Perhaps another argument to paying off home?

[haha]

On the other hand a mortgage definitely does not display the characteristics of "negative real estate". The amount owing and interest rate is fixed on a mortgage whereas real estate fluctuates in value. Thus a mortgage has many characteristics of being short a bond or "negative bond".

A well located modern and marketable home with a typical US fixed rat mortgage is as good as it can ever be from a speculative POV for the home buyer/mortgagor.

You clearly have to keep your eye on the risks inherent in all this leverage, but US terms are very friendly to the mortgagor.

I think all these issues need to be carefully considered in each situation, rather than make an automatic assumption that a mortgage is either good or bad..

One thing is clear to me-no sane private party using his/her own money would ever lend on the terms and rate of a typical 30 year mortgage loan today.

Ha

 

[HFWR]

A well located modern and marketable home with a typical US fixed rat mortgage is as good as it can ever be from a speculative POV for the home buyer/mortgagor.



You clearly have to keep your eye on the risks inherent in all this leverage, but US terms are very friendly to the mortgagor.



I think all these issues need to be carefully considered in each situation, rather than make an automatic assumption that a mortgage is either good or bad..



One thing is clear to me-no sane private party using his/her own money would ever lend on the terms and rate of a typical 30 year mortgage loan today.



Ha

I paid extra on my mortgage for several years, until megacorp made plans that didn't include me... I went back to w*rk soon after, for quite a bit less income, so decided I'd rather have the money available, rather than sunk into a house. When Quicken Loans allowed me to refi for 30 years at 3.75%, I decided the payment was so low ($400/mo) that I could easily handle it (no cash out; refinanced about $85k). So that's the route I chose. I may change my mind at some point, or not.

Funny thing, though, about a year after I refinanced, Quicken's marketing department, who obviously hadn't spoken to the loan department, called, offering me 4.25%...

 

[RetiredAt55.5]

Meh, to paying off my mortgage early

I dunno. My monthly mortgage payment is only $472 so paying it off won't change my needed AGI all that much, and I lose the tax deduction (I have a lot of deductions since I pay $25-30K in medical insurance).

I'm hoping that interest rates will eventually rise, and the gap between my 4% mortgage and interest rates will get a lot closer. I'm only 6 years into my 30 year mortgage. Factor in inflation, and I could be very happy down the road that I didn't pay off the mortgage early. Time will tell.

 

[Danmar]

You clearly have to keep your eye on the risks inherent in all this leverage, but US terms are very friendly to the mortgagor.

I think all these issues need to be carefully considered in each situation, rather than make an automatic assumption that a mortgage is either good or bad..


Ha

Agree. My only point is that a mortgage increases your risk and that this can be reflected in your AA. Taking on more risk usually works out fine but not always.

 

[Gumby]

We own our home free and clear, and it accounts for about 25% of our net worth. I sometimes wonder, if I had the equivalent money and no house, whether I would choose to take 25% of my portfolio and invest it in residential real estate -- in fact, one single family house. I'm thinking probably not, as it would be too much concentrated risk.

 

[RunningBum]

We own our home free and clear, and it accounts for about 25% of our net worth. I sometimes wonder, if I had the equivalent money and no house, whether I would choose to take 25% of my portfolio and invest it in residential real estate -- in fact, one single family house. I'm thinking probably not, as it would be too much concentrated risk.

Is that a mortgage vs. pay off comment, or rent vs. own?

If it's the mortgage, there's not much less risk involved by leveraging that investment with the loan, other than that you've basically found a way to invest 125% of your portfolio, so that house is now 20% of it (25/125) instead of 25%.

If it's rent vs. own, that's been covered in other threads, but you have the risk of runaway rents and having to move because the owner sells the home to someone who wants to live in it, or doesn't want you in it. There's lots more to that on both sides so I'm not looking to add rent vs. own to the argument.

If you are going to own and want less real estate risk, the answer is clearly to buy the least amount of house you are willing to live in. You can say that about anything you buy though--buy the cheapest cars, clothes, food, etc. Most of us are willing to pay a little more for better quality though, and a house is just the largest scale of that.

 

[Gumby]

Is that a mortgage vs. pay off comment, or rent vs. own?

If it's the mortgage, there's not much less risk involved by leveraging that investment with the loan, other than that you've basically found a way to invest 125% of your portfolio, so that house is now 20% of it (25/125) instead of 25%.

If it's rent vs. own, that's been covered in other threads, but you have the risk of runaway rents and having to move because the owner sells the home to someone who wants to live in it, or doesn't want you in it. There's lots more to that on both sides so I'm not looking to add rent vs. own to the argument.

If you are going to own and want less real estate risk, the answer is clearly to buy the least amount of house you are willing to live in. You can say that about anything you buy though--buy the cheapest cars, clothes, food, etc. Most of us are willing to pay a little more for better quality though, and a house is just the largest scale of that.

All very valid points. My post was really just musing on having drifted into an asset allocation that I probably wouldn't choose a priori.

 

[dtbach]

I have only 2.5 years left on a 3.25% mortgage so am basically paying principle now vice interest. Looked at paying it off in a lump sum, but I'd rather keep it in investments and just watch it go away in 29 months.

 

[Starsky]

One benefit of having a paid-off home in retirement is that it can be easily leveraged in an emergency, or down the road when needed. It can be much more difficult to get loans on other types of assets, but a first mortgage on a primary residence is a banker's bread and butter.

There is a point in retirement where a new 30-year fixed cash-out mortgage starts to look pretty good (especially with interest rates being so low), since you can use all the proceeds for whatever you want now, and there's no chance you'll ever pay it off in your lifetime. For seniors, it's almost like a reverse mortgage except for they make you take all the money now.

 

[rayvt]

One benefit of having a paid-off home in retirement is that it can be easily leveraged in an emergency,

Maybe not so easily. You have to qualify. Specifically, you have to show enough steady income to meet their requirements. It's do-able, but not necessarily easy. Also, bankers look harshly at cash-out mortgages. For some reason they suspect that you may take the money and run.

in an emergency,

Not.
Try getting a cash-out mortgage when you are in the hospital with tubes running out of your arms.
My Uncle found out this the hard way. They had a $1million house, free & clear, but could not get a mortgage when he was in the hospital after an emergency heart bypass operation. They couldn't even get a HELOC.

Keep the money out of the house.

 

[Danmar]

There is a point in retirement where a new 30-year fixed cash-out mortgage starts to look pretty good (especially with interest rates being so low), since you can use all the proceeds for whatever you want now, and there's no chance you'll ever pay it off in your lifetime. For seniors, it's almost like a reverse mortgage except for they make you take all the money now.

Except you don't have to pay back a reverse mortgage until you die of sell the house. Regular mortgages are paid monthly and would be a "drag" on your monthly cash flow. Many people use undrawn home equity loans for possible emergencies. Probably more flexible?

 

[iloveyoga]

I just like having one less thing to worry about, that would be my overall deciding factor.

 

[Montecfo]

With substantial equity, a standby HELOC is good to keep in place.

 

[joeea]

I just like a peace of mind in my retirement. I don't want to think about watching a calendar in order to pay any house or car payment on time. When a bill hits the mailbox, I pay it online immediately and toss the paper away. I seldom even pay that close of attention to my cash balances--as there's enough funds there to cover my expenses.

Is your peace of mind affected by paying insurance, taxes, etc?

Almost all bills can be paid automatically these days - automatically withdrawn each month from your checking/savings account, even if your accounts are with other banks.

Instant peace of mind while retaining all of your liquidity.

 

[Scuba]

Is your peace of mind affected by paying insurance, taxes, etc?



Almost all bills can be paid automatically these days - automatically withdrawn each month from your checking/savings account, even if your accounts are with other banks.



Instant peace of mind while retaining all of your liquidity.

+1
Liquid assets give me peace of mind. We have a lot of equity in our home but still have a mortgage and small HELOC for about 1/3 of the value of it. Could pay both off from assets at any time, but we prefer the liquidity and payments are not a large percentage of our spending.

This is truly a YMMV issue with no "right" answer. Some of us like to have more assets and some of us like to reduce or eliminate debt.

 

[Markola]

Really makes no difference (except the way it's handled) with a Roth or just taking the money - same calculation. You will still owe the taxes on what you take (assuming you're not at zero tax).



)

Thanks for thoughtfully responding to my questions, Koolau. If we do pay it off from deferred funds, regardless, it makes sense to wait until after FIRE when we'll be in a lower tax bracket. Or maybe we'd sell and downsize, which is another way to eliminate a mortgage. I had not considered RMDs at all as a factor in paying off the mortgage but, of course, reducing the RMDs through paying off the mortgage would indeed be a major incentive, just as it is with Roth conversions.

 

[mathjak107]

you can't spend the living room . whether a house is worth 1 million dollars or 100k is irrelevant as long as you consume it yourself .

i never count a house for anything except when i would want to feel good about total net worth .

it is an expense like any other bill until the day comes it is sold .

don't forget safe withdrawal rates assume value can be spent down to a dollar at the end of 30 years .

the mortgage is an expense to cash flow .

a senior who goes from a 3 bedroom apartment when the family moves out to a 1 bedroom can see even better cash flow than that owner

 

[Koolau]

don't forget safe withdrawal rates assume value can be spent down to a dollar at the end of 30 years .

I think this may be key in the argument about how to view home ownership. Technically it's part of net worth, but realistically it's not part of invested assets for purposes of determining SWR. YMMV

 

[brokrken]

I grapple with this question quite a bit. In the end, at this point in my life (plan is to FIRE in 2024) anything I put into the house I view as an alternative to a savings account. One reduces the interest that I pay and the other pays me very little interest. My plan is to significantly downsize in retirement to a lower COL area, so much of this (less the cost of the new house) will come back to me and be added to my nest egg.