Why Pay off the mortgage?

[mickj]

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]

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]

ouch that was harsh!

As compared to these?:

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

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.

I can almost hear you crying.  wah!

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.

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

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

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.

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

Another pro murderer.  You should be proud.

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]

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.

 

[Gone4Good]

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]

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.

 

[Gone4Good]

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. 

Assume a young retiree with a 50-year retirement horizon, $1.2MM portfolio, a $200K 30-yr 6.25% mortgage, and $40K in annual living expenses (excluding the mortgage). Mortgage payments are roughly $15K/yr. The portfolio is 75% stocks.

Retiree "A" repays the mortgage leaving a $1MM portfolio and $40K annual draw resulting in a 50-yr survivability of 84.9% according to FIRECalc.

Retiree "B" does not repay the mortgage leaving a $1.2MM portfolio and an annual draw of $55K ($15K of which is not adjusted for inflation). Retiree B's survivability is 81.4% according to FIRECalc.

Although the survivability percentages are close Retiree "A" has somewhat better chances. Furthermore, FIRECalc does not incorporate the fact that Retiree A has a $200K unencumbered asset which could be borrowed against (e.g. a reverse mortgage) or sold if times get tough.

 

[Spanky]

Keeping a mortgage is not always the safest option, but at interest rates that most people are carrying today, it ususally is.

For those who have paid off their mortgage, should they take on another mortgage in light of today's low rate?

 

[Hydroman]

I

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.

But it will provide a comfortable roof over your head which you may loose if you cant pay the mortgage after a long period of poor returns on ther investment funds leveraged on your home.

 

[SteveR]

Just a short comment on this and similar threads.......

This is first and foremost a public discussion board that was created for the mutual use of those engaged in or interested in the topic of Financial Independence and Early Retirement. As such, many topics of mutual interest will be discussed many times over any given period of time so it should be accepted that this will be the case. There will always be new people coming to the board on a daily basis looking for information on a variety of topics that most likely have already been discussed many times before.

A little patients and understanding might be in order here.

 

[whitestick]

Certainly have appreciated the pros and cons on this topic, as DW and I have been having this discussion for almost 6 months now, as we near RE (about 2 1/2 yrs). My twist on this is that, here in McMansion subdivision, the property taxes, homeowners insurance, utility costs for the larger house, and maintenance upkeep (lawn services, et.al.) are almost exactly equal to the cost of a 3 bedroom nice apartment w/garage, etc. A result, I'm told of drastic overbuilding (and it continues) of class A apartments.
By selling out and eleminating mortgage entirely, and using those funds for investment, I can almost use them to pay the apartment rent. Cost of utilities, insurance, fees, etc for the apartment are much lower as well. Seems to be a no-brainer, but none of our friends seem to agree with us, and we are trying to understand if we are missing something.
Comments?

 

[wabmester]

Cost of utilities, insurance, fees, etc for the apartment are much lower as well.  Seems to be a no-brainer, but none of our friends seem to agree with us, and we are trying to understand if we are missing something.
Comments?

I think there's another thread or two on this topic as well. Have you looked at a rent vs buy calculator? The two biggest things missing from your no-brainer are:

1) Home price appreciation.

2) Rent inflation.

If rents don't go up, and the price of homes don't go up, then you're right -- renting is a no-brainer.

 

[rs0460a]

For those who have paid off their mortgage, should they take on another mortgage in light of today's low rate?

Depends.  For me/DW, no - since we will be retiring in early '07.  We've already "climbed out of the hole" (e.g. mortgage) four times during our 37-year marriage.  That, in addition to being F.I. (and no "next generation" for estate distribution <no, it's going to charity, so don't ask  > ), there is no incentive to "get more".

For somebody "younger", who needs to invest to get to F.I. it is an option worth a bit of further study.  Again, there is no "perfect" right or wrong answer (as most things in life)...

- Ron

 

[donheff]

By selling out and eleminating mortgage entirely, and using those funds for investment, I can almost use them to pay the apartment rent. Cost of utilities, insurance, fees, etc for the apartment are much lower as well. Seems to be a no-brainer, but none of our friends seem to agree with us, and we are trying to understand if we are missing something.
Comments?

I have thought about this also. In DC I can't match the house with an apartment for the cost of maintenance and taxes since my taxes go up pretty slowly. But another thought is the diversification issue and unusual risks. Other things being equal, if the market takes a huge tumble there is a fair chance the house would hold up better than the equivalent market investments. And if you do something that gets you in serious financial jeopardy (a la OJ) your creditors can't get the house. Maybe you could survive your twighlight years with SS and a reverse mortgage rather than SS alone.

 

[donheff]

I agree with the posters who suggest that we let this topic run as often as members bring it up even though there are past threads that already "say it all." You can see at a glance that many of us who get into it are either very adament and defensive about our positions/decisions or are anxious and grasping about what to do. I suspect that more than other portfolio discussions this one taps into our underlying anxiety about the future. The debate of whether keeping our mandatory expenses as low as possible (the pay off argument) or maintaing a larger portfolio based on likely average returns (the keep thhe mortgage argument) is at the heart of our uncertainties about investing. The inflation protected annuity topic is similar and should be allowed to flare up as often as posters care to raise it. Speaking of which,...

 

[SecondCor521]

Assume a young retiree with a 50-year retirement horizon, $1.2MM portfolio, a $200K 30-yr 6.25% mortgage, and $40K in annual living expenses (excluding the mortgage). Mortgage payments are roughly $15K/yr. The portfolio is 75% stocks.

Retiree "A" repays the mortgage leaving a $1MM portfolio and $40K annual draw resulting in a 50-yr survivability of 84.9% according to FIRECalc.

Retiree "B" does not repay the mortgage leaving a $1.2MM portfolio and an annual draw of $55K ($15K of which is not adjusted for inflation). Retiree B's survivability is 81.4% according to FIRECalc.

Although the survivability percentages are close Retiree "A" has somewhat better chances. Furthermore, FIRECalc does not incorporate the fact that Retiree A has a $200K unencumbered asset which could be borrowed against (e.g. a reverse mortgage) or sold if times get tough.

Sincere question: What about taxes?

A has a mortgage tax deduction, which may or may not be worth anything vis-a-vis the standard deduction at that age.

B has to pay taxes (maybe) on the extra $15K they're taking out of their retirement nest egg to pay the mortage.

84.9% vs. 81.4% isn't a big deal of difference I don't think -- at least I think the tax issues could cloud the waters a bit. Also, why are you considering a 50-year horizon and a 30-year mortgage? Are you accounting for the drop in expenses in year 31 in the case of Retiree B?

2Cor521

 

[TromboneAl]

What if we had someone other than me write up a summary of some of the popular threads, and post it.  Nords could treat it like a book report.  We could then refer to that summary, and people could discuss it further if desired.

Examples:
Pay off Mortgage?
When to take SS?
Healthcare Costs

 

[thefed]

I didnt read this whole thread a sive read too many so far, but here's my .02


The MOST imprtant thing IMHO is INFLATION. Assuming 3% inflation for the next 30 years, I'd rather pay off my last mort. payment in 30 years, when my dollar isnt so hard to earn


jason

 

[Gone4Good]

Sincere question:  What about taxes?

A has a mortgage tax deduction, which may or may not be worth anything vis-a-vis the standard deduction at that age.

B has to pay taxes (maybe) on the extra $15K they're taking out of their retirement nest egg to pay the mortage.

84.9% vs. 81.4% isn't a big deal of difference I don't think -- at least I think the tax issues could cloud the waters a bit.  Also, why are you considering a 50-year horizon and a 30-year mortgage?  Are you accounting for the drop in expenses in year 31 in the case of Retiree B?

2Cor521

Taxes complicate the issue and will be different for everyone.  In our retiree's case his taxable income is so small as to make very little difference.  Given his asset allocation Retiree A probably earns about $11K in dividends and $14K in interest.  Assume the balance is drawn from principal with 50% coming from capital gains.  In that case our retiree's Federal tax burden would be $780.  The Federal tax burden for Retiree "B" would be $1,280 due to larger portfolio and draws. With first year mortgage interest of around $12.5K, he could itemize and that would knock his Federal taxes down to $1,170 (lower when state taxes are also deducted).  I doubt the difference would affect survivability much.

I used a 50 year time horizon because this is the "Early Retirement Forum" but could have chosen any other period.  I don't know how that would affect the results.  I used a 30-year mortgage because I'm not aware of anyone offering 50-year mortgages.  I assume (but haven't tested) that survivability would go down if we used a 15-year.

Yes, I accounted for the drop in expenses associated with retirement of the mortgage in year 31.


I have to admit I thought the difference between the two would be greater.  Having said that, FIRECalc doesn't consider that Retiree A has an additional $200,000 in home equity that could be drawn on.  That fact could increase Retiree "A"s survivability dramatically.

 

[Nords]

I used a 50 year time horizon because this is the "Early Retirement Forum" but could have chosen any other period.  I don't know how that would affect the results.  I used a 30-year mortgage because I'm not aware of anyone offering 50-year mortgages.  I assume (but haven't tested) that survivability would go down if we used a 15-year.

And another issue is that FIRECalc gets 35 more data runs from a 15-year mortgage than it does from a 50-year mortgage. 

 

[sgeeeee]

Assume a young retiree with a 50-year retirement horizon, $1.2MM portfolio, a $200K 30-yr 6.25% mortgage, and $40K in annual living expenses (excluding the mortgage).  Mortgage payments are roughly $15K/yr.  The portfolio is 75% stocks.

Retiree "A" repays the mortgage leaving a $1MM portfolio and $40K annual draw resulting in a 50-yr survivability of 84.9% according to FIRECalc.

Retiree "B" does not repay the mortgage leaving a $1.2MM portfolio and an annual draw of $55K ($15K of which is not adjusted for inflation).  Retiree B's survivability is 81.4% according to FIRECalc.

Although the survivability percentages are close Retiree "A" has somewhat better chances.  Furthermore, FIRECalc does not incorporate the fact that Retiree A has a $200K unencumbered asset which could be borrowed against (e.g. a reverse mortgage) or sold if times get tough.

50 year survivability simulations using a historical simulator are not accurate. The simulations ignore the worst case retirement situation in history since the most recent simulation sequence begins in 1955. Thus they miss the worst case scenario that should be used to determine SWR (ie retirements beginning in the mid-60's). Simulations should be run only for the period of the mortgage.

But don't misinterpret my earlier posting. Keeping the mortgage is not always the best option. There will be cases where mortgage rate is high enough, duration is short enough, tax situation is detrimental, or some combination of the above, when paying off the mortgage is safer with better financial results. That's why each person needs to run the numbers specific to their situation.

 

[brewer12345]

I used a 30-year mortgage because I'm not aware of anyone offering 50-year mortgages.  I assume (but haven't tested) that survivability would go down if we used a 15-year.

There are actually lenders offering 50 year mortgages, mostly in (huge shock) California. As Dave Barry would say, I am not making this up.

 

[Gone4Good]

50 year survivability simulations using a historical simulator are not accurate.  The simulations ignore the worst case retirement situation in history since the most recent simulation sequence begins in 1955.  Thus they miss the worst case scenario that should be used to determine SWR (ie retirements beginning in the mid-60's).  Simulations should be run only for the period of the mortgage.

Different topic but still  

$1MM portfolio 75% invested in stock with a $40K initial withdrawal:

30-yr survivability 94.3%
50-yr survivability 84.9%

Are you saying that at a 4% withdrawal the 94.3% survivability is the more accurate figure for long duration (greater than 30 year) retirements?

 

[Gone4Good]

There are actually lenders offering 50 year mortgages, mostly in (huge shock) California.  As Dave Barry would say, I am not making this up.

What I'm waiting for is the 100 year zero mortgage.