Pay off house?

[Bestwifeever]

We paid off our house as we started retirement in 2008. Our pension/SS/dividend income easily covers our expenses but would not have covered our mortgage payments, so we would have had to pull a little $$ from the nest egg for it, and that would have meant selling low when there was a little downward excitement (I think this is the basis of the old conventional wisdom of not having a mortgage in retirement). Perhaps you can invest the proceeds of the sale of the rental and then pay off the mortgage when you do retire? You will have made seven more years of payments against the mortgage as well by that time.

I'm sure it's six of one, half dozen etc in the end from a financial standpoint, but I do love the feeling of having zero debt the past ten years.

[joeea]

Quote:

Originally Posted by ERD50 OK, so how can anyone in this thread claim it is "almost a no-brainer" to do an early pay-off?

For some folks, no-brainer-ness involves feelings rather than numbers.

[ShokWaveRider]

Answer to OP.... a resounding YES!

[IMATERP]

You haven’t paid off your property yet? What are you waiting for?

Today makes one year and one day since I FIRED and paying off our house was something that we did 3 years prior to ER.

Just do it!

I

[corn18]

The ROIC on the rental looks to be about 3.43% (12,000/350,000). Is it one of those unicorn rentals that require no work, ever? If not, that has a cost that isn't captured in the ROIC.

The interest rate on your mortgage is 4.25%. So paying off the rental to pay off the primary is a smart financial move.

The payoff mortgage vs. invest is a question that will never really be answered.

Do what makes you happy.

[ERD50]

Quote:

Originally Posted by joeea Quote: Quote: Originally Posted by ERD50 OK, so how can anyone in this thread claim it is "almost a no-brainer" to do an early pay-off? For some folks, no-brainer-ness involves feelings rather than numbers.

OK, but he didn't say "I listened to my heart/gut instead of my brain". The context really sends the message that it is obvious that the pay-off was better.

It would sound snarky for me to reply "So you didn't use your brain?" I don't think that's what they meant.

-ERD50

[joeea]

Quote:

Originally Posted by ERD50 OK, but he didn't say "I listened to my heart/gut instead of my brain". The context really sends the message that it is obvious that the pay-off was better. It would sound snarky for me to reply "So you didn't use your brain?" I don't think that's what they meant. -ERD50

Right. But your question was "so how can anyone in this thread claim it is "almost a no-brainer"" - and that's what I explained.

Your brain doesn't make decisions solely based on the financial math. Often that isn't even a major consideration. And that isn't the same as "not using your brain".

Plenty of folks in this thread could claim it is almost a no-brainer. Not me, but plenty.

[COcheesehead]

I had a really low mortgage, 3.125% for 30 years. I had planned to let it ride. Then as FIRE approached we decided to move to a LCOL area and downsize. So we sold our house in June and are in the hunt for a new one in our new town. Based on what we are looking at, we'll pay cash.

[ivinsfan]

Too many unanswered questions, for example let's say you retire before 65 and HI is a concern...you might want that 350 from the rental house to live on and keep your income below the ACA cliff. In that situation paying off your primary home could be a big mistake.

I f you want to elaborate and give a broader picture of your ER plans people can give a more informed opinion.

[SmallCityDave]

Quote:

Originally Posted by Leifowitz You are right, it is two separate decisions. I should have thought this through a little better before posting. That’s what I love about this forum. We are leaning towards selling the rental. We expect to yield $350,000 after paying taxes, which is close to what we owe on our primary house. Our current interest rate is 4.25%. The breakdown of principal/interest is $600/$1400 per month. Our primary house is the only debt that we have. We have 7 years left until we retire at age 59.

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, you are completely debt free, you keep the rent money & the grass is greener.



If you really hate the feeling of being completely debt free you could always get a HELOC and use that money to invest.

[RetiredAt55.5]

Quote:

Originally Posted by ivinsfan Too many unanswered questions, for example let's say you retire before 65 and HI is a concern...you might want that 350 from the rental house to live on and keep your income below the ACA cliff. In that situation paying off your primary home could be a big mistake.

This is exactly why I'm VERY glad I did not pay off our mortgage.

Paying off your mortgage before retiring is not a "one size fits all" rule, although some people (you know who you are) keep trying to insist it is.

[ERD50]

Quote:

Originally Posted by SmallCityDave Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, you are completely debt free, you keep the rent money & the grass is greener. ...

The pay-off crowd so often misses one part of the equation. Let's restate that:

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, but missed out on investment gains, and in either case, at the end of the loan you are completely debt free.

If I read OP right, " you keep the rent money" doesn't make sense - I thought he said he had to sell the rental to pay off the home mortgage.

Yes:

Quote:

If we sell the rental, we would have enough cash after the capital gains and depreciation recapture to pay off our primary house

So strike that part you added about 'keep the rent money'.

-ERD50

[booey]

I've been making double payments (or more) on my 15-year mortgage to get it paid off in 6.5 years. I have 4 payments left. For me it's a mental/emotional thing. I feel that I can't truly be "FI" if I'm obligated to make monthly payments on something.

[ERD50]

Quote:

Originally Posted by pb4uski ,,,, Just the other day I ran a Portfolio Visualizer analysis that started with a portfolio equal to our mortgage in January 2012 with monthly fixed withdrawals equal to our monthly payments. That portion of our portfolio, after paying ~7 years of payments is $100k more than our mortgage balance... so I am way ahead...IOW, that's $100k that I wouldn't have if I had used that money to pay off my mortgage 7 years ago instead of refinancing.

I posted a while back that I did the same thing following your suggestion. Then I thought about it in a more general way.

Maybe someone can come up with better sources, but these show 20 and 30 year rolling average total returns for the stock market:

https://www.crestmontresearch.com/do...Yr-Returns.pdf

https://awealthofcommonsense.com/201...arket-returns/

From what I can see, only three 20 year periods dropped below 5%, and only one barely below 4% (out of 78).

Thirty year returns were all above 7.75%.

So if you can get a mortgage below those rates (pretty easy these days), history is way on your side.

Some people may still not want the slight risk that they could under-perform their mortgage. That's fine, their decision. Just don't try to sell it to me as any sort of great financial decision, or that almost everyone should pay off their mortgage.

-ERD50

[pb4uski]

Quote:

Originally Posted by Bestwifeever We paid off our house as we started retirement in 2008. Our pension/SS/dividend income easily covers our expenses but would not have covered our mortgage payments, so we would have had to pull a little $$ from the nest egg for it, and that would have meant selling low when there was a little downward excitement (I think this is the basis of the old conventional wisdom of not having a mortgage in retirement). Perhaps you can invest the proceeds of the sale of the rental and then pay off the mortgage when you do retire? You will have made seven more years of payments against the mortgage as well by that time. I'm sure it's six of one, half dozen etc in the end from a financial standpoint, but I do love the feeling of having zero debt the past ten years.

Actually, that made me think... what would my results have been if I took on a mortgage at one of the worst possible times... Jan 2008. So I did a Portfolio Visualizer run assuming that my mortgage had started in Jan 2008 rather than Jan 2012.... the balance in my investment account today... after making 11 years of payments from the investment account... would be 170% of the mortgage balance... so even starting at a horrible time one would be 70% ahead. That is with 60/40 indexed funds.

[BeachOrCity]

I am at a similar crossroads. About to close on selling my rental house. What to do with all of the cash?

The tax bill is huge. Have you looked at opportunity zone funds for the gain that is not part of recapture? You could get a 7 year deferral plus a reduction and other long term benefits too detailed to discuss right here. (Google it for an intro).

I did not see anyone else mention it but I would decide on your asset allocation and treat any existing mortgage as a negative against what should be in bonds based on your target aa.

Comparing a certain mortgage interest expense to a very uncertain stock appreciation is not sound financial logic (my opinion).

Given the new lack of real deductibility for most of us for mortgage interest there is a new wrinkle to consider and that is your other alternative for the cash has a lower hurdle to make financial sense because the mortgage interest is most likely not deductible.

All of this tilts the decision more toward payoff than it used to be but for some because of liquidity or just an emotional desire to have the cash decide to keep the mortgage.

Final thoughts. You don’t have to decide right away. You can’t Undecide paying off a mortgage easily if retired. So take your time. And if you sell the rental house take a look at opportunity zones.

[pb4uski]

Isn't the tax bill just 15% federal on the gain excluding depreciation recapture and the lower of 25% or your ordinary income tax rate on the depreciation recapture?

What did you expect it to be? A free pass?

[BeachOrCity]

Quote:

Originally Posted by pb4uski Isn't the tax bill just 15% federal on the gain excluding depreciation recapture and the lower of 25% or your ordinary income tax rate on the depreciation recapture? What did you expect it to be? A free pass?

15 percent or 20 percent federal. Plus 8.75 percent state. Plus 3.8 percent aca tax on a big part of it. The depreciation recapture will be at 25 instead of 15/20.

Add it all up and when there is a large real estate gain in a high tax state and one is looking at sending about a 1/3 back to the govt if they already have base income eliminating all the low bracket space under 100k income.

Not complaining just stating he reality.

[JDARNELL]

I too have a couple of rentals that I have been approached about selling. When cpa ran the numbers the tax hit was more than I am willing to absorb. Don’t see much of a way around it other than 1031 exchange or passing through my estate. Not interested in either one at this point.

[pb4uski]

I guess another argument when we have the next stocks/bonds vs real estate debate... looks like real estate locks you in more. That said, I have some highly appreciated stocks that I'm unwilling to sell because of the gain and tax... but that is only at 15%... ok,all me cheap.