Why Pay off the mortgage?

[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]

Originally Posted by whitestick

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]

Originally Posted by Spanky

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]

Originally Posted by whitestick

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]

Originally Posted by 3 Yrs to Go

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

[. . . Yrs to Go]

Originally Posted by SecondCor521

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]

Originally Posted by 3 Yrs to Go

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]

Originally Posted by 3 Yrs to Go

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]

Originally Posted by 3 Yrs to Go

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.

[. . . Yrs to Go]

Originally Posted by sgeeeee

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?

[. . . Yrs to Go]

Originally Posted by brewer12345

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.

[brewer12345]

Originally Posted by 3 Yrs to Go

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

Ah, the Methuselah mortgage! Its only a matter of time...

[Khan]

Originally Posted by brewer12345

Ah, the Methuselah mortgage! Its only a matter of time...

Japan had 100 year mortgages during its RE bubble.

Wonder what became of them.

[. . . Yrs to Go]

Originally Posted by Khan

Japan had 100 year mortgages during its RE bubble.

Wonder what became of them.

Foreclosures.