Paying off the mortgage early grows in popularity

[Budman]

Quote:

Originally Posted by W2R 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.

Yes, and I do so knowing that I earned an annuallized 2.7% return on each payment I make! You can't say that!

[W2R]

Quote:

Originally Posted by Budman Yes, and I do so knowing that I earned an annuallized 2.7% return on each payment I make! You can't say that!

Why do you think that 75% of retirees decide not to carry a mortgage? I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

[Budman]

Quote:

Originally Posted by W2R Why do you think that 75% of retirees decide not to carry a mortgage? I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

So they can say they are debt free and "feel safe", while giving up a leveraged return and other qualitative benefits. I could argue this point all day long, but the real kicker is I would have to liquidate tax deferred investments which I am unwilling to do for reasons stated above.

[ERD50]

Quote:

Originally Posted by W2R 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. ...

How's that math work?

Let's see, say a $200K house with a $100K mortgage and the $100K pay-off amount in your portfolio, versus a $200K house paid off (so therefore $100K less in the portfolio).

With mortgage, at closing you receive $200K minus the $100K payoff, net $100K. Add that to the $100K from the portfolio, and you can buy another $200K house with or w/o a mortgage.

Selling paid-off house, you take your $200K proceeds. It's all the same, isn't it?

Unless I overlooked something there(1), I think you should stick with the 'emotional' reasons for paying off

(1) - What if you have to pull the money out during a downturn? Well, that risk was there for the prepay money also. And if you take a mortgage on the new place, you don't have to pull any large sum anyhow (you might even take out a larger mortgage to take advantage of the relatively low value of equities!)

-ERD50

[REWahoo]

Quote:

Originally Posted by Budman I would have to liquidate tax deferred investments which I am unwilling to do for reasons stated above.

But many of us didn't.

[Budman]

Quote:

Originally Posted by REWahoo But many of us didn't.

I'm speaking point forward, not past. All of my investments are tax deferred

[ERD50]

Quote:

Originally Posted by W2R Why do you think that 75% of retirees decide not to carry a mortgage?

I believe you are reading a whole lot into that number to fit your views.

Is it really a number that reflects the "% that decided not to carry a mortgage", or is the "% that do not carry a mortgage". Big difference.

Many retirees choose to rent, a mortgage is not a choice for them.

Plus, I bet that many are just inertia driven. The term of the mortgage ended, and so that was it. Few people would delve into the actual numbers to determine if another 30 year term might make sense for them.

Regardless, when did the majority doing something make it right? You and I may understand the benefits of LBYM, and not carrying a credit-card balance. So should we change our decision based on a poll? No thanks!

Quote:

I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

There is risk in owning a property whether you have full equity or partial equity with those debt $ in a portfolio. It's red herring to compare to FDIC accounts - you invest the money according to your AA.

-ERD50

[rayvt]

Quote:

Originally Posted by W2R Why do you think that 75% of retirees decide not to carry a mortgage?

My (retired) neighbor doesn't have a mortgage. He paid off the new house off when their old one in Chicago finally sold.

So now they have no mortgage, but also nothing invested in, say, preferred stocks or bonds paying ca. 7.4% interest. Without the mortgage payment, they have enough to live on. Except that, so they can do more than "just get by", he got a part-time job as a janitor and she cleans houses twice a week.

[EvrClrx311]

I'm definitely in the ERD50 camp...

one thing I haven't seen mentioned yet in the math is inflation and the part it would pay on both sides under different circumstances (e.g. A-the high 9% numbers we saw in the 70s, or B-the steady 3% numbers we hope to always see in a healthy economy).

any thoughts?

[ripper1]

Mortgage or no mortgage there is always going to be carrying cost with a house that never ends. Upkeep, taxes, utilities, etc. I currently have enough to pay the house off twice but I prefer not to do that. I also have a public pension so my situation could be different from others. I just don't see the logic in paying off a mortgage on an illiquid depreciating asset. It may have been a good idea several years ago but now with these ultra low historic rates it is practically free money to me. Again, my situation can be quite different from others.

[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]

Quote:

Originally Posted by 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...

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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by 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...

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]

Quote:

Originally Posted by 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.

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