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mortgage payoff and other questions
Old 01-31-2010, 12:00 PM   #1
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mortgage payoff and other questions

I realize there is alot of threads regarding the pros/cons of paying off the mortgage. Figured I would outline some thoughts here regarding our situations.

- Have approx. $70,000 left on a 4.75% fixed mortgage. House is probably worth $475,000

- Have apprx. $190,000 cash sitting in various money mkt. funds basically making very little interest.

- Wife and I are thinking of moving in 2012 after son graduates from high school. Plan on downsizing house and paying cash (maybe around $300,000).

Should we pay it off or not?? We cannot decide.

- To complicate matters, I am almost at the end of my rope as far as my job goes. Will turn 55 yrs. old later this year. If I make it to my 55th bday, I will qualify for employer retirement subsidized healthcare. This will cost be about $7,500 per year with a $4,000/$8,000 (family) deductible. In my opinion, not that great of a deal.

Given the above, we are really struggling with the decision to pay off the mortgage. As far as savings go, we have enough in a 529 plan for our son to attend a state university. I will have a NON-COLAED pension paying about $7,800 a year and have enough $$ ininvestments to withdraw (according to FIRECALC) approx. $48,000 per year if we do not pay off the mortgage or approx. $45,000 if we pay off the mortgage. Wife works part time (about $14,000). I would also look for another job realizing I probably will not bring home what I bring in now.


Guess it just bothers me to have a good bit of cash just "sitting there" but at the same time it is comforting to know it probably represents approx. 3 years of living expenses.

Also, regarding 401 distributions, can you withdraw in the year you turn 55 yrs old without the 10% penalty applying. I looked it up in the IRS website and that is what it stated. However, in the employer's 401 summary, it mentions you have to be 55 yrs. old before the 10% penalty does not apply. Any 401K experts out there? I would imagine the IRS provisions would rule here.



I know there is alot here but any comments/insights would be most appreciated.

Thanks,

Golfnut
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Old 01-31-2010, 12:14 PM   #2
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Usually I am in the "pay off the mortgage" group, but yours is a different case than some.

Why not figure out how much the interest would be each year, and then decide whether or not it is worth that much to you to have the "insurance" of three extra years' cash available in case you can't sell the house right away? I am thinking of all the pessimistic predictions regarding the nationwide housing slump lately.

I don't have a clue about the 401K, since I retired at 61.
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Old 01-31-2010, 12:24 PM   #3
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W2R,

Thanks for quick response. BTW, I have read alot of your posts. Gald to see you are happily retired ! What I want is to be happily semi-retired!

Regarding the "insurance". Making only $850 in interest on the $190,000.

Regards,

Golfnut
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Old 01-31-2010, 12:32 PM   #4
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Originally Posted by golfnut View Post
W2R,

Thanks for quick response. BTW, I have read alot of your posts. Gald to see you are happily retired ! What I want is to be happily semi-retired!

Regarding the "insurance". Making only $850 in interest on the $190,000.

Regards,

Golfnut
(Thanks!)

So anyway, you can figure out the interest you are paying right now on the mortgage, and taking into account the interest you are earning on the $70K that it would take to pay it off, you can figure out how much the "insurance" will cost you each year. Your interest rate is so low, that it may not be much. Besides, if you only have $70K left I am guessing that your payments no longer include much interest.
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Old 01-31-2010, 12:59 PM   #5
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There are two major authors who provide insight on your situation:

Jim Otar (Unveiling the Retirement Myth)
otar retirement calculator

and Moshe Milevsky



http://www.ifid.ca/pdf_newsletters/P...7DEC_FEAST.pdf

Welcome to the Individual Finance and Insurance Decisions Centre online...

They both emphasize the need to manage risk, particularly in the years around retirement. If you hit a market downturn early on, the longevity of your portfolio drops dramatically. Therefore it becomes very important to have a buffer that enables you to avoid drawing down on your portfolio for the first few years. Rather than buying an annuity to cover this risk, my recommendation would be to self annuitize with the cash you already have, and not to pay down the mortgage in the immediate future.
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Old 01-31-2010, 01:00 PM   #6
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Quote:
Originally Posted by golfnut View Post
I know there is alot here but any comments/insights would be most appreciate.
Usually, there is little impact financially to paying off or not paying off a mortgage. If the interest rate is unusually high or low, if the need for liquidity is unusually high or low or if investment opportunities are perceived as being unusually good or not, the answer may be obvious. After glancing through the details of your situation, I can't say I see much to drive the answer either way.

Bottom line for me....... Do whatever makes you most comfortable. If you're unsure, just keep making the payments making a note to continue to have your investments structured so that a quick payoff is convenient whenever the mood hits you. It may turn out that simply paying it off when you sell in 2012 is the most convenient thing to do.

The more important question, by far, you should be considering right now is whether you would pay cash for your next, smaller home or take a mortgage on it. Of course conditions at that time will dictate, and likely it won't matter a lot one way or the other, just as in your current situation.

Edit to add this thought: Given no compelling financial reason to have a mortgage or not, momentum (simply continuing to do what you're doing now) becomes a factor. Since you have an attractive mortgage now and will be paying it off within three years anyway, why bother paying it off early? In three years, when you purchase the new, smaller house, you'll have the cash to pay upfront, so unless mortgage rates are unusually attractive, why bother to get one?
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Old 01-31-2010, 03:39 PM   #7
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Meadbh,

Thanks for the websites. I'll take the time necessary to review them.
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Old 01-31-2010, 03:43 PM   #8
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Youbet,

Thanks for the response. I realize there is not necessarily a yes or no answer to the payoff question. I figured I would throw it there just to see if anyone has had a similar situation and what they did. Actually been thinking about paying off by 1/3 every 3 or 4 months.

Still lookin for some feedback on the 401 dist. question.
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Old 01-31-2010, 04:03 PM   #9
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Golfnut: You said
"Also, regarding 401 distributions, can you withdraw in the year you turn 55 yrs old without the 10% penalty applying. I looked it up in the IRS website and that is what it stated. However, in the employer's 401 summary, it mentions you have to be 55 yrs. old before the 10% penalty does not apply."

Aren't those two things exactly the same?

As to the home payoff, I think the plan to sell in 2012 has a big influence on the decision. If you are going to sell in 2012, then you're locking up $70K in a very illiquid asset that you intend to liquidate in 2 years. I'd rather have the cash now.

It was different for me. I plan to be in my home for 10 years, so I'm paying it off this year

Steve
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Old 01-31-2010, 04:05 PM   #10
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DH's 401K plan says there will not be a 10% penalty if separation was made from service during or after the year a participant reaches age 55.

I suggest talking with a tax advisor to confirm your situation. If you can take withdrawals without penalty, you may want to consider keeping enough money in your 401k plan to last another five years and roll the rest of the money in an IRA if you find investments to your liking.

In our situation, we are not taking money from the 401k as we have enough cash to last until he's 59 1/2. We still have the money in the 401k as we like the investments and we will be able to take a distribution without penalty if there is a need.
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Old 01-31-2010, 04:20 PM   #11
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Stevenst,

It is not the same thing. IRS website states you can take distributions from a 401K the year you turn the age of 55. So if you will be 55 this year, you can take dist. on 1/1/10. Also, this only applies to the 401k of your present employer.

Again, my employer's 401k summary states I have to wait until my 55th bday.
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Old 01-31-2010, 04:40 PM   #12
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Now I get it. It fits in with your 'if I make it to 55' in the original post. A fine detail, but important. Now, I will go look at my own 401(k) and see if I might be in the same position.......

Steve
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Old 01-31-2010, 04:46 PM   #13
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Yeah, I had to read this a couple of time myself in order to understand this dist. wrinkle.
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Old 01-31-2010, 05:00 PM   #14
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There is a cost that is easy to calculate based on the amount of the mortgage payoff and the difference in interest rates between what you pay on the mortgage and what you make on the cash savings. You might be able to lower this cost by finding a better interest paying account or refinancing your mortgage or taking a low cost HELOC and replacing the mortgage.

There is also a measure of stability and security in having the liquid cash available to cover any loss of income, especially if your job situation is questionable in any way.

Lastly, if you do pay off the mortgage, you reduce your ongoing monthly expenses by the amount of your former mortgage payment, which makes your ongoing exenses in (future) retirement that much lower. In the short term, it enables you to redirect that cash flow that used to pay the mortgage (principal and interest) into a new investment. Over time, this could rebuild the cash you used to pay off the mortgage.

Complicated. I'm usually all for paying off debts, but recent job issues have made me much more cautious about keeping a cash cushion available. Still, you will end up with some years worth of expenses in cash even after you payoff the mortgage. Only you can answer how big a cushion (how much time) you want to have available in case of loss of your job. As an older worker, my job prospects become more problematic despite anti-discrimination laws, so I'm inclined to allow for a much longer possible time to look for work than I used to.
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Old 01-31-2010, 10:33 PM   #15
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Growingolder,

Refinancing probably would not be cost effective given the rate we already have (4.75%) plus the closing costs involved.

We do have a home equity line (3.0% rate) but the rate is variable. Hmmm - wonder if we should pay off the mortgage with the home equity and then pay off the home equity (maybe paying off 1/3 of it every 3 months or so)

Good or bad idea?
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Old 01-31-2010, 11:44 PM   #16
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With 190k in cash, you will still have plenty left after paying off 70k (you mentioned 190k ~ 3years of living expenses, so now you'd have 2 years, or more since you would not be paying mortgage). If someone gave me 4.75% guaranteed interest on my money in today's environment, I would grab it... Well, taking tax deduction into account, perhaps it's more like 3.5% in your case, but I would grab that too!

This sounds too easy, so I am probably missing some important considerations on the other side... ?
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Old 02-01-2010, 02:51 PM   #17
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Originally Posted by golfnut View Post
Refinancing probably would not be cost effective given the rate we already have (4.75%) plus the closing costs involved.
We do have a home equity line (3.0% rate) but the rate is variable. Hmmm - wonder if we should pay off the mortgage with the home equity and then pay off the home equity (maybe paying off 1/3 of it every 3 months or so)
Good or bad idea?
The HELOC will generally only offer a 10-year draw followed by a 10-year repayment period. If this is less than the time remaining on your mortgage then you'd be squeezed into making more payments in less time.

To hedge your bets, another flexible option would be to accelerate your mortgage repayment by paying bi-weekly instead of monthly. That cuts roughly six years off a 30-year amortization.

A third option would be to put one-seventh, $25K-$30K, of your cash into a seven-year CD at roughly 4%. (This morning NFCU is offering 4%, USAA & PenFed 3.75%.) Each year you could buy another seven-year CD with another $25K-$30K of your cash. I suspect that about halfway through the ladder process you'll be handily earning a yield of more than 4.75%.
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Old 02-02-2010, 06:50 PM   #18
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Nords,

Thanks for the response. Regarding the seven year cd idea, I'm hoping to retire much sooner than seven years. Not sure I can swing it (I think I can with pt work) would like to leave in the very near future.

Still can't decide if I should take a big chunk of my cash to pay off the pesky mortgage.

Decisions! Decisions!
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Old 02-02-2010, 07:55 PM   #19
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Normally, I tend to be in favor of keeping low interest mortgages. However the interest rate environment has changed so much that I don't see much point in keeping 190K in money market earning virtually no money while paying $3,300 in mortgage interest. That still leaves you with $120K in cash plenty for an emergency fund etc.
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