Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Should we pay the mortgage off
Old 01-28-2018, 08:57 AM   #1
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Should we pay the mortgage off

We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.
__________________

Cpadave is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-28-2018, 09:07 AM   #2
Moderator Emeritus
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 40,555
Quote:
Originally Posted by Cpadave View Post
We currently have a 650K mortgage on our house at 6.325 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.
Pay off the mortage or not? This is one of the most contraversial questions on the forum, and always has been. My guess is that about 50% of members will say yes, and 50% no. I am on the "no mortgage" side of the contraversy, but there are good arguments on either side, tax bill or not.

My opinion of it is that it is smart to plan to pay off the mortgage before retirement, as part of risk management. I wanted less risk in my retirement financial plan than I endured when working. The risk that Chase Mortgage is going to claim I still have a mortgage to pay (paid off in 2006), is about zero and certainly lower than the risk that my bond funds might tank or crater (leaving me short when it comes to making those mortgage payments). When working, the risk is pretty negligible either way and can be dealt with using income from work, but when retired one usually has lesser income and would like to not have to worry about it.

When I paid off my mortgage, I used money that I otherwise would have invested in taxable accounts for retirement plus savings that I already had in the bank. I finished paying it off three years before retirement. It gave me a lot of joy to be able to get rid of my mortgage. YMMV
__________________

__________________
100% retired since 2009 and never plan to work for anybody ever again, paid or not. Retirement funded by Social Security, mini-pension, and investments (AA 45:55, mostly Vanguard). Debt free with no mortgage and over-the-moon happy to be retired.
W2R is offline   Reply With Quote
Old 01-28-2018, 09:17 AM   #3
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,090
Quote:
Originally Posted by Cpadave View Post
We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.
Not sure if this is the same in all counties, but in our county you lose the mortgage exemption if you pay off your mortgage, which will cause a significant increase in your property tax bill.

At a minimum, I suggest researching this with your local tax authority before going forward.

What we did was take out a HELOC, then paid off the mortgage. The HELOC maintains the mortgate exemption regardless of the outstanding loan balance. We use the HELOC for various things but keep the outstanding balance very low to avoid significant interest costs.

As a side note, there was a certain "comfort" that came for us with paying off the mortgage...I recommend it.
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Old 01-28-2018, 09:28 AM   #4
Full time employment: Posting here.
UnrealizedPotential's Avatar
 
Join Date: May 2014
Posts: 762
I don't know what's best to do but I ended up mostly just investing in the stock market. I sold my condo and did pretty good because I benefited from price appreciation over the years when I sold my condo. I did well in the market too. It's a tough question with maybe no clear cut answer.
__________________
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. Charlie Munger
UnrealizedPotential is online now   Reply With Quote
Old 01-28-2018, 10:44 AM   #5
Recycles dryer sheets
 
Join Date: Oct 2015
Location: Bozeman
Posts: 88
Quote:
Originally Posted by Cpadave View Post
...I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage...
The money that you would use to pay it off: I assume that you have it invested in something. What's been the return on investment of that money? (Is it more or less than your mortgage rate?) More importantly, what do you think the ROI is going to be going forward, and thus what would you lose if you take that investment money to pay off the mortgage?
l8_apex is offline   Reply With Quote
Old 01-28-2018, 11:07 AM   #6
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 9,599
I fall in the "no mortgage is better" camp... in general.

That said - I'd be nervous dumping $650k into the mortgage in one fell swoop. For me (but perhaps not you) that's a pretty big percentage of my portfolio.

IMO - equity in your home (as in a paid off mortgage) is quite different than a fixed income investment. You can sell bonds and not alter your lifestyle... but to sell a house you have to move... And if you need to pull cash from your "fixed income" portion of your portfolio it's harder to do from home equity.

All of this is less about ROI and interest rates... it's about a primary home being just that - a home.

FWIW - we have a paid off house we live in. We did it by making extra principal payments month by month... although we did lump sum the final $40k. Our home is a significant part of our net worth because we live in a nice neighborhood in a very pricy area. But I never include it in my retirement portfolio/investable assets analysis... The only parts of my retirement plan that it fits in are: 1) a lower cost place to live (no mortgage or rent) and 2) plan B for long term care if one or both of us needs longer term nursing home care.
__________________
Retired June 2014. No longer an enginerd - now I'm just a nerd.
micro pensions 7%, rental income 18%
rodi is offline   Reply With Quote
Old 01-28-2018, 11:35 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 18,616
Quote:
Originally Posted by l8_apex View Post
The money that you would use to pay it off: I assume that you have it invested in something. What's been the return on investment of that money? (Is it more or less than your mortgage rate?) More importantly, what do you think the ROI is going to be going forward, and thus what would you lose if you take that investment money to pay off the mortgage?
+1 What is the after-tax return on what you will use to pay it off vs the after-tax cost of keeping it? If you will be using fixed income to pay it off, do you plan to change your AA?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 01-28-2018, 12:14 PM   #8
Full time employment: Posting here.
Luck_Club's Avatar
 
Join Date: Dec 2016
Posts: 556
Quote:
Originally Posted by Cpadave View Post
We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

Or do nothing. Thanks for your input.
Assuming the following:
Standard deduction for married couple is now $24,000.
Maximum real estate tax deduction is $10,000
Mortgage interest deduction is $23,562

You are still better off itemizing your return. Once your principle balance falls below below $386,000 you are at a point where the standard deduction is higher than itemizing based on those two deductions.
__________________
2017 dry run spending: 2018 accelerate debt elimination: 2019 RV procurement & 1MY begins: 6/19 DW last month went early: 9/19 start cross country loop: 1/20 first reinforcements arrive. 6/20 sell business or shut doors. 9/20 begin globe trot: 4/26 401K reinforcement.
Luck_Club is offline   Reply With Quote
Old 01-28-2018, 12:41 PM   #9
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,383
Yes, sell the house, pay off the mortgage, and buy a different lower-cost place with cash.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 01-28-2018, 12:45 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Mar 2015
Posts: 1,288
You haven't provided enough information for making the decision. Income, age, goals, risk aversion, size and type of portfolio, planned retirement date, how long you intend to remain in the house, etc - all these and more could go into your decision.

Or you could be the type that can't sleep at night when you have a mortgage, and you could choose to pay it off now.

My primary home was paid off long ago, before we were smart enough to analyze the financial implications. Our second home (and likely retirement home) has 24 years remaining on a 30 year mortgage.

For us, the mortgage rate is very favorably low so we are in no hurry to pay it off, even though we have plenty of money to do so. Once we fully retire we'll sell our current primary home and likely move into our other home. At that point we can decide to pay it off using proceeds from the sale of our primary, or continue to hold the mortgage. We are leaning toward the latter.

The good thing about not paying if off now is that we can decide to do so at any point in the future, should market conditions dictate. We'll always have enough to pay it off. But once we pay off the mortgage, it's hard to un-pay it off.

This question, along with "when to start collecting Social Security" seem to be the Big Two for endless debate. I think it's funny that some who want to collect SS at 62 so they can start investing it early seem to be the same who want to take money out of their portfolio to pay off the mortgage. I tend toward exactly the opposite decisions. In general, for folks who have the means to decide, I think they tend to both be choices between "good" and "better" decisions. Unless you are living closer to the edge, I doubt you will go wrong either way. And I'm convinced that pretty much everyone is happy with their decisions, no matter which way they decide.
__________________
Old enough to know better.
joeea is online now   Reply With Quote
Old 01-28-2018, 01:15 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 2,039
DH & I have not paid off our mortgage and don’t intend to pay it off early. We have a 30 year fixed loan at 3.375%. The opportunity cost to pay it off is too high as we’ve been earning much more than that on our investments. And the monthly payment is a small part of our monthly outflow.
Scuba is offline   Reply With Quote
Old 01-28-2018, 01:24 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 19,337
Also consider lumping any deductible payments if possible - this could get you a higher deduction in alternate years.

-ERD50
ERD50 is offline   Reply With Quote
Old 01-28-2018, 01:54 PM   #13
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Quote:
Originally Posted by pb4uski View Post
+1 What is the after-tax return on what you will use to pay it off vs the after-tax cost of keeping it? If you will be using fixed income to pay it off, do you plan to change your AA?

The after tax return would be my current rate based on the fixed income portfolio which is about 2.5-3%. Plan to use the cash flow savings to allocate back to fixed income portfolio over time.
Cpadave is offline   Reply With Quote
Old 01-28-2018, 01:55 PM   #14
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Quote:
Originally Posted by Senator View Post
Yes, sell the house, pay off the mortgage, and buy a different lower-cost place with cash.
That is our plan after the kids finish school, in about 10 years.
Cpadave is offline   Reply With Quote
Old 01-28-2018, 02:08 PM   #15
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Quote:
Originally Posted by joeea View Post
You haven't provided enough information for making the decision. Income, age, goals, risk aversion, size and type of portfolio, planned retirement date, how long you intend to remain in the house, etc - all these and more could go into your decision.

Or you could be the type that can't sleep at night when you have a mortgage, and you could choose to pay it off now.

My primary home was paid off long ago, before we were smart enough to analyze the financial implications. Our second home (and likely retirement home) has 24 years remaining on a 30 year mortgage.

For us, the mortgage rate is very favorably low so we are in no hurry to pay it off, even though we have plenty of money to do so. Once we fully retire we'll sell our current primary home and likely move into our other home. At that point we can decide to pay it off using proceeds from the sale of our primary, or continue to hold the mortgage. We are leaning toward the latter.

The good thing about not paying if off now is that we can decide to do so at any point in the future, should market conditions dictate. We'll always have enough to pay it off. But once we pay off the mortgage, it's hard to un-pay it off.

This question, along with "when to start collecting Social Security" seem to be the Big Two for endless debate. I think it's funny that some who want to collect SS at 62 so they can start investing it early seem to be the same who want to take money out of their portfolio to pay off the mortgage. I tend toward exactly the opposite decisions. In general, for folks who have the means to decide, I think they tend to both be choices between "good" and "better" decisions. Unless you are living closer to the edge, I doubt you will go wrong either way. And I'm convinced that pretty much everyone is happy with their decisions, no matter which way they decide.
We both retired at 40. I am currently 51. I think the idea in our situation is that since our mortgage will be paid off in 8 years anyway, why not take some of the fixed income portfolio that is not earning more than 2.5-3% after tax and pay off the mortgage.

I understand if there were many years left on the mortgage. In that situation, it is more likely the bond rates might exceed the cost of mortgage. Or if we were 100% in stock market and expected to have higher return with that money. Which is not the case with out 60/40 allocation.
Cpadave is offline   Reply With Quote
Old 01-28-2018, 02:27 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 18,616
If you pay off the mortgage with the proceeds of fixed income and then don't rebalance and just replenish fixed income with cash flow, I'm not sure there is a big advantage one way or the other, so either choice seems fine.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 01-28-2018, 02:33 PM   #17
Full time employment: Posting here.
Luck_Club's Avatar
 
Join Date: Dec 2016
Posts: 556
Quote:
Originally Posted by Cpadave View Post
We both retired at 40. I am currently 51. I think the idea in our situation is that since our mortgage will be paid off in 8 years anyway, why not take some of the fixed income portfolio that is not earning more than 2.5-3% after tax and pay off the mortgage.

I understand if there were many years left on the mortgage. In that situation, it is more likely the bond rates might exceed the cost of mortgage. Or if we were 100% in stock market and expected to have higher return with that money. Which is not the case with out 60/40 allocation.
What is the remaining balance on the mortgage? Did you borrow $650K or did you borrow more and you have $650K remaining?

The answer will definitely impact the tax decision. As mentioned above, I think you loose all tax benefit when you reach about $369K, and you will be taking the standard deduction anyways. Interest rates are going up, so your "fixed income" investments (bond funds) that are earning 2.5-3% will be losing value, unless held to maturity.
__________________
2017 dry run spending: 2018 accelerate debt elimination: 2019 RV procurement & 1MY begins: 6/19 DW last month went early: 9/19 start cross country loop: 1/20 first reinforcements arrive. 6/20 sell business or shut doors. 9/20 begin globe trot: 4/26 401K reinforcement.
Luck_Club is offline   Reply With Quote
Old 01-28-2018, 03:08 PM   #18
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Quote:
Originally Posted by Luck_Club View Post
What is the remaining balance on the mortgage? Did you borrow $650K or did you borrow more and you have $650K remaining?

The answer will definitely impact the tax decision. As mentioned above, I think you loose all tax benefit when you reach about $369K, and you will be taking the standard deduction anyways. Interest rates are going up, so your "fixed income" investments (bond funds) that are earning 2.5-3% will be losing value, unless held to maturity.
$650k is the remaining balance of what was originally a bigger mortgage. The monthly payment is ~$7k, most of which being principal pay down at this point (which we do not consider an expense, but still a cash flow we have to fund). However, the interest expense of almost $25k/yr is still quite high. The mortgage payment is a significant portion of our annual cash flow needs.

I find it hard to stomach the fact that our fixed income portfolio is generating less than the mortgage rate on the after-tax basis. only half of our interest expense gets the tax deduction, while the yield from the bond portfolio that we use to fund the mortgage payments is fully taxed as ordinary income. I am leaning towards paying it off, while DW is more hesitant because she is more conservative and is always big on dry powder and financial flexibility.
Cpadave is offline   Reply With Quote
Old 01-28-2018, 03:14 PM   #19
Recycles dryer sheets
 
Join Date: Nov 2017
Posts: 57
Quote:
Originally Posted by pb4uski View Post
If you pay off the mortgage with the proceeds of fixed income and then don't rebalance and just replenish fixed income with cash flow, I'm not sure there is a big advantage one way or the other, so either choice seems fine.
Yes, if we do liquidiate some of the bonds to pay off the mortgage, we will just replenish the bond portfolio over time with excess cash flow.
Cpadave is offline   Reply With Quote
Old 01-28-2018, 03:32 PM   #20
Thinks s/he gets paid by the post
RobbieB's Avatar
 
Join Date: Mar 2016
Location: Central CA
Posts: 3,284
How about you pay off say half of the balance with the bonds? Enough so that you can deduct all the interest you pay?
__________________

__________________
Retired at 59 in 2014. Should have done it sooner but I worried too much.
RobbieB is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Pay off or not to pay off? brownred FIRE and Money 16 03-13-2017 05:28 PM
Just paid off the mortgage. Putting the pay off the mortgage question to rest. FUEGO FIRE and Money 65 06-08-2015 05:08 PM
Should I pay off my mortgage early? novaman Young Dreamers 15 07-28-2009 07:20 PM
What would you do - pay off student loan or pay down mortgage? bank5 FIRE and Money 27 07-27-2009 05:30 PM
(FAQ archive) Should I pay off the mortgage or invest the money? Nords Early Retirement FAQs 0 10-15-2007 03:05 PM


 
All times are GMT -6. The time now is 03:55 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.