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payoff mortgage w/savings yes or no?
Old 02-26-2017, 10:01 PM   #1
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payoff mortgage w/savings yes or no?

DH and I are kind of at a crossroads and I figured i'd throw our situation out there to savvy folks to get a sense of direction as to where we should go.

We have a second home that we plan to move into in 5 years, and we have about 5 years of payments left. Our current residence is a co-op with no mortgage (probably a unique situation in NYC for those not familiar). Thinking of paying off mortgage on second home now, using savings to make a lump sum payment on the balance. WWYD?

TIA!
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Old 02-26-2017, 10:11 PM   #2
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Depends.

If I had enough, I'd pay off.

If I needed "ordinary" returns to achieve my goals, I'd keep a low after tax mortgage payment assuming I'd make more investing in equities.

If I was just going to sit in a savings account, earning less than the mortgage costs, pay it off.
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Old 02-26-2017, 10:20 PM   #3
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How does the mortgage rate compare to your expectation of inflation in the near future? If close, that plus a tax deduction makes the mortgage free money, and thus no reason to pay it any sooner than necessary.
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Old 02-27-2017, 12:26 AM   #4
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OP what is the interest rate of the mortgage, if it is high the answer tends to yes.

Do you get any tax benefit, I doubt you do as only having 5 years left on it, how much interest (not principle) did you pay last year and did you itemize ? If you didn't itemize, the answer tends to yes.
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Old 02-27-2017, 12:27 AM   #5
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What are you doing with the house now, if it's renting it out, then the answer tends strongly to keep the mortgage.
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Old 02-27-2017, 06:51 AM   #6
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What will the money be doing if you don't use it to pay off the mortgage? If the money is "probably" going to be growing at a higher rate than the mortgage, then I'd let it do that. If it's not, then I'd consider paying off the mortgage.
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Old 02-27-2017, 07:22 AM   #7
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Do a search on the forum and you will find some extensive threads on this topic. It is virtually a Rorschach of our risk profiles. I made the mental calculation of whether I would refinance, adding a few hundred thousand of added debt to generate additional funds to invest. The answer was no so I paid off. But I recognized that the odds were in favor of the refinance at the low rates then available and had I done so I would have been better off to date. No regrets at all.

Edit: My decision on the mortgage makes me think of the book, Predictably Irrational, by Dan Ariely. Other than my decision to eliminate two mortgages and going to zero debt before retiring, I am very risk tolerant. I kept over 70% equities right through the 2008 recession without blinking. I think I subjectively view it like an insurance decision. When considering adding debt to invest I think about the worst possible consequence but I don't think that way with the existing portfolio.
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Old 02-27-2017, 07:36 AM   #8
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The answer tuns on these questions:

1. What after tax returns are you earning with the funds presently, and how are they invested?

2. What is the after-tax cost of the mortgage?

3. Do you have adequate liquidity outside of these funds.

I would consider payoff if my after tax returns on my as currently invested did not exceed (or were not expected to exceed) my after-tax cost of the mortgage by 1-2%, and answer to #3 is"Yes".
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Old 02-27-2017, 07:46 AM   #9
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One other important point not mentioned yet, does the mortgage deduction give you a potential tax filing advantage to move beyond just a standard deduction in order to move you down into a lower tax bracket?
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Old 02-27-2017, 07:46 AM   #10
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If a low mortgage rate, it is basically (as suggested above) an individual comfort-level decision.

We (well, DW) chose not to pay our mortgage off before retirement; instead, refinanced into a 15-year 2.75% conforming loan. Gives us more liquidity for the pre-59.5 years, and the rate is acceptable. Easily understand those who would choose to pay it off and remove the anticipated 10% of monthly spending that will be devoted to the mortgage....
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Old 02-27-2017, 07:48 AM   #11
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Quote:
Originally Posted by Sunset View Post
OP what is the interest rate of the mortgage, if it is high the answer tends to yes.
...
Another option if it is at a high rate, is to refinance at these historic low rates, and lock in 15 - 30 years at a low rate.

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Old 02-27-2017, 08:43 AM   #12
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Another option if it is at a high rate, is to refinance at these historic low rates, and lock in 15 - 30 years at a low rate.
While I'm pro-mortgage usually, I think in this situation I'd lean toward paying it off. Refinancing would only be on the (probably) small amount left on the mortgage. If you do a cash out refi to get a bigger mortgage you will probably, at least in my experience end up with a higher rate.
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Old 02-27-2017, 03:22 PM   #13
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I've read a lot of "should-I-pay-off-the-mortgage" threads on this forum, especially when I was pondering this decision myself several years ago. My sense is it's about 60/40 in favor of keeping the mortgage, assuming you can get a really low rate. Historical market returns for a balanced portfolio would easily beat today's mortgage rates. Rates today seem to be hovering around 4%, which is still ultra-low by historical standards. But depending on one's market outlook and risk tolerance, it may not be quite as compelling as when rates were near 3%.

We retired with 9 years to go on a 5.25% 30-year mortgage. The unpaid balance was only about 5% of net worth, but the payments were quite high at 20% of monthly spend. We had the option of refinancing at 3.375% for 30 years or just paying it off. According to various retirement planning tools, neither choice made much difference in our overall retirement spending capacity or success rate. So for simplicity, we just paid it off.
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