Pay off mortgage or put money into bond fund?

[Dennis]

Ditto.. And isn't it nice feeling (& kinda Cruel) that when you see those Unfortunate and some are dummies, loosing their Homes ,etc or crying the blues they're having trouble getting refinancing, evicted, abandon, etc. that most had no business buying such big places in the first place..and in questionable areas..

and If it's the Old Homestead with More Bedrooms and Needs maintenace all the time? Consider looking around for a Smaller place that is both Much lower Priced and Had Very little Maintenance for your Retirement Home..

We did this about 5 yrs before retiring and we got a place for only $75k, put $25k into it ( $100k total) & spent Wknds there and Retired in it 5 yrs later and put $200k tx free leftover $ into our Savings in the process.. Since 2003' that $200k has grown to over $300k and we're only about 1.5 hrs from our old place and family & old friends.. but making new one's as well up here in SE Wi. so we can still get Chicago Cubs and Bears Games up here too! and go see the Cubs in a nicer stadium in Milwaukee.

Then we also go South to the Ozarks for a Mo. and then Fla for 3 mos in Winter.. and did 4 cruises last yr and plan to do 5 this yr.. they're really cheap now..

Happy campers!

PS. There are other reasons for Owning your own place... one of which is it is a Forced savings plan into a Piggy bank , that keeps some of your $ out of your Greedy little hands to Invest and loose it..like so many have over the yrs..and keeps Extra $ floating around the House that there is Always a Home for it , when raising a family.. And Wifes Want to Own their own Kitchen and Just in case They want to divorce you, they get the Home..is their Insurance policy..LOL

[rayvt]

Well, because lots of people try to convince themselves that what they want to do is objectively the right thing to do. Happens all the time, in all walks of life. How many times does a Ford dealer tell you that a Volkswagon would be a better buy for you?

There's a perfectly good reason & valid to pay off your house mortgage: When the house is a small percentage of your net worth,and you have plenty of liquidity other than the house. 'course, some people would look at this situation and ask, "Why even bother to pay off the house? The monthly payments are trivial, so what's the advantage?"

Our family got a lesson the hard way. My uncle owned a $1M house&land just outside Atlanta, free and clear, and their pension + SS was plenty enough income for them. Then one day he had a chest pain and had an emergency quintuple heart bypass surgery. Medicare pays for a (very short) stay in a convalescent facility that is "street-people" quality. So if you want someplace with middle-class quality facilities and service, you have to pay for it yourself. Cash on the barrelhead. A paid-off house doesn't do you much good when you need $50,000 tomorrow.

[Dennis]

RE: rayvt:
All good Points my friend
I left out to also have a HELC.. HomeEquityLineof Credit as soon as you can get one
I keep one and my Bank Revises it every yr.. Up or down at the rate of using a guide we set up of 75% of the est. Resale value of the house, while others use per what their RE taxes say ..and it's just another Insurance Policy, costing us $25 a yr then as we built up credit, the bank waived that after 5 yrs..

fortuntately we never had to use it, but it's nice to have it avail. in time of need.just like keeping a Credit card with $20k LOC around as well, just for emergencies, regardless of what the Rate is, while we use other Credit Cards with Lower rates & Flyer Miles for our daily use.. our neighbor uses a Am. Express Card with a $50k LOC.
and you're right .. Private NH cost around us run about $6-$7k/mo and thus every few yrs we review things to make sure we have emergency $ to tap into , incase we need it , to buy one of us time for a few mo's to set up longer term financing if need be..

Happiness is a back up..several of them if possible

[Bestwifeever]

Quote:

Originally Posted by megacorp-firee Today, I wired the payoff amount to my mortgage holder. The thrill is second only to FIREing. It wasn't a large amount in comparison to our FIRE portfolio and we would have payed it off in 4 or 5 years anyways. So the liquidity we gave up was not that great. DW had been wanting to do this for a while, so she is happy too. The psychological boost in this era of recession worrys ... etc. is certainly a welcomed feeling.

What, you made a financial decision that you felt is the best thing for you and your family in your own personal financial circumstances and you didn't consult us about it first so we could tell you how wrong you are? Let me just say one thing to you in response: CONGRATULATIONS!!!! Now you can pay the mortgage to yourself and watch your savings grow. Or blow it all on bacon--your life, your choice.

[clifp]

This is a normally a fairly academic discussion for me because I've figured that at below 5% for both my 1st and Pen Fed HEL it just didn't make sense to pay off the mortgage.

However I am starting to seriously consider doing so, although the arguments about maintaining liquidity are pretty compelling. The way I figure the economic future is even more cloudy than normal, and the prospect of severe weather ahead is worse than anytime in my lifetime.

So I think is worth consider some factors beyond historical rates of return and higher SWR rates. The way I figured we have many possible economic outcomes over the next five or so years. Here are four that I am considering

1. A normal economic recovery with a rise in interest so that 10 Yr T-bills are in the 5-8% range. In which case keeping the mortgage makes sense, although the financial benefit is relatively modest.
2. Hyper-inflation 10-yr T-bills exceed 10% as does inflation. In which case my equities should do fairly well and the ~15% of my liquid assets in inflation protected bonds and inflation sensitive (REITs) assets will do even better and borrowing money at 5% looks positively brilliant.
3. The great recession stretches into many years interest rates remain very low, and the market corrects once the prospect for a good economy gets dimmer.
4. The great depression II hits, interest rates drop lower, commercial real estate collapses and housing continue spiraling downward.

Now personally, my portfolio and my ability to remain retired are fine under 1-2. In the 3rd scenario I am going have to make modest cuts in my expenditures. The 4th scenario means I will likely have to look for a job in a downright horrific job market.

Right now Schwab and Penfed offer CDs in the 1-3.2% range for up to 5 years and 5 year ladder yields approximately 2.5% (all considerably higher than money market funds). It seems me that if I replace 280K ~5% mortgage vs a CD ladder I am decreasing my interest expense by $14K a year while decreasing my income by $7K a year. It seems me that I have a net $7K gain. I am missing something?

[ERD50]

Quote:

Originally Posted by clifp It seems me that if I replace 280K ~5% mortgage vs a CD ladder I am decreasing my interest expense by $14K a year while decreasing my income by $7K a year. It seems me that I have a net $7K gain. I am missing something?

No, that seems about right (at current interest rates). You can't come out ahead borrowing at 5% and investing at 2.5%, right? I think this was discussed a while back when some "expert" said that it was almost always best to pay down the mortgage, but he included all these conditions that "made" him right.

When I've done those FIRECALC runs, I always maintained the same AA with and w/o the mort. So what that basically says is, your AA and SWR keep you ahead of inflation in all those successful historical scenarios. And in my runs, that same AA and SWR (with correspondingly larger portfolio) also beat a 5% fixed mortgage (slightly).

-ERD50

[Bikerdude]

Quote:

Originally Posted by clifp Right now Schwab and Penfed offer CDs in the 1-3.2% range for up to 5 years and 5 year ladder yields approximately 2.5% (all considerably higher than money market funds). It seems me that if I replace 280K ~5% mortgage vs a CD ladder I am decreasing my interest expense by $14K a year while decreasing my income by $7K a year. It seems me that I have a net $7K gain. I am missing something?

Well we can't argue with the math the way you have done it. However you are comparing short term rates with possibly 15yr or 30 yr rates (ERD50 mentions this in his reply). You need to include the tax savings on the interest deduction.

I guess if you feel inflation and interest rates are going to remain low for an extended period of time (say 10yrs) then that would help to improve your case . In your last scenario, a depression, I would think your home would plummet in value but 30 yr treasuries would do very well.

[megacorp-firee]

Quote:

Originally Posted by ERD50 Under what circumstances would keeping this: lead to 'losing your home', compared to paying it off now?

The amount to pay off was just over 2.5% of our portfolio and about 1% networth, so in my mind, not significant either way. So if that happens (losing the home), we would have been in trouble either way. So we paid off the 4.875% mortgage instead of putting the money in a 2.7% CD

Quote:

Hey, I get it, for some people it "feels good". So do it. But why try to justify it on economic principals that don't hold water? -ERD50

Our mode of operations throughout the years is to NOT play it too close to the edge, so we have always left a considerable (economic and comfort level) margin in all of our transactions.

I seemed to have hit a raw nerve ... what's up ERD?

[megacorp-firee]

Quote:

Originally Posted by Bestwifeever What, you made a financial decision that you felt is the best thing for you and your family in your own personal financial circumstances and you didn't consult us about it first so we could tell you how wrong you are? Let me just say one thing to you in response: CONGRATULATIONS!!!! Now you can pay the mortgage to yourself and watch your savings grow. Or blow it all on bacon--your life, your choice.

Yep, I scoured the board and this post and figured the time for debate was over ... it was time to 'do or do not', as Yoda would say
... and the occasional slab of bacon never hurt anyone

[clifp]

Quote:

Originally Posted by Bikerdude I guess if you feel inflation and interest rates are going to remain low for an extended period of time (say 10yrs) then that would help to improve your case . In your last scenario, a depression, I would think your home would plummet in value but 30 yr treasuries would do very well.

That is the rub, normally when I look in my economic crystal ball, I least have some gut feeling what will happen in the next few years. I am often wrong but seldom in doubt . Now days I really have no clue what the next 5 years is going to bring, and while I use to dismiss gloom and doomers as being tinfoil hat wearers no longer.

I am pretty confident that ERD50 Firecalc runs are right keeping a mortgage slightly improves SWR survival rates. I just wonder if this time it really is different...

[rayvt]

Quote:

Originally Posted by clifp I just wonder if this time it really is different...

Everything I've ever read w/r/t investments says that "this time it's different" are the 4 most dangerous words every uttered.
As long as human nature remains as it is, it is never different this time.

[Finance Dave]

Quote:

Originally Posted by rayvt No. Today the yields are low, true. But in 5 years what will they be? 6%? 7%? If so, you won't be able to change your mind and get that money back out of your mortgage.

To me this is the biggest factor. You lose control of the money if you pay off the mortgage. That's not to say which decision you make...but it's certainly a big factor.

If you pay off the mortgage today, then in 2 years need money (for college loans, car, vacation, home remodel, medical bills, etc.) and have to borrow it...you'll regret your decision.

However, if you have other cash you can rely on later...then this will not be a concern for you...so good luck!

[megacorp-firee]

Interesting reasonings for not paying off mortgages.

Does this mean, for those that advocate not paying off the mortgage, you will refinance indefinitely as your mortgages get close to being paid off?

Just wondering how far you would take this.

[Katsmeow]

Quote:

I am pretty confident that ERD50 Firecalc runs are right keeping a mortgage slightly improves SWR survival rates.

I've read many of the threads on this but felt one part doesn't really get discussed much. So perhaps I am missing something. Let's say you have 1.25 million in cash but have a mortgage of $250k paying $1350 a month on it. Your SWR is 4% which is $50,000 a year but you spend $16200 for the mortgage so you have $33800 to spend each year other than the mortgage (plus SS, any pension).

But you then pay the mortgage leaving $1 million. At a 4% SWR you then have $40000 to spend each year. Isn't that an argument in favor of paying the mortgage ...at least for those for whom the difference between $33800 and 40000 would be meaningful?

[rayvt]

Quote:

Originally Posted by megacorp-firee Interesting reasonings for not paying off mortgages. Does this mean, for those that advocate not paying off the mortgage, you will refinance indefinitely as your mortgages get close to being paid off? Just wondering how far you would take this.

I don't know about others, but my refi triggerpoint is if the payment savings for a new 30yrFRM is $100/mo or more. No cashout, just refinance the current balance. (Or you could go by interest savings, which triggers at a slightly higher new rate.)

For a 300K balance and 6% current rate, that would be a new rate of 5.375%. (For int sav: 5.5%)
For a 100K balance and 6% current rate, that would be a new rate of 4
.375% (For int sav: 4.750%)
For a 50K balance and 6% current rate, that would be a new rate of 2
.5% (For int sav: 3.5%)

So the lower the remaining balance, the greater the rate difference would have to be.

[rayvt]

Quote:

Originally Posted by Katsmeow I've read many of the threads on this but felt one part doesn't really get discussed much. So perhaps I am missing something. Let's say you have 1.25 million in cash but have a mortgage of $250k paying $1350 a month on it. Your SWR is 4% which is $50,000 a year but you spend $16200 for the mortgage so you have $33800 to spend each year other than the mortgage (plus SS, any pension). But you then pay the mortgage leaving $1 million. At a 4% SWR you then have $40000 to spend each year. Isn't that an argument in favor of paying the mortgage ...at least for those for whom the difference between $33800 and 40000 would be meaningful?

That's an annual difference of $6200.
If you use an SWR of 4.5%, the difference is $4950. But!!! Now the net income (after mortgage payments) is $40,040. That's essentially the same as $40k

If your portfolio is a bit bigger--$1.5M--, the 4%SWR difference is still $6200, but now the net income is $42,800. Bigger than $40K.

So, from one aspect, it all depends on your viewpoint.
Is $40K what you think you need?
Do you want to use a really low SWR? Or are you comfortable with a slightly higher SWR? Why did you pick 4%? Why not 3.9%? Or 3.5%?
Are you focussed on the absolute dollar delta?
If your need is less than $33,800, then there is no need to reach for $40K. It's overkill. How much do you want the rubble to bounce?

De gustibus non disputum.

[rayvt]

Also, remember that decisions are made at the margin. "The standard is not perfection. The standard is the alternative."

What other alternatives do you have for the $250K, besides paying off the mortgage?
You could put it in bonds, and earn perhaps roughly the same rate as the mortgage.
You could put it in preferred stocks, and earn more than the mortgage rate.
You could put in in hot internet stocks and either make a fortune or lose it all.
You could leave it in your portfolio, per your chosen asset allocation.

How about this scenario:
Arguably, people who are serious about FIRE and not depending on Social Security for living expenses. (After all, "FI" means you are not depending on the government to give you money, and "RE" means that you are not old enough to collect SS.)
So, when you start collecting SS, it is essentially extra money.
So how about just allocating your SS income to the mortgage payment? In essence, the SS and the mortgage cancel each other out. Eventually, of course, the mortgage will get paid off and then the SS money will become extra spending money.

[clifp]

Quote:

Originally Posted by Katsmeow I've read many of the threads on this but felt one part doesn't really get discussed much. So perhaps I am missing something. Let's say you have 1.25 million in cash but have a mortgage of $250k paying $1350 a month on it. Your SWR is 4% which is $50,000 a year but you spend $16200 for the mortgage so you have $33800 to spend each year other than the mortgage (plus SS, any pension). But you then pay the mortgage leaving $1 million. At a 4% SWR you then have $40000 to spend each year. Isn't that an argument in favor of paying the mortgage ...at least for those for whom the difference between $33800 and 40000 would be meaningful?

I think the missing element in your analysis, is that some of the $16,200 you are paying each year is going toward the paying down the principal. At some point in the future maybe 5,10 or even 30 years in the future the mortgage will be paid off leaving you with $1.25 million portfolio and $50,000 a year while the person who pays of the mortgage still has a $1 million portfolio and $40K/year. Until that time you are correct the person who pays off the mortgage has more spendable income.

[Dennis]

all I can say is what has worked for me over the past 10+ yrs now

being in Bonds ave 8.4% apy M* Says my port has done..and a 4.2% ave yld
But, then again, That is going to be taxable come time to take it out

so, maybe paying off the mortgage and when comes time to sell it and that first $500k is Tax Free is the Edge..

It was For me when we sold our home to retire...

The house ave a 7% apy growth, but the sale $ we got was all Tax Free..$350k, even at 15% LT CG's would have left us with only about $298k...
We would have had to earn over 12% apy on our Taxable Bond income to net the same..
The house cost us for the 16 yrs we had it,( 1976-1992) about a total of $112k ( includes RE taxes) & getting $350 = $238 net profit of providing both Housing in a Nice Community and A Piggy bank with some Interest rtn..

[rayvt]

Quote:

Originally Posted by Dennis The house ave a 7% apy growth, but the sale $ we got was all Tax Free..$350k, even at 15% LT CG's would have left us with only about $298k...

But the house gain is the same whether or not you have a mortgage.

That's how people continually make all sorts of mistakes in housing finance comparisons. There are a lot of subtle issues that are easy to get wrong.

Part of each payment is principal, and therefore isn't a cost--it's just moving your own money around.

The house grows the same with or without a mortgage. You get the entire gain either way.