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pay down mortgage thought
Old 08-18-2018, 05:54 AM   #1
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pay down mortgage thought

A random thought ...
We are in pretty good shape, 100% by Firecalc, for retiring in 2020.
At that point I'll be 64. We have been putting all new savings into 401Ks and HSA the past 5 years or more. Now, I'm thinking maybe it's time to start paying down the mortgage. The mortgage will be the only debt we'll have but, there's no way we'll have it payed off.

We owe $335K on our 30yr mortgage, 28 yrs left. Home vale is >$460K.
The rate is 3.625% fixed.


WE plan to sell and downsize again in a few years, about the time I retire or shortly after that. We want a modest ranch, or a nice condo perhaps.
Normally, I'd say it makes more sense to keep putting savings into tax deferred savings. Almost all of our retirement savings is tax deferred, with AA of about 60% equity, 40% bonds. I would think that long term it would earn > 3.625%.


A few opposing thoughts to encourage paying down mortgage:


* the goal of downsizing is a short term goal (<5yrs) .... cashing out on our house to buy something else. Long term thinking is risky.
* paying down the mortgage is guaranteed 3.625%
* the next mortgage will be at a higher rate since, rates have been climbing (assumption). Buying equity now, will make that loan smaller.
* debt is evil



We'll never have the mortgage fully paid off by retirement but, was thinking of where best to put our aggressive savings over the coming years.
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Old 08-18-2018, 06:11 AM   #2
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Normally Iím in the payoff the mortgage camp because I loathe debt. But Iím not so sure in your case. The reason is because you said most of your savings is in tax deferred accounts. You might consider building up some after tax accounts to allow you more flexibility in your finances. You can still use some of it for your down payment on your future property purchase, while taking advantage of tax benefits of the mortgage if you can itemize.
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Old 08-18-2018, 06:57 AM   #3
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Originally Posted by albireo13 View Post
We owe $335K on our 30yr mortgage, 28 yrs left. Home vale is >$460K.
The rate is 3.625% fixed.

WE plan to sell and downsize again in a few years, about the time I retire or shortly after that.

* debt is evil
It makes no sense to me to aggressively pay down a 3.625% mortgage for a few years. What's the point?

If you feel debt is that evil, save your money instead of paying down this mortgage and pay cash for your downsized house. That way you'll avoid all that evil in the first place.
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Old 08-18-2018, 07:04 AM   #4
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Originally Posted by albireo13 View Post
A random thought ...
We are in pretty good shape, 100% by Firecalc, for retiring in 2020.
At that point I'll be 64. We have been putting all new savings into 401Ks and HSA the past 5 years or more. Now, I'm thinking maybe it's time to start paying down the mortgage. The mortgage will be the only debt we'll have but, there's no way we'll have it payed off.

We owe $335K on our 30yr mortgage, 28 yrs left. Home vale is >$460K.
The rate is 3.625% fixed.


WE plan to sell and downsize again in a few years, about the time I retire or shortly after that. We want a modest ranch, or a nice condo perhaps.
Normally, I'd say it makes more sense to keep putting savings into tax deferred savings. Almost all of our retirement savings is tax deferred, with AA of about 60% equity, 40% bonds. I would think that long term it would earn > 3.625%.


A few opposing thoughts to encourage paying down mortgage:


* the goal of downsizing is a short term goal (<5yrs) .... cashing out on our house to buy something else. Long term thinking is risky.
* paying down the mortgage is guaranteed 3.625%
* the next mortgage will be at a higher rate since, rates have been climbing (assumption). Buying equity now, will make that loan smaller.
* debt is evil

.
We paid off our mortgage when we were 32... but that is a different story. Short term is hard to determine which is better financially, long term having a low rate mortgage is likely better if you can keep the loan if you can keep the $ invested. In the end it is often what makes you feel better.

Note after you quit working it can be more difficult to get a mortgage, or so I've heard.

Look at what % of your NW you home equity is... If it is small, it will have little effect short term
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Old 08-18-2018, 07:15 AM   #5
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Normally I’m in the payoff the mortgage camp because I loathe debt. But I’m not so sure in your case. The reason is because you said most of your savings is in tax deferred accounts. You might consider building up some after tax accounts to allow you more flexibility in your finances. You can still use some of it for your down payment on your future property purchase, while taking advantage of tax benefits of the mortgage if you can itemize.
I agree with this. I have most of my retirement money in tax deferred accounts, and it would have been better if I would have focused on building the after tax accounts. In my case, I would have taken the last couple years and only don’t the 401k up to the employer match instead of maxing out.

As for the house, since your timeframe is so short, I would not bother paying down that mortgage.
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Old 08-18-2018, 08:29 AM   #6
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i am debt adverse , that might be because the first property i bought was at 17.5% pa interest ( seems i was doomed to be a sub-prime customer ) in 1975 .

however karma has strange ways , and i am happy to say i am a in better financial condition, now than the lender ( GE Finance )
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Old 08-18-2018, 08:29 AM   #7
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I have most of my retirement money in tax deferred accounts as well. My thinking on the house is a bit different though. I plan on staying in my huge house for as long as possible. On paper downsizing makes a lot of sense but I love where I live in SW Florida and it would not be easy to replicate my current housing set up. As a result after maxing out my 401k contributions I have been aggressively paying down my mortgage. I will be done the end of this year and will be retiring at the same time or maybe a few months into the new year. Zillow says my house is worth right around $1M. I will get some comfort knowing that I own a $1M property outright. What I did a few months ago was take out a small ($60k) HELOC from the same lender(Third Federal) on the property. They were quite happy to give it to me with $0 closing costs and a waived for life annual fee. They even gave me a $100 Home Depot gift card! I decided that it was much easier to get this HELOC before retirement than after. I never plan to use it other than as a tool to maximize tax savings. Obviously using it will depend on things like future interest rates and tax rates, etc. Seem to me though if interest rates are low then useing the HELOC gives you a sort of "do over" if you paid the house off and later wished you hadn't.
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Old 08-18-2018, 08:32 AM   #8
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net worth is $2.3M
home equity is ~ $140K


so, equity represents 5.7% of total net worth
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Old 08-18-2018, 08:35 AM   #9
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Almost all of our retirement savings is tax deferred,
I have to rethink my comment I think. If this means that most of you assets are in tax deferred accounts, then this is likely the herd of elephants in the room.
Taxable account can help you do roth conversions if they are appropriate for you (paying conversion tax out of taxable $). It can provide some income at low rates (with qualified dividends) instead of pulling from qualified $ taxed as normal income.

Tax diversification provides several knobs that help control the cost of money to live on. I've been surprised how many people only have deferred plans.
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Old 08-18-2018, 08:44 AM   #10
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If you plan to sell and downsize in the next few years, I woudl not pay off a 3.675% mortgage.... it will automatically be paid off when you sell in a few years (from the proceeds from the sale).

Take the money that you would have used to pay down the mortgage and build some taxable account funds.... it'll give you more flexibility.
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Old 08-18-2018, 09:12 AM   #11
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We'll never have the mortgage fully paid off by retirement but, was thinking of where best to put our aggressive savings over the coming years.
Rather than agonize over the question, just start small. Suggestion: Find your amortization schedule, and mark off where you are. Find what you need to do to pay off one additional month in principal. IOW, pay this month's coupon, and add the exact principal for next month. It's probably a small amount of money. However, you will be addressing your goal in a less aggressive manor, and will feel satisfied as the months and years go by. At the end of one year, you have knocked off 2 years, and so on.

Other ways are described in this article:
¬Ľ 3 free ways to pay your mortgage faster
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Old 08-18-2018, 11:42 AM   #12
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Can you save enough cash to buy your future home outright? If so, that would make that change simpler and/or less costly as you wouldn't be taking on a new mortgage and the costs for doing so. Of course many folks use the proceeds from the sale of the old home to finance the new one, but I'm just suggesting you try to avoid that. It makes you a more solid buyer as there is that contingency that doesn't come into play.
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Old 08-18-2018, 12:18 PM   #13
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I knew my job at Megacorp wasn't going to last until age 65. Job consolidation and closed facilities pointed that direction.
We moved to a ultra low COL area and downsized somewhat with the intentions of owing very little on the house as our Ace In a Hole in maintaining our current lifestyle.
Sure enough, everyone 55 and older were presented a termination package they couldn't refuse.
My insight 20 years ago to get a paid for roof over our heads paid off. It sure is nice to be debt free and not to have to think about coming up with the funds to pay the mortgage on reduced incomes.
I recommend anyone with retirement and especially ER in the near future to make getting the house paid or close to paid off a priority in life.
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Old 08-18-2018, 01:20 PM   #14
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Originally Posted by albireo13 View Post
We'll never have the mortgage fully paid off by retirements
Because you mention that most of your current investments/savings are in tax deferred accounts, I'd lean towards keeping this inexpensive mortgage for a while as you build up after-tax amounts. But, really, it doesn't look like going either way will matter much in your situation. And it seldom does for anyone in financial terms.

It's always interesting to note how some folks put such emphasis on the decision to keep or pay off a mortgage when it generally matters so little. And, humorously, they sometimes simultaneously give little thought to key decisions such as AA.

Flip a coin. Either way there's a path to success. If the "debt is evil" thing is really branded into your psychology, paying it off will give you that "feely good thing" although without any particular financial improvement in your overall circumstances.
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Old 08-18-2018, 04:49 PM   #15
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You already have an 8 page thread from last year on your mortgage. Has something changed, or do you just like churning random ideas like this?
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Old 08-19-2018, 03:01 AM   #16
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Originally Posted by albireo13 View Post
* the goal of downsizing is a short term goal (<5yrs) .... cashing out on our house to buy something else. Long term thinking is risky.
* paying down the mortgage is guaranteed 3.625%
* the next mortgage will be at a higher rate since, rates have been climbing (assumption). Buying equity now, will make that loan smaller.
* debt is evil

Quote:
net worth is $2.3M
home equity is ~ $140K
Don't pay down the current mortgage. When you sell and are looking to downsize, simply pay cash for the new home and not take a mortgage.
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Old 08-19-2018, 07:03 AM   #17
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Don't pay down the current mortgage. When you sell and are looking to downsize, simply pay cash for the new home and not take a mortgage.
OP noted that he has most of his assets mostly in tax deferred. It looks like he has had this mortgage for about 2 years. If he has to withdraw from tax deferred accounts to pay cash for the house... that could be expensive. It really depends how much he has after tax/tax free.

Th OP really needs to understand how his tax diversification will affect his retirement plans. The OP may be fine and able to pay cash, but we can't tell based on his descriptions.
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Old 08-19-2018, 07:30 AM   #18
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OP noted that he has most of his assets mostly in tax deferred. It looks like he has had this mortgage for about 2 years. If he has to withdraw from tax deferred accounts to pay cash for the house... that could be expensive. It really depends how much he has after tax/tax free.

My assumption is that the $140k in equity would be enough to downsize and purchase a decent place in a low cost of living locale. A nice condo (which he points out as an option) can surely be had for $140k.
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Old 08-19-2018, 07:36 AM   #19
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Normally Iím in the payoff the mortgage camp because I loathe debt. But Iím not so sure in your case. The reason is because you said most of your savings is in tax deferred accounts. You might consider building up some after tax accounts to allow you more flexibility in your finances. You can still use some of it for your down payment on your future property purchase, while taking advantage of tax benefits of the mortgage if you can itemize.
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I agree with this. I have most of my retirement money in tax deferred accounts, and it would have been better if I would have focused on building the after tax accounts. In my case, I would have taken the last couple years and only donít the 401k up to the employer match instead of maxing out.

As for the house, since your timeframe is so short, I would not bother paying down that mortgage.
Agree with these posts.
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Old 08-19-2018, 08:40 AM   #20
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My assumption is that the $140k in equity would be enough to downsize and purchase a decent place in a low cost of living locale. A nice condo (which he points out as an option) can surely be had for $140k.
So your net worth is $2.3m and your plan is to constrain yourself to a $140k condo solely because you don't want to have a mortgage in retirement or pay the taxes on a retirement savings withdrawal?

That seems really shortsighted to me... especially if your nestegg and retirement benefits are sufficient to cover both your living expenses and a mortgage payment. Roll you equity into a new place that meets your needs and lifestyle and accept having a smaller mortgage as a trade-off for not having to write a big check for taxes.
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