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Old 11-28-2014, 05:07 PM   #21
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Another factor people often fail to consider is what is done with the money you would use to make the mortgage payment if you did pay it off. When I paid off my mortgage four years ago the money that would have been my interest payments was invested, so those investment earnings build over time and can be added to the immediate interest savings from the mortgage payoff. Personally I just couldn't see paying the interest and chose the security of paying off my home. If the economy enters a deflationary stage, I'd hate to have a mortgage with declining values as many did a few years ago.


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Good point, you will have a stream of payments to invest, so the advantage of higher return would decrease over time.
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Old 11-28-2014, 05:44 PM   #22
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I'm probably an anomaly in that I did an 80% cash out refi a couple weeks before I retired a few years ago. I dropped my rate from 4.375% to 3.375% (both 15 year mortgages) and I figured that would be my last/best chance at "cheap' money. I figure if I can't beat 3.375% then having a mortgage will be the least of my worries. So far it has worked out well as my portfolio return since I took out my mortgage has been 11.82% annually so things would have to go bad in a big way for me to come out behind so my timing was good with 20/20 hindsight.

I think carrying a mortgage in retirement is easier if it is relatively small (ours is less than 10% of our net worth at the time we took it out).
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Old 11-28-2014, 07:05 PM   #23
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Without quoting anybody I will make a few comments on some of the posts...

Some say to make a comparison to CD or Treasury rates... I say this is wrong.... You have an AA that you have picked... if you pay off the mortgage with your CDs, then you will have too much invested in stocks and you will sell some to get back to your AA.... the real rate to compare is an anticipated rate on your AA...


Someone quoted about feeling better with having a paid off house if the market goes down.... what does it matter If you do not plan on moving, you just keep making your payments and ignore the value of the house.... it might have an emotional effect, but in reality there is nothing different in the two ways....



The reality is that since the market usually does better over a 15 or 30 year time frame, having a mortgage has more advantages financially than not having a mortgage.... if interest rates go down, you can refi and take advantage of those lower rates.... if interest rates go up, then you earn more on your investments... IMO, paying off the mortgage is a emotional decision which cannot be modeled... that is why it is so hard to find any that really make sense, because they do not make sense...

It think it was REWahoo that said do what makes you sleep better at night... that is the big decision (If I said the wrong person... sorry)...
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Old 11-28-2014, 07:31 PM   #24
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Hi Texas proud
I don't think the mortgage professor was saying to pay off the mortgage with bonds or cd's. He was saying that an apples-to-apples comparison of paying off a mortgage at a certain interest rate should be compared to the returns of an investment of equal risk - cd's and bonds being those vehicles.

Now you're right, from a practical standpoint, many of us would be pulling $ to pay off a mortgage from an AA that is most likely stocks/bonds. To me, that's when taxes and the amount of time left on the note comes into play as well as inflation (which means real returns) since a standard mortgage won't change with inflation, but your effective returns from your AA will.


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Old 11-28-2014, 08:07 PM   #25
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With a paid off home I feel like I can have a bit more aggressive AA than I would if I had to come up with a mortgage payment every month. So, I'm more in favor of comparing a mortgage to a more conservative investment as a personal viewpoint.

A different factor for some to consider, if you are in ER and have the bulk of your savings in tax advantaged accounts, keeping a mortgage that extends beyond age 59.5 can make sense to bridge the gap until you can access your 401K/IRA, pension and SS money.
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Old 11-28-2014, 08:32 PM   #26
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If I paid off my mortgage, I'd probably buy a new boat. I know me.

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Old 11-28-2014, 08:35 PM   #27
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Regarding the sleep at night factor -- having a mortgage always seemed better to me on this front since it preserves the "walk away" option (as well as the options provided by having a pile of money).

Owning a home has always made me a little nervous due to its undiversified nature. Had one coworker whose house in florida was swallowed up by a sinkhole, other acquaintances have had major foundation issues, etc.
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Old 11-28-2014, 10:21 PM   #28
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Hi Texas proud
I don't think the mortgage professor was saying to pay off the mortgage with bonds or cd's. He was saying that an apples-to-apples comparison of paying off a mortgage at a certain interest rate should be compared to the returns of an investment of equal risk - cd's and bonds being those vehicles.

Now you're right, from a practical standpoint, many of us would be pulling $ to pay off a mortgage from an AA that is most likely stocks/bonds. To me, that's when taxes and the amount of time left on the note comes into play as well as inflation (which means real returns) since a standard mortgage won't change with inflation, but your effective returns from your AA will.


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Why would I want to compare something that would never exist

I do not have a stash of CDs that I could cash out and pay off the mortgage, so right there his method is broken for me...

IF I had an AA that had enough CDs to pay it off.... I would rebalance the portfolio after I had paid it off (that is, unless it was low where I could just pay it off without having to rebalance).... so the rate of return on my whole portfolio is the rate I would need to use....
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Old 11-28-2014, 11:51 PM   #29
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Even though this discussion has been beat to death every which way, I still think about this as well. After reading alot of this type of thing at bogleheads, I treat my mortgage like a "negative bond" which needs to be compensated for in my AA. In other words, I need to hold in bonds (or CDs, etc) the balance of my mortgage to offset the 'negative bond' effect it has. If my portfolio was big enough to supply a 2.5% draw rate that covered all of my expenses, including the mortgage payment, I wouldn't even think about paying it off, and I would invest the mortage balance in long term muni bond fund from vanguard. Right now, my portfolio is not that big, so I prefer to hold the mortgage balance in a "principle safe" investment such as CDs or savings account. Right now, this strategy is costing me a liquidity premium, as my mortgage rate is 3.125% and the most I can get out of 5 year CDs right now is about 2.5%. I'm hoping for an arbitrage situation where I will find a CD rate of equal to or higher than my mortgage, but even at a 3% CD rate, I believe the liquidity premium is worth paying due to the flexibility of being able to get my hands on that cash should I need it. (Penfed, are you reading this ;-))

Just my $.02, and probably what it's worth!
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Old 11-29-2014, 07:01 AM   #30
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I think it is best to compare my mortgage interest rate to my overall portfolio rate since I don't attempt to match investment cash flows with mortgage cash flows. IOW, I don't attempt to have any investments whose cash flow characteristics mirror my mortgage cash outflows, but rather, everything goes into one pot that is invested 60/40... it was 60/40 before I did my cash out refi and once my mortgage is paid off it will still be 60/40.

My rationale of using the portfolio rate is by analogy to finance theory for corporate investments where you evaluate investments using your weighted average cost of capital (which is in turn based on a mix of cost of equity and cost of debt) rather than the incremental cost of capital. IIRC using incremental cost of capital can bias the investment decision. YMMV.
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Old 11-29-2014, 07:23 AM   #31
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If I had put the $400K it took me to pay off the mortgage into the market instead, I'd be way ahead right now. If the market implodes tomorrow, the payoff would look like a better deal.
I paid off my mortgage in August 2014. When the recent correction was happening, I was glad I paid it off. Now, I wish I had invested it in the market in October.

Of course, next month, I might be glad I did it again. (actually, I am still glad.)

Either way, cash flow is $1,145 higher and no one has a crystal ball. And 5.5% is a lot more palatable than 3.5%
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Old 11-29-2014, 07:38 AM   #32
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My rationale to pay off mortgage- std deduction was more than itemized

The year was 2008 - Money Market was making almost 0% - paid off 65k remaining mortgage (5 percent interest rate) using emergency funds - still had a year left in the bank

Started banking the mortgage payment to rebuild the emergency fund

So at the time I figured it was the best way to earn 5 % guaranteed

This is a tough decision and timing is everything
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Old 11-29-2014, 09:24 AM   #33
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For me, if i paid off my mortgage I would have to reduce my Roth conversion by an amount about equal to my mortgage interest as my itemized deductions excluding mortgage interest are about the same as the standard deduction so I would rather keep the mortgage, do higher Roth conversions and spend less time in the 25% tax bracket once RMDs start.
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Old 11-29-2014, 09:48 AM   #34
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I paid off my mortgage a couple of years ago.

My mortgage interest was my biggest tax deduction. While I was w*rking and when I got to the last 7 years of my mortgage the mortgage interest started to decline to the point that I started to increase my contributions to my 403b to avoid paying taxes on my additional taxable income. The amount increased each year.

The result was that I was pouring more and more money into my retirement savings account. And I was practicing LBYM. Five years later I found that I was living quite well on a fraction of my income and that my pension payments were more than enough to allow me to ER.
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Old 11-29-2014, 11:53 AM   #35
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For me, since most of my assets are in tax advantaged accounts, I'm trying to stretch out the number of years I keep my income below certain thresholds (for tax purposes).

Not only am I not going to pay it off, but I'm going to use a HELOC to squeeze another year of showing low income, if I can!
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Old 11-29-2014, 07:04 PM   #36
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In my simple mind, debt is something to be avoided except when you have no choice... like when you're 25, with no savings, and need reliable transportation to get to/from your job. It's not intended to boost your investable assets in retirement. That type of balance sheet leverage, and the unnecessary risk and uncertainty it creates, has no place in my retirement plan. I'm not a "sleep better" type. IMHO, it's just an inappropriate "capital structure" for that stage of life. Even worse if you're counting on the market outperforming your mortgage to enable early retirement.

Now... having said that, if you find yourself going into retirement holding a 20-30 year mortgage at sub-3.5%, it's hard to imagine a financial/market scenario that won't favor holding the mortgage. As someone else posted, under that worst-case scenario, the mortgage would be the least of your concerns. OTOH, if I was sub-15 years with a 4-5% rate or above, I would pay it off immediately. FIRECalc and cFIREsim are great tools for quantifying the success rate of your specific mortgage scenario. Just be cautious using all the bullish historical data to evaluate the next 10-15 years. With interest rates at historic lows, I don't think all that historical goodness is a reliable short-term indicator. Many people are quick to tout the current, historic low interest rate environment as justification to hold a mortgage, without realistically thinking through what that means to the other side of the equation.

Lastly, the tax advantage of holding a mortgage is frequently over-valued. I no longer have a mortgage, but when I did, my itemized deductions typically exceeded the standard deduction by about one-fourth the amount of my deductible mortgage interest. At my expected marginal rate of 15% in retirement, the advantage was negligible and would have phased down to zero in just a few years. This is quite easy to project by using your amortization table and applying an inflation factor to the current standard deduction. I'm sure there are scenarios where a meaningful portion (or all) of the deductible mortgage interest exceeds the standard deduction. But given the size of standard deductions these days, I have to believe that is the exception and not the rule.
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Old 11-30-2014, 12:39 AM   #37
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In my simple mind, debt is something to be avoided except when you have no choice... like when you're 25, with no savings, and need reliable transportation to get to/from your job. It's not intended to boost your investable assets in retirement. That type of balance sheet leverage, and the unnecessary risk and uncertainty it creates, has no place in my retirement plan. I'm not a "sleep better" type. IMHO, it's just an inappropriate "capital structure" for that stage of life. Even worse if you're counting on the market outperforming your mortgage to enable early retirement.

Now... having said that, if you find yourself going into retirement holding a 20-30 year mortgage at sub-3.5%, it's hard to imagine a financial/market scenario that won't favor holding the mortgage. As someone else posted, under that worst-case scenario, the mortgage would be the least of your concerns. OTOH, if I was sub-15 years with a 4-5% rate or above, I would pay it off immediately. FIRECalc and cFIREsim are great tools for quantifying the success rate of your specific mortgage scenario. Just be cautious using all the bullish historical data to evaluate the next 10-15 years. With interest rates at historic lows, I don't think all that historical goodness is a reliable short-term indicator. Many people are quick to tout the current, historic low interest rate environment as justification to hold a mortgage, without realistically thinking through what that means to the other side of the equation.

Lastly, the tax advantage of holding a mortgage is frequently over-valued. I no longer have a mortgage, but when I did, my itemized deductions typically exceeded the standard deduction by about one-fourth the amount of my deductible mortgage interest. At my expected marginal rate of 15% in retirement, the advantage was negligible and would have phased down to zero in just a few years. This is quite easy to project by using your amortization table and applying an inflation factor to the current standard deduction. I'm sure there are scenarios where a meaningful portion (or all) of the deductible mortgage interest exceeds the standard deduction. But given the size of standard deductions these days, I have to believe that is the exception and not the rule.

Just a couple of comments.... if the interest rate was as high as you say, then why not do a refi to a lower rate instead of paying it off You say we do not look at the other side.... not exactly sure what you mean, but IMO I do... I do not think that rates can stay this low forever... in 5 or so years a mortgage in the 3% range will be a thing of the past and then your money will be earning more than what you pay....

As for a tax deduction... I agree... but there are a lot of people in high cost areas and the deduction does mean good money in their pocket.... for me, I have to double up on my property taxes every two years just to get over the standard deduction... (hint, my loan balance is low and with a low interest rate the total interest is very low)....
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Old 11-30-2014, 07:41 PM   #38
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Many of the younger folks on Mr. Money Mustache claim that financially if you have an interest rate under 5% that you are better off to keep investing instead of paying off your mortgage. We paid ours off before we retired & I have never regretted that decision. Was it the smartest thing to do? No clue.
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Old 11-30-2014, 08:15 PM   #39
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I would tend to agree with them in that it is more likely than not that your investments will return more than 5% over the long run, some of that investment return will be tax-advantaged qualified dividends and long-term capital gains and mortgage interest is deductible against ordinary income, and younger folks would also presumably have income coming in to make their mortgage payments.
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Old 12-01-2014, 01:03 AM   #40
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We had a mortgage rate under 5 percent and yeah we put our savings into the market instead of paying it down. However after a while it becomes tiresome to see the huge balance that barely changes so we started increasing our payments.

The bulk of our extra money still went to investments though.


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