she called to verify we have no debt. Could not believe it. Life is good.

 

[imoldernu]

We discuss this often, on a personal planning basis, but what does this overhang of mortgage debt mean for the future value of housing? As banks continue to hold on to foreclosed housing, to avoid marking to market... And the homes that are on the books at Freddie Mac?....

The real bottom line question is, does this have an end?
The general impression I get is that the worst of the housing crisis is over, and with new building going on, that the market is on the way up.

If the numbers quoted are true, then it seems there's a way to go before values will exceed the precrisis pricing.

 

[athena53]

I wanted to add an update to this; banks are crazy. (Or maybe the regulations around granting mortgages are crazy.)

As I mentioned earlier, DH and I applied for a mortgage to buy a smaller house. Our credit scores are around 770-780. They'd be higher but we churned the credit cards a little last year as I dumped some of the loyalty program cards and went for straight cash-back. Our record of payments on credit cards and the mortgage is impeccable.

We applied for a mortgage that would be 6% of our invested assets and less than half the price of the house we're buying. Our bank originates its own loans but then sells them, so they want to meet Fannie Mae standards. (A "non-conforming" loan would have had an interest rate 150 basis points higher.) Fannie Mae is very picky about what sources of income it will consider. Without going into a lot of gory numbers, our taxable dividends in 2014 were enough to pay that mortgage. Taxable capital gains were twice that, and of course the income from the IRAs doesn't show up in the taxes at all.

They can loan us 4% of the value of our invested assets. And that's counting DH's SS as part of our income. We'll take it, but I find this mind-boggling. They'll loan ridiculous amounts to people with installment debt up the wazoo and zero savings but a regular paycheck, but can't deal with a couple of retirees who could pay cash for the house nearly ten times over. Maybe they think we'll spend it all on a private plane and they'll have to foreclose on the mortgage.

 

[pb4uski]

That surprises me as I was talking with a friend who is retired but is a part-time real estate agent the other day and he was talking about the great availability of low/no-downpayment mortgages and we were both commenting on how the banks never learn from their stupid mistakes.

Have you asked whether they would consider any Roth conversion income as income? Both my sister who does loans for a bank and my mortgage broker indicate that the "pension income" shown on my tax return as a result of Roth conversions would count but it seems that practice varies.

 

[Totoro]

Maybe they think we'll spend it all on a private plane and they'll have to foreclose on the mortgage.

Even if they have to foreclose, you are lending only 50% of the current house value, so there's virtually no risk.

And to add craziness, banks themselves are judged harshly on their (risk-weighted) balance sheet and much less their income.

It may be helpful though to look around a bit more for a bank who caters to your demographic. Out here [that's the Netherlands] the mainstream ones cannot deal with your situation, but there are a few who can (usually geared to professionals like doctors, SME owners, laywers etc ..).May be the same for you?

 

[bclover]

That surprises me as I was talking with a friend who is retired but is a part-time real estate agent the other day and he was talking about the great availability of low/no-downpayment mortgages and we were both commenting on how the banks never learn from their stupid mistakes.

Have you asked whether they would consider any Roth conversion income as income? Both my sister who does loans for a bank and my mortgage broker indicate that the "pension income" shown on my tax return as a result of Roth conversions would count but it seems that practice varies.

I wanted to add an update to this; banks are crazy. (Or maybe the regulations around granting mortgages are crazy.)

As I mentioned earlier, DH and I applied for a mortgage to buy a smaller house. Our credit scores are around 770-780. They'd be higher but we churned the credit cards a little last year as I dumped some of the loyalty program cards and went for straight cash-back. Our record of payments on credit cards and the mortgage is impeccable.

We applied for a mortgage that would be 6% of our invested assets and less than half the price of the house we're buying. Our bank originates its own loans but then sells them, so they want to meet Fannie Mae standards. (A "non-conforming" loan would have had an interest rate 150 basis points higher.) Fannie Mae is very picky about what sources of income it will consider. Without going into a lot of gory numbers, our taxable dividends in 2014 were enough to pay that mortgage. Taxable capital gains were twice that, and of course the income from the IRAs doesn't show up in the taxes at all.

They can loan us 4% of the value of our invested assets. And that's counting DH's SS as part of our income. We'll take it, but I find this mind-boggling. They'll loan ridiculous amounts to people with installment debt up the wazoo and zero savings but a regular paycheck, but can't deal with a couple of retirees who could pay cash for the house nearly ten times over. Maybe they think we'll spend it all on a private plane and they'll have to foreclose on the mortgage.

LOL,
Doesn't suprise me at all. I can't begin to tell you the wackiness that happened to me when I downsized.

case in point:
after my dh died and one son started his life dance I decided to sell and move, I was actually put down about 60% of the price for various reasons (don't flame, I know some folks would have done differently) anyhoo, my credit union that I have been a member for 30 years declined me some of the downpayment did not come from income but from an inheritance left to me by my father.

LOL, so let me get this straight, I have more than enough to pay for the house in cash, no debit, a job, a fico score of 815 and I'm a bad risk because my parents did the right thing and their kids receive an inheritance



nothing banks do now surprise me. nothing at all.

One explaination I got was that I could spend my inheritance at any time. when I pointed out that, that made absolutely no sense because in reality I could also quit my job (thus losing my income) 2 seconds after closing.

I asked her is this how they make decisions? you coulda, woulda, shoulda