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Old 02-17-2012, 07:09 PM   #121
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However, I understand the logic of less bills/debts in RE. If you sleep better knowing you don't have a mortgage, drive on. That income stream to pay the mortgage has gotta be solid as steel.
+1
I would not ER if I had to worry about mortgage payment every month. Everyone was telling me, that I was nuts paying the house off when I was still w*rking. What about the tax deduction? Well I get enough of that (deduction) with Medical Insurance we now have to pay after ER.

When we first retired, we rented for couple of years in the local mountains. I had to put aside large chunk of money each year to cover the rent - it was a painful. I can't see us renting again. We paid cash to build our retirement house, so there was no need for construction loan and no interest to pay. Same goes for buying a car, why pay interest.

Bottom line: interest that you pay is part of burn rate, it adds up!
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Old 02-17-2012, 09:15 PM   #122
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I blow hot and cold on this question of paying off our mortgage before I retire:

The case for not paying off the mortgage:

Our mortgage is linked to HIBOR and is currently costing us about 1.1% pa. This is well below the average rate of inflation for the last few years and well below the yield on some longer term bonds or good quality equities.

Once I stop earning a salary, the ability to reborrow is significantly affected. Also, I would not be able to get such favourable terms again (probably).

The case for paying off the mortgage:

The mortgage interest rate is floating and gets reset every month. If interest rates rise our mortgage costs will go up as well. Rising interest rates would also (probably) reduce the value of the bonds and equities we invested in instead of paying off the mortgage meaning that we would take a hit if we change our minds later.

We have no pension, SS etc and will be funding all our bills from our investments. Although Mrs Traineeinvestor intends to continue working part time, I want this to be because she wants to work rather than because she feels she has to

Other factors

Although mortgage interest is tax deductable, this only useful if you have salary based income to offset it against. I'm hoping we won't.

Inflation out here has typically been above 3% pa in recent years and above 5% in a couple of them. Based on my amateur fumblings with a spread sheet, FIRECalc etc, inflation over a 40-50 year period is one of the greatest risks to the financial sustainability of our retirement.

We will also be carrying mortgages on some investment properties post retirement.

Right now I'm in the don't pay off the mortgage camp.
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Old 02-17-2012, 09:33 PM   #123
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.....Although mortgage interest is tax deductable, this only useful if you have salary based income to offset it against......
Not really, the increase in deductions also allows you to do a larger tIRA>Roth conversion while staying in your target tax bracket. IOW, if you have 10,000 interest deduction and you are already itemizing then you can convert 10,000 more that you would be able to without the mortgage interest.

On this whole mortgage question, while keeping a mortgage is most optimal from a pure financial viewpoint since in most cases your earnings rate will exceed your mortgage interest rate, that there is no single "right" answer.
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Old 02-17-2012, 10:48 PM   #124
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Not really, the increase in deductions also allows you to do a larger tIRA>Roth conversion while staying in your target tax bracket. IOW, if you have 10,000 interest deduction and you are already itemizing then you can convert 10,000 more that you would be able to without the mortgage interest.

On this whole mortgage question, while keeping a mortgage is most optimal from a pure financial viewpoint since in most cases your earnings rate will exceed your mortgage interest rate, that there is no single "right" answer.
My tax position is a little different as I am neither a US resident or a US person for tax purposes and will drop out of the US tax net when I retire.

I agree that there isn't a universally "right" answer. As others have said, it's not all about the numbers.
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Old 02-17-2012, 11:05 PM   #125
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Wow, it's been a while since we've stirred up this mosh pit!

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Most re-fi's are a new mortgage. Banks HATE to re-fi their own mortgages unless they have too.
Look at it from the Banks/business side of the deal...
The bank has lent your friend $370k at 4.25% why would they want to refinance that down to 3.5%? To do that would cost them $2,775 a year in interest. Would you do that out of the goodness of your heart?
The other banks do not want to offer your friend a $370k mortgage on a house worth less than that.
They other reason is the banks you are paying your mortgage to, in all likelihood, do not hold the mortgage note, they are just servicers. The collect the payments and distribute the proceeds to the bondholders of the Mortgage Backed Securities that the mortgage (with thousands of others) are part of.
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I never knew that, that banks hated to refinance their own mortgage. I figured they'd rather refinance and keep their customer, and keep some money, rather than lose everything.
And no, if I was in the bank's position, I wouldn't let a customer refinance to a lower rate, just out of the goodness of my heart. But I'd rather refinance that customer, rather than have the customer do a strategic default. I guess I just don't think it's fair that someone can keep paying faithfully on their mortgage, and no concession is made for them, but if you decide to stop paying, then the banks might try to work with you. Or, if you do a strategic default and the bank takes it possession of you, they're going to end up selling it at a lower price, anyway.
I think most banks sell the mortgages as soon as they lend out the money, and I think they'd be happy to refi them every five minutes if they could-- they earn more from selling the loan and from the refi fees than they earn from collecting the interest.

I've never had a bank reluctant to refi when I asked them to. However they've always insisted on going through the FHA-endorsed due-diligence fee-paying refi process so that they could sell the loan after the closing.

The days of paying a small fee to drop the interest rate, as you used to do with the 1980s S&Ls, are over.

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But renters have no skin in the game. Rent is determined by market conditions - supply & demand. The tax that the owner pays is just one of his costs, and is not directly reflected in the rent.
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Maybe we should ask a few of the folks posting here who are landlords to chime in with their perspective...
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I think the arguments to keeping a mortgage when you don't need to on a primary residence can be frequently sourced to not wanting to reduce consumption to pay it off early.
Renters have some skin in the game-- the hassle of finding a new place, the hassle of moving to it. There's also the hassle of kid's schools and pets. All of those have expenses as well as personal hassles. Those "hassle factors" are effective landlord rent-raising tools.

We set our rents high enough to be able to absorb the inevitable property-tax increases for a couple years. Around the third year, though, we know that we need to raise the rent by a few percent or by $50/month just to deal with inflation. Sometimes the tenant leaves by that point, but usually they're not gonna pick up & move over $600/year.

When we were tenants, we'd make sure we were valuable to the landlord. Sometimes we'd sign a 2-3 year lease. Other times we'd do repairs & improvements for the cost of the materials. Other times we'd help them keep an eye on the contractor or the pool cleaner or whatever they needed help with. We felt as though we had skin in the game.
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Old 02-18-2012, 06:59 PM   #126
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Wow, it's been a while since we've stirred up this mosh pit!
Yep. Here's more mosh...

Boomers turn home equity into 401(k) funds: big risks and big reward

The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.
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finance 401k accounts
Old 02-18-2012, 07:43 PM   #127
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finance 401k accounts

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Originally Posted by REWahoo View Post
The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.
wow, that's crazy - I bet some of these guys are walking away from the house & loans, but the 401k is safe.
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Old 02-18-2012, 07:55 PM   #128
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Thought I'd chime in here as I'm currently paying down our mortgage. I made the decision after careful thought. I determined that I definitely wanted it paid off before daughter heads to college. And definitely before retirement. My husband works a job he dislikes and has no good prospects for changing jobs due to a significant disability. I didn't want to have to generate income to pay the mortgage monthly if I could avoid it. I'd love to be in a position to tell him he can quit his job and we can live on my salary. Sure, I could always pull from investments to generate monthly income, but it seems like a PITA.

I determined that I would only pay down the mortgage with income after the following:
--Max out all tax deferred retirement accounts (one 401k, one SIMPLE IRA, two Roths = $38,500 this year)
--Max out state tax deduction on 529 ($5k)
--Emergency fund with six months expenses
--Sinking funds for all planned expenses, e.g., vacations, auto repair, Christmas, etc.

Our mortgage has a balance of about $151k at 3.25%. Maybe some would say we're foolish to pay it early, but it makes sense to us. I could sell some investments to pay it off, but we're not doing that. It keeps us lean, too. We live on about 38% of our income because paying off the mortgage gives us a tangible goal to work for. We expect it will be gone in three to five years. After that, I'm not sure what we'll do with the extra money when it's gone, but I'm sure we'll come up with something.
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Old 02-18-2012, 11:34 PM   #129
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Yep. Here's more mosh...
Boomers turn home equity into 401(k) funds: big risks and big reward
The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.
Quote:
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wow, that's crazy - I bet some of these guys are walking away from the house & loans, but the 401k is safe.
Interesting. Seems the researchers can't really tell directly what's happening:
Quote:
The study authors say they found that taxpayers who itemize were more likely to have high mortgage debt and they also found that investing in a tax-sheltered retirement account was related to higher mortgage debt.
“The results seem to indicate that the more sophisticated households are responding to government tax incentives by borrowing against their house and investing in their 401(k),” he said.
To be sure, there’s nothing illegal here. “The government has created this incentive,” said Finke, who also noted that researchers have previously expressed wonder why even more people don’t take advantage of this arbitrage.
In 2007, for instance, Gene Amromin of the Federal Reserve Bank of Chicago and others suggested in a presentation that households were, somewhat irrationally, leaving about $1.5 billion on the table annually by prepaying their mortgage debt instead of saving in their tax-deferred accounts.
I think the researchers are going way out on a limb to suggest that smart people are intentionally mortgaging their homes to fund their 401(k)s.

Maybe it's more likely that the only people who can itemize are the ones who have huge mortgage debts-- because their jobs qualified them to borrow huge mortgage debt to buy too much home. And, coincidentally, they're funding their 401(k)s for the minimum match.

I'm so confused. Are these the same researchers who are claiming that nobody is saving for retirement, and we're all going to work until we die?

Maybe the better data would come from the people who are funding Roth IRAs just because they're saving for retirement, not for the employer match.
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Old 02-19-2012, 12:04 AM   #130
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Interesting. Seems the researchers can't really tell directly what's happening:

I think the researchers are going way out on a limb to suggest that smart people are intentionally mortgaging their homes to fund their 401(k)s.
On the margin, that is exactly what I have been doing for the bulk of my adult life. Yep, I could have been directing my funds toward mortgage paydown, but instead I have been strongly incented to max out my 401k and just make the the minimum payment on the mortgage.
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Old 02-19-2012, 12:07 AM   #131
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Thanks guys, for giving me a little insight into how the whole property tax/seizure thing works. Makes me feel a little better, that it's not as easy for the gov't to screw the little guy over as much as I thought!
For the record, tax sales are one way municipalities deal with delinquent real estate taxes, but they are only used in some jurisdictions. In other states, what happens if you do not pay your taxes is that the municipality or county sells the lien to an investor for cash on the barrel-head. If you don't pay up, the investor has the legal right to foreclose on the property after a set period of time. Come this Fall, I plan on investing in a few tax liens in my neck of the woods.
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Old 02-20-2012, 10:21 AM   #132
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I have two mortgages.

One is on my current vacation/future retirement home. DW and I are working to pay off that mortgage ASAP. Having no mortgage on what we want to believe will be our final home is integral to our ER plans

The other is on my current residence - a suburban boat anchor. (I still have fledglings...) I have enough equity in it so that I am comfortable we won't be upside down when the time comes to unload it. But I have zero interest (a pun...get it? :^) ) in acquring the rest of the equity - ever. I don't want to live there any longer than I have to.

I guess I am pre-supposing, but let me ask the question:

Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?
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Old 02-20-2012, 10:25 AM   #133
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Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?
Provided I had a decent interest rate on the mortgage, I wouldn't feel much urge to pay it off early.
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Old 02-20-2012, 10:40 AM   #134
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This article was in Sunday's paper:

Seniors wise to avoid lump-sum mortgage payoff - chicagotribune.com

A 74-year-old asks if he/she should pay off the $98K balance on the mortgage in a lump sum. The RE professional says no because that money might be needed one day but to refinance if possible. But then says at the end of his answer, regardless of refinancing:

Quote:
...consider making larger monthly payments on your mortgage. This way, you have your proverbial cake and eat it also; you keep your money in your bank but start reducing the outstanding loan balance at a more rapid pace.
This seems like contrary advice--why would you do that if you follow the strategy not to pay it off so you can stay liquid?
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Old 02-20-2012, 11:04 AM   #135
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Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?
One nice thing about having a paid off mortgage, is that if/when I move I can use the proceeds from the sale of this house to buy the next house in cash too. Basically, one paid off mortgage can mean that one need never have a mortgage again on any house. So for me, the motivation is the same regardless of "unloading the asset" (selling my home that I love), or not.
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Old 02-20-2012, 12:13 PM   #136
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Refuse to Payoff

To pay off my home mortgage, I would have to liquidate tax deferred investments, causing a taxable distribution and corresponding tax bill at an incremental State and Federal tax rate of 39 cents on the last dollar. I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free. The emotional pain of giving up the earnings on the lost tax deferred principal far exceeds the emotional pain of the loan cost over the long term. My pretax portfolio return last year was 6.8% vs a mortgage rate of 4.11%. All things equal, this 2.7% margin is huge over 30 years in my portfolio. Consequently, I am in the "carry the loan" camp and I agree with ERD50. Do I like the debt...no, but it has become a necessary evil and I have ample fixed income with which to service it.
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Old 02-20-2012, 12:20 PM   #137
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I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free.
(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.
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Old 02-20-2012, 12:26 PM   #138
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(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.
Ten years ago I was debt free for about 4 years. It really wasn't that much more fun . Now I have a bigger, better house by a pond that is more fun!
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Old 02-20-2012, 12:32 PM   #139
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To pay off my home mortgage, I would have to liquidate tax deferred investments, causing a taxable distribution and corresponding tax bill at an incremental State and Federal tax rate of 39 cents on the last dollar. I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free. The emotional pain of giving up the earnings on the lost tax deferred principal far exceeds the emotional pain of the loan cost over the long term. My pretax portfolio return last year was 6.8% vs a mortgage rate of 4.11%. All things equal, this 2.7% margin is huge over 30 years in my portfolio. Consequently, I am in the "carry the loan" camp and I agree with ERD50. Do I like the debt...no, but it has become a necessary evil and I have ample fixed income with which to service it.
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Old 02-20-2012, 12:33 PM   #140
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Quote:
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I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free.
(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.
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Ten years ago I was debt free for about 4 years.
Well good for you. Now you can SAY you are debt free without actually putting any significant money back into "your" house and while mailing off that mortgage payment on time month after month. I give you permission.
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