Why Pay off the mortgage?

[Shabber]

I am working on a nestegg and doing a lot of reading. Why should I pay off my 6.25% mortgage with part of my nest egg when I retire, when I can get the tax deduction and only make the payment as usual? Seems that my portfolio well balanced should yield 7-9%?

Thanks in advance!

- Shabber

 

[JB]

It doesn't make sense to compare to your expected portfolio return because they don't have the same risk/volatility.

I was in a similar situation and decided to pay it off. Here's how I viewed the problem. Someone is lending you money risk free at 6.25%. If you are holding bonds as a part of your asset allocation you are lending money at the rate that the bonds are paying. If it's less than 6.25% you are losing money. The tax issue is a wash because you pay tax on the bond dividends. Would you buy a risk free taxable bond with the same terms as your mortgage? If so pay down accordingly.

 

[rs0460a]

Most "retirement financial planners" look at a home not as an investment, but as a "place to live".  Yes, you can buy/sell it and treat it as an equity investment, but for retirement purposes, it's not part of the "retirement base" unless you have defined plans to sell it (or downsize) and use it to fund your retirement.  Statistics show that most people consider this option but relatively few execute the plan.

That being the case (and also that it requires $$$ for upkeep, taxes, etc.) I look at it only from an "estate value".  Is it part of my net worth?  Of course.  Is it part of my retirement plan? No...

Additionally,  it's more of the case of looking at mortgage debt I'd rather be without (and that's why my DW /I paid off our current 30yr mortgage in 5.5 years).

Finally, it's a "good feeling" kind of thing, to know that you don't have that debt to reduce your "perceived net worth".

Only other thing I can say (for myself) is that I also don't use it as an ATM.  The value of our home (going up or down) doesn’t matter, and is an important part of today’s news.  It's where I (and my family) live.  Sometimes you just can't put a price on a "physiological possession"...

- Ron

 

[REWahoo]

Why should I pay off my 6.25% mortgage with part of my nest egg when I retire...?

Shabber, that question has been the subject of ugly fist fights much discussion on this board. Use the search function to look for threads on "pay off mortgage" and you will find heated and impassioned name calling discourse on the subject. Here is one example:

http://early-retirement.org/forums/index.php?topic=420.0

 

[LOL!]

With a low interest rate there is usually little reason to pay off a mortgage early, because you can get your money working elsewhere.

However, if your social security benefits are being taxed because you earn too much money and you need to earn that money to pay the mortgage, then it makes sense to pay off the mortgage.  

For example, suppose your mortgage is $2,000 a month.  You could reduce your annual expenses by $24,000 and thus reduce your required annual income by $24,000.  If you earned $24,000 less than you do now, how would that affect your income taxes?  

Would you be in a lower tax bracket so that conversion of some money in non-Roth IRAs to a Roth IRA would be beneficial?

Would your social security benefits now become tax-free?  Would you qualify for other benefits because you are low income?

You have to run the numbers.

I don't buy into this good feeling thing.   I get good feelings from money in the bank that I can use to pay off my mortgage anytime I want if the numbers make sense.   I get an even bigger good feeling knowing that the interest my money earns is even more than the interest I pay on my mortgage.  That extra interest can be used to help pay the property taxes and the homeowners insurance.

But I realize there are irrational folks out there who feel otherwise.

 

[REWahoo]

But I realize there are irrational folks out there who feel otherwise.

...and rational ones as well.

 

[LOL!]

It's interesting to read the posts in that previous thread from 2004 (thanks for the link REWahoo!).

Not surprisingly, in the meantime, interest rates have changed and the folks who wrote about "where else can you get a guaranteed 5% return?" now know where you can that guaranteed return.

Ain't hindsight grand?

 

[astromeria]

Great points have been raised so far--and here's one more (OK, it's not so great, but another perspective anyhow):

If you were to sell your house and move to a new house, would you pay cash or take out a mortgage (assuming the same interest rate you have now)? If not, I'd put a little more weight on the pay-off side.

Since DH and I will have only a tiny pension and considerably less than the max for two people in Social Security payments--and therefore subject more than many of you to the vicissitudes of the market--and we may have higher medical costs than most fo you as well, I prefer to keep my other required expenses as small possible; hence, no mortgage for us.

 

[Rich_by_the_Bay]

One of the great things about NOT having a mortgage is that it puts you in better control of your cash flow.

If you hit a rough month or two or three for whatever reason, the mortgage is till due. Banks do not sell empathy. If you are investing what you would have paid toward your mortgage in your fund of choice you can simply skip your voluntary investments for a month or two or three.

Peace of mind for me. HELOC as a final safety net.

 

[LOL!]

One of the great things about having a mortgage and the money to pay it off invested is that it puts you in better control of your cash flow.

If you hit a rough month or two or three for whatever reason, the mortgage is still due. Banks do not sell empathy. If you have investments you can simply sell a portion of your investments for a month or two or three.

Peace of mind for me.  Cash as a final safety net.

 

[WRBT]

One of the great things about not having a mortgage and having sufficient funds invested is that it puts you in better control of your cash flow.

If you hit a rough month or two or three for whatever reason, the mortgage is still due. Banks do not sell empathy. If you have paid off the house and invested in your fund of choice your expenses are so low there is minimal impact.

Peace of mind for me. Heloc and cash as a final safety net.

 

[MonarchDon]

Just think how much money you will save by not paying the intrest on your mortgage. That money can be put to work making you more money.

I have always liked this article by Suze regarding the "Tax Writeoff"

http://biz.yahoo.com/pfg/e01tax/art021.html

 

[brewer12345]

Just think how much money you will save by not paying the intrest on your mortgage. That money can be put to work making you more money.

I have always liked this article by Suze regarding the "Tax Writeoff"

http://biz.yahoo.com/pfg/e01tax/art021.html

So if I have a "mortgage" that is costing me 2% after tax insterest, I would be a lot better off by pre-paying? I think you (and Suze ) need to go back to the calculator...

 

[MasterBlaster]

Well there really is no correct answer here.

You can take that money (the dead equity money), invest it, and probably come out way ahead instead of paying off a mortgage.

However what is not mentioned is that paying off the mortgage is the much much lower risk approach.

For me I plow lots of money into investments and the market. But I also take a little to pay off my mortgage.

You can do a little of both.

 

[kz]

I go back and forth constantly over whether to pay off the mortgage or not. Currently we have a 4.75% mtg while our CDs are earning 5.35%. At this time it doesn't seem to make sense to me to pay off the loan. A few yrs down the road I may change my mind though. I'll leave my options open.

 

[donheff]

I have carried two mortgages for a long time so I understand that there are many reasons to carry a mortgage. But there are as many reasons and circumstances to pay one off. Here is a potential situation:

$1,050,000 nest egg
$40K expenses includes taxes, insurance, and everything except the mortgage P&I.
$50K remaining on the mortgage with a $1200 monthy payment with a few years to go. E.g. an extra $14,400 in expenses until the mortgage is paid off.

Is it better/safer to pay off the mortgage and start out with a 4% SWR, or start out with a 5.1% withdrawal rate for the few years of $54,400 expenses it takes to finish off the mortgage? I'm sure we could debate this one both ways but I would feel more comfortable starting out with the paid mortgage and a 4% SWR. From a financial perspective is that rational or irrational?

 

[Nords]

Is it better/safer to pay off the mortgage and start out with a 4% SWR, or start out with a 5.1% withdrawal rate for the few years of $54,400 expenses it takes to finish off the mortgage?  I'm sure we could debate this one both ways but I would feel more comfortable starting out with the paid mortgage and a 4% SWR.  From a financial perspective is that rational or irrational?

Run the two different scenarios through FIRECalc and see if the success rates are markedly different. One starts with a higher withdrawal but a larger portfolio and may be more survivable, the other starts with a lower portfolio and a smaller withdrawal and may also be more survivable. The two factors can offset each other.

If the success rates are over 80% then I'd do whichever one makes you sleep better at night.

"Feeling more comfortable" would be considered irrational from a financial perspective. However sleeping at night is just as valid a reason to pay off the mortgage. They're two different value systems with two different sets of rules... and you get to choose.

 

[tryan]

Pretty much a no-brainer for us to keep the morgage a 4.875% fixed (15 year). Heck CD's are paying more. If that changes I'ld be open to paying it off.

 

[spideyrdpd]

Or you could see what the rate would be if your refinanced and took some of that cash out and invested it and got a 30 yr mortgage.

I am suprised its not approached here on the basis of having a balanced portfolio. You mention the million but wouldnt the more important part be if allocated well ?

 

[donheff]

Or you could see what the rate would be if your refinanced and took some of that cash out and invested it and got a 30 yr mortgage.

I am suprised its not approached here on the basis of having a balanced portfolio. You mention the million but wouldnt the more important part be if allocated well ?

I guess the 30 year mortgage would be an even better comparison. Same scenario, but you refinance to get a couple of hundred thousand cash out. Now your mortgage is about the same but you have thirty years to go. The extra 200 thousand placed in a well diversified portfolio would safely pay for about $8,000/yr in mortgage, but you would have to spend something like $13K to pay off a 6% 200K mortgage. Now you have a SWR rate well above 4% for thirty years.

Whatever, we do tend to beat this topic up. It seems to me that the mortgage is a good deal if you have extra money but if you are trying to stretch to live within a 4% or less SWR you are better off dumping it.

The well diversified portfolio is assumed.

 

[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]

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]

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...

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/index.php?topic=1390.msg20740#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.