mortgage versus debt free?

[dory36]

A couple of years ago there was a lively discussion among the ER group about whether it made more sense to have a mortgage plus a hefty portfolio, or be debt free and have a somewhat smaller portfolio, as one entered early retirement.

I took the debt free side, but it seemed like folks were about evenly split, with those favoring a mortgage arguing that the return on the larger portfolio would beat the mortgage interest.

With the change in the market, what is the sentiment today?

Call me contrary, but I'm almost inclined to favor the mortgage currently. The times are bad for liquidating stocks to pay off a mortgage, certainly, but given a choice, I'd put more into the market right now.

Having said that, I do not plan to refinance anything to free up cash for investment!

What do you think?

Dory36

 

[goinfishin]

Rick Edelman has some of the best writing I have seen on this, and he seems to almost always be able to make a case for a large mortgage.

I personally vote for no mortgage as to me this is a guaranteed return on your money all be it possibly a lower rate of return than maybe elsewhere. However, in today's times, I'd exchange lower return for safety. Maybe its the banker in me but I don't think so.

Oh yeah, Dory, do you know of any good web sites about house boat living?

 

[Prometheuss]

I am in the camp that says that there is no right answer to this just as there is no right answer to the asset allocation question. It depends on your personal situation, outlook and values. I do agree that now is a good time to put more money into the market. I am a renter myself and I prefer saving more for retirement versus buying a house; however, I am living in one of the most expensive housing markets in the country.

It is not unusual here to pay $1800 a month in rent for a two bedroom/two bath house that would sell for $550,000. When you do the math on this, the return on equity is less than 4% before taxes. However, I can see the owner's side of this. She bought the place at about a quarter of the current price and owns it outright. The income has gone up well beyond her expectations.

You must also factor in the transaction costs of selling. One of those is the big annual property tax increase that a sale triggers. The current owner pays taxes on the basis of her purchase price with very minor adjustments each year. The next owner will pay taxes (just over 1%) on the selling price and that amounts to over $5,500 per year in property taxes alone. Throw in the one time cost of real estate agents which can be up to 4% and the transaction costs are not insignificant.

Housing sales have slowed and prices are not going up. There are plenty of houses on the markets though sellers have not begun to slash prices. That causes me to wonder if I should buy soon or wait to see if prices drop. I watched a friend and co-worker delay his retirement for three years while he waited for the house he bought to climb out of a $90,000 negative equity situation when selling prices dropped and the public school and park planned for his neighborhood turned in "affordable low income houseing." When things got overheated in the late 90's he bailed with a $50,000 profit, but he was mighty unhappy.

I am not anxious to trade away my relatively low rent. If I was sure that I wanted to retire here I would feel differently. I am looking for land where I might build a retirement home. I would have no problem with a mortgage in retirement since I have an inflation protected defined benefit component to my total retired income.

Regards,
Prometheuss

 

[dory36]

Living aboard (side conversation)

Oh yeah, Dory, do you know of any good web sites about house boat living?

Most of the links I had from a couple of years ago seem to be dead now. Www.sailnet.com has some articles, but it is mostly about the cruising aspects rather than about living aboard, and houseboat living -- usually in one place, and usually at a marina of some sort -- doesn't compare with cruising living, where you're seldom in the same place more than a week or so. The articles tend to reflect the issues related to transient living.

There is a very active "living aboard" mailing list; I used to subscribe, but when getting volumes of email became a problem due to infrequent and slow internet connections, I dropped off the list. You might try them a while, and maybe ask for current links. To subscribe, send email to live-aboard-request@crux.astro.utoronto.ca with the word subscribe in the text of the message.

Dory36

 

[RedOscar]

My aversion to debt will always drive me to be paid for over holding a mortgage, especially in early retirement.

I like the security in knowing that making a mortgage payment each month is not on my list of concerns. In today's uncertain stock market, and predictions of below average returns on investment, I'm thrilled to be debt free.

Sure, the bean counters can come up with a dozen reasons why being invested in "the market" may have advantages over paid for, I just don't always buy the arguments.

To me, debt (even a mortgage) is not all that desirable of a thing.

Red

 

[arrete]

RedOscar said

My aversion to debt will always drive me to be paid for over holding a mortgage, especially in early retirement.

I like the security in knowing that making a mortgage payment each month is not on my list of concerns. In today's uncertain stock market, and predictions of below average returns on investment, I'm thrilled to be debt free.

I have to agree. It's really nice not to have any debt to worry about - taxes are bad enough. And in that vein - some people who have been paying their property taxes through their mortgages may be shocked at how much the property tax actually is. So, be sure to include that in your retirement budget if you plan to pay off your mortgage beforehand.

Ours went up 22% this year. I'm hoping that's nor a trend.

arrete

 

[Mr._johngalt]

I have no mortgage. However, with rates as low as they are now, I know I could borrow to the max. and
make money on the cash borrowed. It's a no-brainer
in my opinion. So, why don't I do it? I just don't have
the energy anymore and don't want the hassle.
But, if I was 15 years younger I could make a pile of money pretty easily. Would probably concentrate in
real estate investment.

 

[Thinkingaboutretiring]

I recently took a cab ride with a Mortgage Backed Security broker that was trying to "sell" me on the benefits of Mortgage Backed securities.

As we discussed the issues, I asked him the question as to whether it made more sense to buy a mortgage backed security or to pay down the mortgage on my own house.

His answer was that almost everyone he knew in the industry completely owned thier own house.

So if you are buying bonds anyway - you are better off paying down your mortgage.

I've got a very small mortgage on my house anyways - but that's so I can refinance for a much larger amount in case my financial situation ever changes.

 

[dory36]

I've got a very small mortgage on my house anyways - but that's so I can refinance for a much larger amount in case my financial situation ever changes.

I didn't know that having a mortgage made getting new financing easier. Is that so?

Dory36

 

[Mr._johngalt]

I don't see why having a small mortgage would make
refinancing any easier, unless you refinance with the same lender and assume that you will save some money or hassle that way.

 

[Mr._johngalt]

With rates so low, I have found opportunities where
I could borrow and reinvest short term and pocket the
interest spread. Been doing this for several years now and, although I have not made a pile of money it
can be a "no brainer" if done right. If I was younger
I do believe the low interest rates could offer big returns
if you picked your spots. Too much hassle now for me.
If it's not easy I avoid it (ask my wife .

 

[dory36]

With rates so low, I have found opportunities where
I could borrow and reinvest short term and pocket the
interest spread.  Been doing this for several years now and, although I have not made a pile of money it
can be a "no brainer" if done right.  If I was younger
I do believe the low interest rates could offer big returns
if you picked your spots.  Too much hassle now for me.
If it's not easy I avoid it (ask my wife .

I've found myself in this situation many times, before I gave up a decade ago. There were so many situations where I could borrow at x% and invest for a sure return of x+3%. Somehow it never worked, but there was always a plausible explanation, and next time...

Obviously, despite my Mensa membership for the past 30 years, I'm not smart enough to find such sure bets.

I learned to ask: If folks managing large sums of money could make more, and were being paid or evaluated on how much they made with their portfolios, why would they loan money out at current interest rates? Government-backed mortgages alone were not sufficient to answer the question.

If nothing else, if such discrepancies exist, traders would borrow all the available capital and buy up the "no brainer" investments that offered sure returns in excess of the interest rates. That is the sort of effect that keeps lots of investments in line -- the arbitrage traders who will immediately jump on a tenth of a percent discrepancy with so much money that trading costs are inconsequential, and rewards are in the 6 and 7 figures.

I have to assume that risk, reward, and volatility (and other factors I've surely neglected) are well-reflected in the interest rates being offered.


Dory36

 

[baanista]

Thinkingaboutretiring mentioned that he kept a small mortgage on his place in case he needed to remortgage it. Dory36 wondered why? It may be that he is in a jurisdiction where homestead protection causes this. I think this was the case in Texas at least until the law was changed to allow second mortgages a few years ago. The logic I think, was something on the order that the state shouldn't allow those wicked Eastern bankers to get their hooks on your place after you had paid it off.

What I really liked about thinking's post though, was the anecdote about how everyone in the mortgage backed security business owned their homes outright. Where is the banker's mortgage appears to be a question on the same order as where are the customer's yachts.

Regards,

Baanista

 

[fgcugt]

Alert to goinfishin

Rick Edelman is slick but corrupt. Will only recommend investments on which his "financial advice" company will get a commission. Examples: Recommends load funds, disdains "cheap" no-load funds like TR Price and Vanguard, hates index funds, says Consumer Reports recommendations are garbage, defends high-cost variable annuities, disdains bonds and CDS, says EVERYONE should carry a big mortgage (and invest your $ with him), etc.

 

[Mr._johngalt]

Been semiretired since 1993. I only borrow when I can see "carved in granite" returns with little risk and virtually no effort. Otherwise I am 100% debt free
and intend to stay that way.

 

[bongo2]

John, can you give an example of such a "carved in granite" arbitrage opportunity?

I agree that Edelman is obviously influenced by his own compensation. I think he is a very interesting read, though, if you want to challenge your opinions on financial planning.

One good reason for a working person with limited savings not to pay down their mortgage is that, because the payments generally do not change, they would loose some flexibility with that money. If they buy a $10k bond they can sell it if they need to, but they may not be able to get the $10k back out of their house if they need it. For a retired person this shouldn't be an issue, because they should have funds left over after paying off the mortgage.

 

[Mr._johngalt]

Hello! I do have some "carved in granite" or as I like to call them "no brainer" situations, where I can borrow at rates so low that reinvesting (and pocketing the spread) is no problem. Been doing this for a couple of years now. The profits won't let me buy a Porsche, but they are significant, at least to this ER, living close to the poverty
level. I remarked to a friend recently that if this continues, they will just pay you to take their money.
You gotta have time to work all this out, i.e. crunch the numbers. When I was working I didn't have it. Now
it's like a hobby that pays me $.

 

[bongo2]

john, I guess I was wondering if this is something that relates to your specific situation, or if it is something that anyone can take advantage of. What would be an example? Mortgage vs treasuries? Morgage vs muni's? 0% Credit cards vs I-Bonds? What are we talking about here?

 

[Mr._johngalt]

Well, one example would be -0- APR credit credit rates.
Borrow at -0- and then find a home for the money
until the promo rate expires. If your credit limits are
high enough and you shop hard for short term
investments (like bank money market accounts)
it's easy money, even at today's low rates.

 

[REWahoo]

Focusing back to the subject of this topic (whether it is better to head into early retirement with or without a mortgage), I've had a change of sentiment in the past couple of years. The perfomance of the market influenced my rethinking, but it went beyond portfolio performance.

From my perspective, the debt free/mortgage with larger portfolio issue is largely a matter of personal preference. When I was 5-6 years from my RE target date, I planned to carry my mortgage into retirement. But as I got closer to my RE date, I began to be uncomfortable with the thought of the debt I would continue to be saddled with once I left the "working" world. I crunched the numbers on various refinance options and came to the conclusion that I would sleep better with less debt and a smaller portfolio.

As a result, I began last year to cease adding to my portfolio (with exception of 401k contirbutions) and divert those funds to paying off my mortgage. My goal was (is) to retire the mortgage within 3 years and I am on target with 20 months to go.

 

[dory36]

I would sleep better with less debt and a smaller portfolio.

Absolutely!  Not only that -- the income is probable, the outflow is guaranteed. Not a good combination!

Dory36