Why Pay off the mortgage?

[ash]

If not paying off the mortgage all-at-once is a good idea, then why is paying it off a little at a time a good idea? Why not just get an interest only loan, and never pay off the principal, always stuffing that extra money into investments?

I fall into the category of folks that like the idea of not having a mortgage for psychological reasons, the idea of not having any debt is attractive to me. Although, I haven't been able to afford this yet.

[donheff]

Originally Posted by ash

If not paying off the mortgage all-at-once is a good idea, then why is paying it off a little at a time a good idea? Why not just get an interest only loan, and never pay off the principal, always stuffing that extra money into investments?

I fall into the category of folks that like the idea of not having a mortgage for psychological reasons, the idea of not having any debt is attractive to me. Although, I haven't been able to afford this yet.

Good question. We have just passed through a period of the lowest interest rates in memory. Is there anyone ERd here who refinanced to pull out a couple of hundred thou from a paid off home and invested the proceeds under the assumption that they can certainly beat the interest rate? Anyone who didn't was, in effect, practicing what we nervous nellies preach.

[Nords]

Originally Posted by ash

Why not just get an interest only loan, and never pay off the principal, always stuffing that extra money into investments?

Sounds great to me!

The 40- & 50-year mortgages still have sucky rates compared to our 30-year 5.375%.* And I wonder if the mortgage bankers are going to whip out their life-expectancy tables when we apply, but I'm only 45 with 29 years to go on the current mortgage...

Originally Posted by donheff

Good question.* *We have just passed through a period of the lowest interest rates in memory.* Is there anyone ERd here who refinanced to pull out a couple of hundred thou from a paid off home and invested the proceeds under the assumption that they can certainly beat the interest rate?* Anyone who didn't was, in effect, practicing what we nervous nellies preach.*

Yep, we posted this on the second try and finally got it right on the third refinance...

http://early-retirement.org/forums/i...20740#msg20740

As of today (including reinvested dividends) we're up 29%, but of course there's 28 years to go. Another benefit (pointed out by SG) is that the larger ER portfolio is more survivable despite the larger SWR.

[sgeeeee]

Run the two scenarios in FIRECALC. You can see historically what was most likely to be best financially, what the maximum downside potential of that choice would have been, and which choice carries the least risk in terms of SWR.

If you you have an interest rate less than about 6.5%, and time remaining on your mortgage of a dozen years or more, you will almost certainly find that keeping your mortgage is not only most likely to pay off financially, but will actually produced a larger (safer) long term withdrawal rate.

If the numbers don't comfort you and you still feel uncomfortable with a mortgage, then pay it off. It won't make that much difference.

[bpp]

I'm irrationally attracted to early payoff, and admit it, so I split the difference and put some new money into investments, and some into mortgage pre-payment. Meanwhile, I am thinking of specifying future pre-payments to go towards reducing future monthly payments instead of going towards shortening the remaining loan period, so that I at least get some cash-flow benefits in case of job loss or other problem. (Don't know why this didn't occur to me before. Have been doing period-shortening up to now.)

If I can at some point get a better return from government bonds than from the mortgage paydown, then of course that will be the obvious choice.

It's all psychological, really. I know what the rational thing to do would be (max investments and don't pre-pay), but cannot bring myself to do it even after all the time spent playing with spreadsheets. If I had the cash at hand to just pay it off at any time, I would probably feel more comfortable with just carrying it. But knowing that I could theoretically get hanged on that rope makes me fear it more.

[kowski]

Anything can happen to this economy and, certainly, something will eventually. Debt-free homes belong to the owners, not to the lenders, and one of the best ways owners can be assured that they can eventually have a debt-free home is to pay off their home mortgages as soon as possible.

[dmpi]

I don't think it really makes a big difference. I think it’s mostly mental. I'm a big believer in LBYM & not having a mortgage enables you live off much less dollars per year. This will lower your stress, while investing the money that you didn't use to pay off your loan may actually raise your stress.

[Spanky]

Originally Posted by kz

Currently we have a 4.75% mtg while our CDs are earning 5.35%.

4.75% fixed? That's a very cheap rate! I agree - why pay down the mortgage when CD is returning at 6%?

[Spanky]

Originally Posted by sgeeeee

If you you have an interest rate less than about 6.5%, and time remaining on your mortgage of a dozen years or more, you will almost certainly find that keeping your mortgage is not only most likely to pay off financially, but will actually produced a larger (safer) long term withdrawal rate.

In retrospect, we should have accepted an offer for a home equity loan at 5.75% five years ago - no closing cost or points.

[youbet]

Because you can.......and it feels good!

[mathjak107]

At 6.25 you need a guaranteed after tax return of at least 5.25-5.50 to equal it.The key is equal it with what? The comparison should be against other risk free investments since this return is guaranteed .At this point it would be very difficult to beat paying off the mortgage as 5.5 after tax with zero risk is hard to do..While yes long term the markets can beat that the fact is you would be comparing 2 different risk levels.Borrowing the money for your house and taking your own money and putting it in the markets after a higher return is now akin to buying on margin.If you wouldnt buy stocks on margin at this point then dont do this as its the same thing,your borrowing the money to invest your own in effect.

[donheff]

Originally Posted by Nords

Yep, we posted this on the second try and finally got it right on the third refinance...

http://early-retirement.org/forums/i...20740#msg20740

Nord's - that quote is in response to my question "has anyone taken out an extra $200K equity..." I read the original post and assumed that by refinance ("We signed the refinance papers today for a credit union 30-year 5.5% mortgage. We'll be making only the monthly payments and no additional principle so this one won't be paid off until the end of 2034 (when I'm 74).") you meant that you were finally able to get the payment on the existing debt reduced to a level that you can cover the payment with your pension while keeping the remaining expenses under 4% of your portfolio. We refinanced the existing debt several times over the years to get the monthly payments down -- and each time did it with a 30 year mortgage like you to maximize the tax benefits.

But did you actually do an equity take out and invest the extra $200K or whatever in the market?

[tryan]

"has anyone taken out an extra $200K equity..."*

My old boss in mega corp did this at the top of the tech run (Jan 2000).* Rolled it all in the NASDAQ.* He's not too happy with the results.* But still managed to retire at 55.

Would do lunch with him every day and if the topic came up his standard reply was "I am not worried, it'll come back." Still waiting and waiting ....

[sgeeeee]

Originally Posted by mathjak107

At 6.25 you need a guaranteed after tax return of at least 5.25-5.50 to equal it.The key is equal it with what? The comparison should be against other risk free investments since this return is guaranteed .At this point it would be very difficult to beat paying off the mortgage as 5.5 after tax with zero risk is hard to do..While yes long term the markets can beat that the fact is you would be comparing 2 different risk levels.Borrowing the money for your house and taking your own money and putting it in the markets after a higher return is now akin to buying on margin.If you wouldnt buy stocks on margin at this point then dont do this as its the same thing,your borrowing the money to invest your own in effect.

This is one of the myths of early payoff fans. Owning a home is not risk free. A home has inflation risk, liquidity risk and several other types of risk associated with it. If people just "feel good" paying off their mortgage like some posters have indicated, then they should do it. If they want some historical data to help make a financial decision, they should run Firecalc scenarios and look at the data.

[WRBT]

I'm not sure it saying a home has inflation risk makes sense in the context of the discussion since both options (pay off mortgage or invest) would carry same inflation erosion risk on rates or return.

[bosco]

Originally Posted by Spanky

4.75% fixed? That's a very cheap rate! I agree - why pay down the mortgage when CD is returning at 6%?

1) because the 6% is less than that once you consider the taxes you must pay on it. (unless the money is in tax deferred status)

2) because what nobody has mentioned thus far in the discussion is that although you can write off the interest on the mortgage, you aren't usually really getting all of this writeoff effectively. You should first subtract off the standard deduction (you'd get that much anyway, without the mortgage), and use that amount, plus any other miscellaneous deductions that add to it for the comparison. For many, the mortgage deduction isn't as attractive when viewed that way.

[Nords]

Originally Posted by donheff

But did you actually do an equity take out and invest the extra $200K or whatever in the market?

We kinda backed into it. *Over the years it was easier to refinance the mortgage than to cash in a chunk of the ER portfolio.

It's a calculated risk, the long-term odds are in our favor, we don't have any bonds in our ER portfolio, I have a govt pension with a COLA, and we sleep fine at night. *But I wouldn't recommend this without an extremely reliable pension or a small mortgage. *

FIRECalc claims that we have a good chance to come out ahead over a 30-year mortgage if we invested it in equities, and interest rates have dropped even further since I realized that. *What clinched the analysis is that a larger retirement portfolio is generally more survivable, even if that larger portfolio consists partly of invested mortgage money and results in a higher SWR than without it.

You have to run FIRECalc for your original expenses & portfolio, and then run it again with the additional mortgage payments plus the larger portfolio. *Our FIRECalc runs tend to be pretty long, 75-80 years, so we probably have less data than most people's runs. *But even running a 30-year mortgage through FIRECalc all by itself is generally a winner-- especially at 5.375%.

So last year we decided to keep the mortgage. *Its payment (plus utilities, gas & groceries) is covered by my pension, which is also rising with inflation. *Our SWR is higher now but our portfolio will be boosted by my spouse's pension (in 2022) plus Social Security (2022-3).

[donheff]

Originally Posted by Nords

We kinda backed into it. Over the years it was easier to refinance the mortgage than to cash in a chunk of the ER portfolio.

DW and I have done something equivalent, although I always assumed it was financially nuts. She has to file quarterly self employment taxes but cash flow is a mess -- she gets the bulk of her income in the second half of the year, sometimes as much as 40% in the final quarter. With auto-investments, etc., we frequently found ourselves with insufficient cash to pay the first quarter (which includes whatever is due for yearly, plus the first quarterly). Like you, virtually everything is in equities so we would take out a home equity loan for the taxes and pay it off later in the year. We just didn't want to get into the habit of tapping into the ER fund for any reason.

[Hydroman]

Originally Posted by kowski

Debt-free homes belong to the owners, not to the lenders, and one of the best ways owners can be assured that they can eventually have a debt-free home is to pay off their home mortgages as soon as possible.

Don't kid yourself into believing that you own your home if you pay of the mortgage. The property tax man can always take your house if you don't pay your taxes. Other then in California where there is Prop. 13 protection, you have little control over escalating property taxes. That said I am in the debt free camp and can sleep at night.