Why Pay off the mortgage?

[sgeeeee]

Originally Posted by 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.

No. Real estate appreciates or depreciates quite differently than the rest of your portfolio. If you have your money in other investments, you can easily rebalance those parts of your portfolio as prevailing rates of return and inflation change. But if property values stagnate and all your money is in your home, it's hard to rebalance.

This is a point a lot of pro-payoff people seem to miss. If you payoff your mortgage, your portfolio is diminished by the payoff amount. When people talk about cash flow improvement, they are ignoring the fact that they made a huge payout that reduced their cash flow by an amount that they will not overcome for many years. The odds are that they have reduced the value of their nest egg forever.

Run the numbers in FIRECalc. Many people don't want to acknowledge the results or try to modify the ground rules to justify payoff. But run the numbers and you will see -- for balanced portfolios, ~6.25% mortgage rates or lower, remaining time on loans >~10 years, the financial advantage has historically been with keeping the mortgage. Paying off the mortgage actually increases the risk of running out of money in retirement. It may make you feel good, but it isn't neccesarily making you financially safer. You need to run the analysis to see what works out best for your situation.

[LEX]

I paid cash for my house. This allowed me to hammer the seller with a lower price since the seller had no contingencies to price in, no points and other stuff that allows the cash to leave your control at closing.* Quite a shock to the system to cut out the assorted pirates in the real estate game, but if you have cash, you can save large amounts of money simply by avoiding all the extra costs required by the lender that do not add any value for you as the owner.* Title insurance is not really as important as a good title search. A survey on a tract home is a waste of money if the original plat was well surveyed, and they typically have to be to be platted.* Then there are so many hiden costs that you avoid, especially the mortage amortization that is so scewed against you on the front end.* Just pay cash and LBYM if thats what it takes.

[donheff]

Originally Posted by sgeeeee

If you payoff your mortgage, your portfolio is diminished by the payoff amount. When people talk about cash flow improvement, they are ignoring the fact that they made a huge payout that reduced their cash flow by an amount that they will not overcome for many years. The odds are that they have reduced the value of their nest egg forever.

Run the numbers in FIRECalc.

Yes, you have reduced cash flow significantly. But you have reduced expenses at the same time. Once again, $1.0M portfolio with a mortgage payment vs. $800K portfolio without a mortgage payment. Which one comes in under 4%? Depends on total expenses including the amount of the mortgage payment, which depends on the original amount financed. If the payment is high but the principal is low (e.g. 20 years in) you could always refinance the pricipal due but that still may not meet the target.

Agreed - "run the numbers in FIRECalc."

[azanon]

Question for astromedia: How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.

Just curious.

Azanon

[REWahoo]

Originally Posted by Azanon

Question for astromedia: How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.

I'm betting she will jump all over it as soon as you start reading what's been previously posted in a thread before duplicating it in your post...

Originally Posted by Andre1969

My thoughts on aging? DON'T DO IT!!

Originally Posted by REWahoo!

I suppose you are one of those who believe it has a limited future...

Originally Posted by Azanon

Don't do it; There's no future in it.

[azanon]

I'm betting she will jump all over it as soon as you start reading what's been previously posted in a thread before duplicating it in your post...

Oh I didn't realize i wasnt entitled to have the same opinion as someone else.* *Have any more apples/oranges comments or is that the only one?

As soon as I find the time to read through entire threads at work, i'll let you know ok?

Also, what's wrong with your mod features? We're 4 pages deep now and its still open

[astromeria]

Az, it sems to me we have multiple threads on many topics--is there something special about to mortgage or not to mortgage that we should carefully combine threads that arise a couple times a month (as a guess)? I am loathe to close down a useful thread and tack it onto a previous one, even if redundant--especially long threads, and especially on a very important question that every retiree has to resolve, maybe more than once. After all, one can continually revisit this issue, especailly if one's circumstances/knowledge/gut-feel/insomniac tendencies change.

If other moderators (or posters) disagree with me, they will let me know!

PS--I like the variation "astromedia" on my screen name "astromeria" (whether typo or deliberate) and can only wait for the appropriate opportunity to use it.

[WRBT]

I agree with you.

They do pop up over and over, and do get the standard early-thread references to previous threads, but people can't resist the discussion so it's always interesting. If people didn't want to engage in it there wouldn't be pages of posts so quickly.

[ash]

For those of you who favor having a mortgage for cash-flow, investment, etc. reasons:

At what point does the mortgage become such a small part of your portfolio, that not having to deal with a mortgage would be more attractive to you? For instance, if your home's value was 5% of your portfolio, would you still feel compelled to have a mortgage? Or is there no point at all at which you would not give up the financial benefits of having a mortgage?

Additionally, if you could borrow other money at home mortgage rates, how much debt would you take on (as a percentage of portfolio, or however you wish to measure it) in order to invest elsewhere? For instance, assume you could walk into a bank and get an unsecured loan at 6%, how much would you take for investment purposes?

[Nords]

Originally Posted by Azanon

Question for astromedia: *How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.
Just curious.
Azanon

Judging by the response to this and all the other mortgage threads, many of which I've linked here already, it's a popular topic. *While certain grizzled veterans may no longer find some threads interesting, every day someone on this board discovers something new to them and can probably find at least one other person as interested in it as we once were all those hundreds of posts ago. *That's the water & fertilizer that keeps a board fresh and growing, so I wouldn't pee on it. *You can choose which threads you read, and if you don't have something to contribute then you don't have to say anything.

Geez, Az, with all your complaints about the board and its posters, it seems hypocritical for you to waste any more of your time here. *

We moderators get a lot of complaints similar to your mortgage-thread sentiments, only they usually read "How many times are we going to have to read this guy's outraged trolling bait before he's just closed off and links are posted to his other existing rants?"

Unless you're volunteering for moderator duty or contributing to Dory's server fund, maybe you should go start your own board where your complaints can be dealt with more appropriately... and certainly more constructively.

[mickj]

Originally Posted by Nords

Judging by the response to this and all the other mortgage threads, many of which I've linked here already, it's a popular topic. While certain grizzled veterans may no longer find some threads interesting, every day someone on this board discovers something new to them and can probably find at least one other person as interested in it as we once were all those hundreds of posts ago. That's the water & fertilizer that keeps a board fresh and growing, so I wouldn't pee on it. You can choose which threads you read, and if you don't have something to contribute then you don't have to say anything.

Geez, Az, with all your complaints about the board and its posters, it seems hypocritical for you to waste any more of your time here.

We moderators get a lot of complaints similar to your mortgage-thread sentiments, only they usually read "How many times are we going to have to read this guy's outraged trolling bait before he's just closed off and links are posted to his other existing rants?"

Unless you're volunteering for moderator duty or contributing to Dory's server fund, maybe you should go start your own board where your complaints can be dealt with more appropriately... and certainly more constructively.

ouch that was harsh!

[REWahoo]

Originally Posted by mickj

ouch that was harsh!

Looks to me like Nords is just following the warning label posted in Azanon's signature:

"Warining: I don't adjust my posts for political correctness. They emphasize truth and sometimes truth is not gentle."

[Nords]

Originally Posted by mickj

ouch that was harsh!

As compared to these?:

Originally Posted by Azanon

And what a hateful thing to close with, Sheryl. *Maybe some other method besides bitterness would be a better approach for your current situation.

Originally Posted by Azanon

I dont see what difference it makes pointing this out, since hiring one with any designation makes one a suckor anyway.
An "investment advisor's" primary job is to separate you from a portion of your money and subsequently deposit it in his bank account.

Originally Posted by Azanon

I can almost hear you crying. *wah!

Originally Posted by Azanon

The only comparison i've done is that i pulled up the Kinsey report about 2 years ago out of curiosity. *I'm above average on both statistics. *
Oh, money was the topic,.... dont know what to say, I really dont care what others have, but if you dont believe me, that's your choice.
I'm powerful in ways that he is not; *i'll just leave it at that.

Originally Posted by Azanon

This is a messageboard, so i'm intentionally far more outspoken and less modest. *

Originally Posted by Azanon

You're confusing caring with recognition. *Just because i may recognize you're not important, doesnt mean i care one way or the other.

Originally Posted by Azanon

There is no question that i'm a powerful person. * *You sitting at home getting your bank statements in.... you're a non-factor. * Out of the game. * I'm glad you made way for powerful people like me.

Originally Posted by Azanon

... but this is the exact mentality i have to live with here in Arkansas. *Now those are some morons.

Originally Posted by Azanon

Another pro murderer. *You should be proud.

Originally Posted by Azanon

My thought is so what, who cares? *Speaking for myself, I have always felt like I have exactly as many friends as i want to have. * Making new friends and melting ice are about the same difficulty, IMO.
Friends are overrated. *Ive seen logevity studies that actually give you a few years for having more friends. *I laugh at that because too many people around me actually stresses me. *I prefer being by myself most of the time.

[hogwild]

As a newcomer to the forum, I have really enjoyed this thread. I had been planning under the assumption that I would pay off my mortgage on the month prior to my ER. I have a fairly sophisticated spreadsheet that I maintain that has several alternatives for my retirement plan. For example, the age to draw SS, whether to take a lifetime pension vs. a 10-year only pension, etc. However, in each scenario I had been paying off my mortgage. I had thought that the increased income required for the P&I payment would cause my SWR to be too high. Since reading this thread, I added the scenarios of keeping my mortgage (5.875%) and, to my amazement, it appears this actually works. I need to go over this to see if I have missed something, but it surely warrants a second look.

There is one thing that I don't think anyone has mentioned, however. And that is the effect to one's spouse if you checked out early. Would the remaining cash flow be sufficient for your spouse. In my case, my pension would be cut in half and SS would be cut by a third or so.

[Toejam]

Originally Posted by ash

For those of you who favor having a mortgage for cash-flow, investment, etc. reasons:

At what point does the mortgage become such a small part of your portfolio, that not having to deal with a mortgage would be more attractive to you? For instance, if your home's value was 5% of your portfolio, would you still feel compelled to have a mortgage? Or is there no point at all at which you would not give up the financial benefits of having a mortgage?

The remaining mortgage on my personal residence is $130k at 5-3/8%, which makes my monthly mortgage payment a little over $1,000 (including property taxes). I refinanced several years ago to get this lower interest, 30-year fixed mortgage. (Current value of residence is approximately $400K to $500K.) The mortgage represents about 5% of my portfolio, a combination of cash, stocks, & rental property.

Although I retired 2-1/2 years ago at the age of 50, I have kept the mortgage. At the time I retired, I thought it would be a good idea to pay it off. My sister, who is a realtor and owns a number of rental properties, argued against this, saying that I could do better investing that chunk of money somewhere else (stock market over the long term). She said that if you pay off your home, that $130,000 is "stuck" in your house and you have no control over it. She kept saying "your house doesn't know how much it's worth". I still don't know if I understand exactly what that means. () She also told me that since I have enough savings/equities to pay it off anytime, I could always make my mind up later, should I decide I just don't want the mortgage anymore. Anyway, being that my sister has always been so much smarter and successful than me financially, I listened to her and decided to keep the mortgage. However, I have always had a pretty high risk tolerance. And since I am single, I don't have to worry about a spouse or children who need to be considered should something happen to me.

On the other hand, I paid off the mortgages on my 2 rental houses in 2002 because they were so low (about $12k and $46k) and the interest rates were quite a bit higher then. It wasn't worth it to refinance and keep these mortgages.

Everyone has their own unique attitude and situation to consider when making these decisions. IMHO, there's no definite "right" or "wrong" on this never-ending debate. Of my friends (all of whom are still employed full-time but are close to retirement age), I'd say about half have paid off their mortgages and half have not.

[. . . Yrs to Go]

I plan to pay off the mortgage when I retire.* For me it is a matter of risk reduction.* I figure I am taking a big enough financial risk by retiring early I don't need to compound that risk by employing leverage.* Although I fully recognize that the 5.25% rate on my mortgage is likely lower than the "expected return" on my portfolio, I also understand that "expected" and "actual" returns are often times very different things.* At retirement I plan to convert the ~$20K / year I am currently paying on the mortgage into discretionary spending.* That way if the market ends up treating my badly, or my expenses go haywire, I have an additional $20K/yr to play with.* If I had the mortgage I'd have a slightly larger stash, but a lot less flexibility on the expense side.*

[sgeeeee]

Originally Posted by 3 Yrs to Go

I plan to pay off the mortgage when I retire.* For me it is a matter of risk reduction.* I figure I am taking a big enough financial risk by retiring early I don't need to compound that risk by employing leverage.* Although I fully recognize that the 5.25% rate on my mortgage is likely lower than the "expected return" on my portfolio, I also understand that "expected" and "actual" returns are often times very different things.* At retirement I plan to convert the ~$20K / year I am currently paying on the mortgage and convert that into discretionary spending.* That way if the market ends up treating my badly, or my expenses go haywire, I have an additional $20K/yr to play with.* If I had the mortgage I'd have a slightly larger stash, but a lot less flexibility on the expense side.*

I'm not telling you not to pay off your mortgage. If that's what feels right to you, then you should do it. But it is a mistake to assume you are reducing your risk. FIRECalc simulations show that mortgage payoff will often put you at greater longevity risk and require a lower SWR than keeping the mortgage.

Owning a house will not feed you and will not provide nest egg for recovery after a long period of poor returns or high inflation. Investments in other assets will. Historical simulations will illustrate this. Keeping a mortgage is not always the safest option, but at interest rates that most people are carrying today, it ususally is.