Pay off or carry mortgage?

[runnerr]

After the interesting discussion of taking SS at 62/65 I have another that might be interesting. Shortly after early retirement I got married and my wife is 45. Well we decided to build a house and the question is should I pull 150000 out of my investment money to pay it off or carry the 6.25% mortgage. I would hope I could make at least close to 6.25% return and being able to write off the interest payment is money ahead. I am 56 and the portfolio of investments is about 850,000. There is no pension seeing I took the lump some. I am carried on wife’s health insurance. Comments please. Is it wiser to pay off a mortgage or continue with one for tax purposes?

runnerr

 

[SteveR]

This has come up a few times before and a thread search should find it for you. I think it all depends on your individual circumstances like how far are you into your loan; what kind of rate do you think you can earn on your investments; what will a mortgage do to your daily living expenses in retirement; how long do you intend on staying in the house; how much equity do you have now; whick option lets you sleep at night?

Do the math and see what will change if you pay off the mortgage. Don't forget taxes and loss of investment future income to pay off the mortgage. It will all come down to what works for you.

 

[REWahoo]

Is it wiser to pay off a mortgage or continue with one for tax purposes?

In one corner, we have the "EE Bomber", SG. In the other corner, we have the "IQ Crusher", (). Let's Get Ready To Rrruuuummmble!!!!

Wait, is that Don King I see coming toward the ring? No, that's just Dory36 with his hair standing on end.

 

[SteveR]

In one corner, we have the "EE Bomber", SG.  In the other corner, we have the "IQ Crusher", ().  Let's Get Ready To Rrruuuummmble!!!!

Wait, is that Don King I see coming toward the ring?  No, that's just Dory36 with his hair standing on end. 

Duck and Cover...............incoming!!!

 

[yakers]

Is it wiser to pay off a mortgage or continue with one for tax purposes?

runnerr

Analytically you can answer this either way dependending on your assumptions and forcasts. IMHO what is at least as important is your personal pschology about debt and risk. I vote for paying off a mortgage fully realizing that there are some financial circumstances where it would be advantagous to have a mortgage. You also have to sleep well at night or at least I do.

As others have suggested, search through old posts as this has been discussed. If there is *anything* new or unique that post again and you will probably get some great responses.

 

[brewer12345]

I'm still accumulating and I maintain a fixed mortgage at 4.99% (12.5 years to go). I don't quite have the cash to wipe it out in one go, so I just leave it alone, but I could probably gin up the dough in a year or two if I pulled out the stops. However, I will likely not pay it off until I either retire or I can no longer deduct the interest for some reason. Its too easy to beat 3.33% after tax.

 

[unclemick]

And then and then

We have the 62 year old phart - who looked thru the classified ads for what was there in rentals(3 women, dog and a cat).

Said screw the the numbers - took out a 30 yr fixed at 5.7%.

Not all things are spreadsheet driven.

Sleep pretty good at night - so far. Will I pay it off early - someday??

I don't honestly know.

heh heh heh heh

 

[HnE]

Everyone's personal situation is different.

I paid mine off very early and am glad. It bought me a certain level of satisfaction. I wouldn't consider taking out a new mortgage or line of credit unless my back was to the wall. I would not want to invest on margin in anticipation of a higher rate of return. I hope to remove as much unnecessary risk as possible from my life.

Aronnax

 

[bongo2]

It's all here.

http://early-retirement.org/forums/index.php?topic=753.0

 

[Michael Moore]

We're with Aronnax. We feel a lot better having things paid off.

I was talking with a friend (FIRE'd about 12 years ago) and we both agreed that not having $XXX.00 going out every month on housing sure makes a fixed income a lot more bearable. I have trouble seeing how people who have rented all their working life and continue to rent into retirement manage to have any significant disposable income while retired.

cheers,
Michael

 

[LEX]

IMHO pay it off and pocket the bankers profits for your own account! Debt limits ones personal options just like a job...."I owe, I owe, so its off to work I go...." 8)

 

[sgeeeee]

FIRECalc really offers an incredibly versatile way to examine this. You have to approximate tax impact.

The best option for you depends first on your temperment. If you just don't feel comfortable with a mortgage, then pay it off. If you want to look at the financial implications, FIRECalc can tell you how you would have done historically by keeping the mortgage vs by paying it off. The result depends on at least all of the following:

1 - the mortgage rate
2 - the length of the loan
3 - the ratio of loan to total portfolio you have
4 - how you would invest the money you do not use to pay off the mortgage
5 - your specific tax situation (this is usually a second order issue)

Go read the previous threads and run the simulations.

 

[califdreamer]

should I pull 150000 out of my investment money to pay it off or carry the 6.25% mortgage.

First consideration would be is the 150k coming out of a tax-advantaged retirement plan? If so, would be wise to wait until age 59.5 (or age that you can withdraw funds w/o penalty) to look at options.

 

[cute fuzzy bunny]

Adding to what SG said:

- On #2 make sure your "loan length" is the time you expect to be in the home when running simulations; using a loan length of 30 years when you expect to be in the home for 7 will give you different results.

- #3 - good one to pay attention to. It may or may not make sense to hold REITS if you have a paid off house - thats another good windy discussion. It may or may not make sense to hold a lot of bonds to 'ballast your portfolio' if you have a paid off house. It may or may not make sense to hold the proverbial 1-3 years of 'emergency cash' if you can tap a low cost home equity line of credit.

- #4 - building on the comments in the last paragraph, under some circumstances you can tweak your investments to take on more volatility and/or default risk but increase your rate of return if you have the mortgage money to invest. Without the mortgage debt you'll have less, but you'll also have less monthly expense 'risk' in that your total monthly bills will be a lot lower. So feel free to take on a little or a lot more risk as you can handle the volatility. Or go the other way and take on a lot less risk and the associated lower returns...you may not need the money.

#5 - Definitely one to look at closely. If you dont have to pay a mortgage, you can reduce your withdrawal amount (not necessarily the percentage) significantly. With the lowered drain, you may be able to get by on qualified dividends thrown off of your investments rather than sell shares. Since qualified dividends dont count as "ordinary taxable income" and are taxed at a separate rate of 5 or 15% depending on your taxable income (salary, interest, non qual dividends), you may be able to reduce the latter to the point where your qualified dividends drop below the 15% level to 5%, or perhaps even get your income tax situation to zero.

So whats next Runerr? Gay marriage? Right to life? Arming bears?

 

[unclemick]

Hmmm

Here be a left handed INTJ, former fish camp owner from LA now in MO view:

1. All housing is expenses - I don't count any equity in my retirement portfolio.
2. Any remodeling is entertainment - in the same expense catagory as travel, taking a cruise, etc. If anyone has seen me remodel - they would understand the entertainment factor.

Like food - a house is consumption - not investment - either a necessary expense - or sometimes a gourmet meal - depending on the entertainment value.

BTY - my BIL is a mining engineer - given location, location, location over the last thirty years here and there - he counts himself in the hole real estate wise.

My duplex(15 yrs) was an accident/luck. I would love to attribute skill - but got a good buy and learned as I went along - AND  sold and consumed the proceeds early in ER.

Just NOT a R.E. cat. My hat's off to those that are.

heh heh heh

 

[Nords]

Go read the previous threads and run the simulations.

I'm tracking a spreadsheet of our mortgage money invested (& reinvested) in the S&P600 Small-cap Value ETF (IJS).

The results won't be in for another 28.5 years, but so far we're up 23.6%. (Admittedly the ETF is setting new 52-week highs this month.) That kind of early performance gives a pretty comfortable pad for a 30-year 6.7% withdrawal rate.