Paying off the mortgage early grows in popularity

[Texas Proud]

To me a mortgage is just a way of buying a house...... I look at the opportunity costs of having a mortgage vs paying it off... and at my 4.5% I do not want to pay it off..

However, my old house was paid off and I did not see the point of mortgaging the house to get funds to invest. IOW, I am not going deeper into debt just to try and arbitrage the spread... that is also why I did not do it with the 0% credit cards like my BIL did....

So,to summarize, if I were going to buy a house today, I would get as much mortgage as I could TODAY and pay it off as long as I could... but I would not do the same with a house that was paid off... yes, doing the math it is the same, but to me they are different transactions...

 

[Budman]

To me a mortgage is just a way of buying a house...... I look at the opportunity costs of having a mortgage vs paying it off... and at my 4.5% I do not want to pay it off..

However, my old house was paid off and I did not see the point of mortgaging the house to get funds to invest. IOW, I am not going deeper into debt just to try and arbitrage the spread... that is also why I did not do it with the 0% credit cards like my BIL did....

So,to summarize, if I were going to buy a house today, I would get as much mortgage as I could TODAY and pay it off as long as I could... but I would not do the same with a house that was paid off... yes, doing the math it is the same, but to me they are different transactions...

I agree with you. In my case, before I retired I was debt free for several years, and later incurred debt on a new, larger home, then retired. I carry that debt today at 4.115%. I would not increase my leverage to arbitrage a spread...too risky

 

[ripper1]

One could also say having a paid off house puts your diversification out of whack.

 

[MDJO]

Paid off mortgage a few years ago at age 55. With today's rates so low, if you are willing to take the risk, borrowing at low rates and investing makes sense. I didn't owe that much and it just felt good to quit dealing with the bank.

 

[clifp]

It is difficult to come up with new stuff in this classic debate. I am mostly in the it doesn't matter much category.

One thing that maybe worth considering is figuring out economic scenario that stress tests your current assets and base the mortgage pay off decision on a worst case forecast.

For instance consider an early retiree with decent sized pension with no COLA adjustment, a large say 60% bond portfolio with minimal TIPs bonds. A prolong period of high inflation will be potentially devastating to their standard of living. For this person maintaining a 4% mortgage will provide the best protection for their nightmare scenario.

On the other hand somebody, with a government pension with COLA, a small (20-30%) bond portfolio, rental properties, and some gold is well protected against inflation. The nightmare scenario for them is a deflationary period. None of their asset classes are likely to return more than the 4% mortgage. In this case they are better paying off their mortgage.

In my case with a decent amount of real estate (including REITs) of 25% and liquid AA of 80/10/10, and no pension I am reasonably well protected against moderate inflation since my dividend stocks will more than likely be able to increase dividend payments to equal inflation. On the other hand, the last few years have seen the dramatic decrease in the income generated in my small fixed income portion. A decade of Japan like deflation will definitely impact my lifestyle. So I am happy to have paid off my mortgage. Although I've hedged my bets by setting up a HELCO.

My observation is that paying off the mortgage decision is based primarily on risk tolerance levels. People with high equity AA are the ones mostly likely to keep mortgages and those with high bond AAs are most likely to pay them off. Although other assets (especially pensions and rental properties) matter a lot, I'd argue that in general folks with 60%+ bonds should have mortgages and those with 60%+ equities should not.

 

[Danmar]

Agree that we have been around the horn on this topic. We just bought a house in Arizona for cash. Everyone around there was pretty shocked that we weren't going to put a huge mortgage on it like the guy we bought it from. I like being debt free, and I don't care how cheap mortgages are.
@ Clifp. I like your statement about asset allocation and mortgages. Makes some sense.

 

[audreyh1]

Agree that we have been around the horn on this topic. We just bought a house in Arizona for cash. Everyone around there was pretty shocked that we weren't going to put a huge mortgage on it like the guy we bought it from. I like being debt free, and I don't care how cheap mortgages are.

Same here for the same reasons. Paid cash in 2010. Besides, if I'd tried to get a mortgage, there is no way we would have made the closing deadline and I would have missed out on the big tax rebate. I know the closing on the house down the street was delayed several times, for significant amounts of time, due to bank mortgage issues.

Actually, most of the folks around here pay cash so we weren't unusual. It's a 55+ community and they are retirees usually downsizing from a more expensive home where they had plenty of equity.

Audrey

 

[ripper1]

To me a mortgage is just a way of buying a house...... I look at the opportunity costs of having a mortgage vs paying it off... and at my 4.5% I do not want to pay it off..

However, my old house was paid off and I did not see the point of mortgaging the house to get funds to invest. IOW, I am not going deeper into debt just to try and arbitrage the spread... that is also why I did not do it with the 0% credit cards like my BIL did....

So,to summarize, if I were going to buy a house today, I would get as much mortgage as I could TODAY and pay it off as long as I could... but I would not do the same with a house that was paid off... yes, doing the math it is the same, but to me they are different transactions...

Exactly proud man that is what I did. Retired, sold my paid off house, put down 20% on the dream and kept the rest. At 3.9% interest rate and tax deductions to me it is practically free money. I have better places to invest my money other than a single family home. Stay diversified.

 

[sirion]

One of the calculations I did was to determine how much money I would have to have invested to pay the mortgage with a 2% withdrawal rate. When that number was over $1M, I felt extra incentive to pay it down. However, I'm using income, not investments, and maxing out all tax-deferred space before any extra payments. My total portfolio is about 10x my mortgage so perhaps my position is less common.

 

[ripper1]

One of the calculations I did was to determine how much money I would have to have invested to pay the mortgage with a 2% withdrawal rate. When that number was over $1M, I felt extra incentive to pay it down. However, I'm using income, not investments, and maxing out all tax-deferred space before any extra payments. My total portfolio is about 10x my mortgage so perhaps my position is less common.

Well then you are unique because usually rich people carry mortgages. They are using the banks practically free money.

 

[FIREd]

I paid off my mortgage a few months ago. The mortgage was small compared to the size of my retirement portfolio, so I don't think it will make much of a difference in the end.

 

[Bestwifeever]

Well then you are unique because usually rich people carry mortgages. They are using the banks practically free money.

Source?

 

[Texas Proud]

Paid off mortgage a few years ago at age 55. With today's rates so low, if you are willing to take the risk, borrowing at low rates and investing makes sense. I didn't owe that much and it just felt good to quit dealing with the bank.

One of the problems is with the fees... to get a new mortgage will cost maybe $5K, or more... that is a lot to overcome without a good return...


When I bought my house, I priced that into what I was willing to pay...

 

[Finance Dave]

I'm in the "can't wait to pay off the mortgage" camp. Just refinanced and have about three years left--counting down the months!

Good luck! Paid ours off about 3 months ago. Only downside is that we bought another rental...and partially financed it. We put 50% down and we are forcing ourselves to pay it off in 3 years to avoid any step-up in the HELOC rate issues. So far so good!

 

[Surewhitey]

Paid ours off in 05, sold in 08 and still are renting since. We may plant ourselves soon, but only if we pay in cash and maybe take advantage of the weakness in the market lately and in the near future.

I'd rather guarantee a 4-5% return vs. the minuscule bank rates now and in the future. Not to mention savings of closing costs and increased monthly cash flow. Peace of mind and personal gain is better to us than trying to make 8% to net 4% on a 4% loan and taking on risk to do so.