Paying off mortgage vs leveraging $

[G-95]

Hello everyone,
Which one is more important for people who will retire in 21st century? It seems like our government will not stop taxing us and continue printing money which will devalued our savings. Should we pay off mortgage (and still pay property tax, of course) or never pay off mortgage and enjoy our hard-earned money?

[seraphim]

We paid ours off to get rid of monthly payments during retirement. If we need, we can always get an equity loan.

[MichaelB]

Quote:

Originally Posted by G-95 Hello everyone, Which one is more important for people who will retire in 21st century? It seems like our government will not stop taxing us and continue printing money which will devalued our savings. Should we pay off mortgage (and still pay property tax, of course) or never pay off mortgage and enjoy our hard-earned money?

This question is confusing. Are you asking about paying the mortgage vs defaulting? Isn't buying a house a way to enjoy your hard earned money?

[arebelspy]

No, it's the classic pay off mortgage or invest question.

Do a search and you'll find plenty of reading materials, OP.

If you think lots of inflation is coming, having a cheap mortgage is good, because you can pay it off with future inflated dollars. But it's really a personal preference question.

[Lsbcal]

Quote:

Originally Posted by G-95 Hello everyone, Which one is more important for people who will retire in 21st century? It seems like our government will not stop taxing us and continue printing money which will devalued our savings. Should we pay off mortgage (and still pay property tax, of course) or never pay off mortgage and enjoy our hard-earned money?

This is really a numbers question. It depends on (1) your tax situation and whether the standard deduction works better then the itemized which depends on your income sources to balance against, (2) the mortgage rate versus the expected ROI, (3) emotional comfort level and safety of plan.

You have to approach this as a multi-year spreadsheet. Or consult a reputable financial person for an analysis (not for fill in financial products).

[pb4uski]

Your OP suggests that you see the decision as pay of the mortgage or spend the money. If that is the case, then I would suggest pay off the mortgage.

The other alternative is to invest the money that would have been used to pay off the mortgage. From a purely financial perspective, if your expected after-tax investment return exceeds your after-tax cost of debt (the mortgage) you should take the money that you would hae used to pay off the mortgage and invest it. However, usually you can only make an educated guess as to what your after-tax investment return will be, so there is a risk that you might be wrong and it will be less than your after-tax cost of debt and you will have made the wrong decision.

However, there are nonfinancial aspects to be considered as well. Many people feel more comfortable having their home paid off and not having a mortgage payment hanging over their heads.

[GrayHare]

With mortgage rates at lifetime lows, and the Fed printing money, the math says keep the mortgage and pay it off as slowly as possible with devalued dollars.

[MichaelB]

What happens if the US is in an extended period of low inflation, low wage growth and credit contraction? In that circumstance debt is something to avoid.

[youbet]

Therefore, you'll either be worse off or better off financially if you pay off the mortgage depending on future financial conditions and tax rules we can't predict accurately from here. Likely, it won't make much difference as long as you handle the situation prudently.

[RetireBy90]

I would suggest there are many variables to consider. What is the after tax cost of your mortgage, the return on $$ you would invest rather than payoff, what inflation will be, what changes to taxes will be made in the future, how secure is the income you will use to make the house note, how much is it worth not to have a mortgage to your peace of mind, I'm sure others also.

Only after consideration of these variables can you decide the answer.

Now for me, I've decided to not make extra payments on my mortgage as I would have to take $$ I'm using to increase my investments and use it to make extra payments. I also use a cola adjusted retirement to make the payments, and I expect inflation to increase. It is somewhat of a gamble, but I will be able to take the $$ invested and apply it to the mortgage if things don't happen as expected. I also have several months of payments set aside just in case.

FYIW

[G-95]

Inflation will be here before we know it, gas prices have been rising almost $1 per gallon since last year. That is a huge increase and all commodities prices will be rising soon because all companies still want profits.

Is it wise to keep most of our money on house (mortgage)? Keeping equity as low as possible will give us extra cash to invest in assets that can produce monthly cash flow. We can use this extra cash to help mortgage payment or to invest again. The idea is to have a stress-free life and stop worrying about paying mortgage. By doing this, I think eventually all cash flowing assets will pay our monthly mortgage.

I truly believe that debt-free will not get us to our dreams or retirement. This financial systems were design to get people into as many as debts, this debt is driving world economy and all banks will go bankcrupt without people's debt. US is about 15 trillion Dollars in debt and IMF just doubled their loan-funds to about $450 million, I don't see that they are planning to pay off their debt in the future because they know that they can keep printing money out of nothing.

In this era, I believe we have to able to manage debt and make this debt to our advantage, saving money will not work anymore.
Maybe we should do what our govt do?

.....just a thought.

[veremchuka]

Quote:

Originally Posted by G-95 Is it wise to keep most of our money on house (mortgage)? Keeping equity as low as possible will give us extra cash to invest in assets that can produce monthly cash flow. We can use this extra cash to help mortgage payment or to invest again. The idea is to have a stress-free life and stop worrying about paying mortgage. By doing this, I think eventually all cash flowing assets will pay our monthly mortgage.

What will you invest in that will produce a monthly cash flow that will pay your mortgage? Fixed income yields are at record lows. If you had a few million maybe a bond or bond fund with a 2 or 3% coupon would generate enough cash? I suspect you don't have that much money to invest from what you said. Equities can generate a much better cash flow but it sure is not steady enough to rely on. High yield bonds have a better yield but would not be my choice though I hold a small percentage in my AA.

[FinanceDude]

If you have a low mortgage rate, keep it. Focus on building up savings for retirement.

[rodi]

What about those that are still working - still maxing their retirement account and FIRECALC says they have 100% if they continue... and are able to make extra principal payments.

I figure I'll have a lot more discretionary income if I don't have that pesky mortgage payment in retirement... so I'm budgeting for a case where I can make the mortgage payment if I have one... but where the mortgage gets paid off in a small lump sum at retirement. (Small like $10k for my final payment - the month before I retire.)

Fully funding retirement AND paying off the mortgage are not necessarily mutually exclusive - and ensure you get used to the LBYM lifestyle before you need it.

edited to add: on re-reading I wasn't clear that I'm making extra principal payments every month to the tune of a few thousand... This is in addition to maxing out 401(k)s, including catchup contributions.

[Closet_Gamer]

Went thru this analysis recently. Paying mine off. Part personal preference, part security, part the simple fact that a 10 yr treasury is paying 2%...paying it off is the best risk-free rate I'd return.

No one ever went broke staying out of debt.

[kumquat]

This story is from Canada, but I imagine it could occur in the US. What a difference paying off the mortgage (instead of increasing it) would have made for these people. Yes, I understand that they did some incedibly dumb things, but some people can be incredibly dumb.

[HillCountry]

Guess the answer depends on situation.

For me, still working, I am loading up mortgage now. I need the interest, depreciation to reduce my tax bill.

Besides, as everybody can see, the rate is so low. With so much money injected into the system, it cannot be this low forever.

BTW, rental in my local market already went up 20~30% past couple of years.

[Old Microbiologist]

That is always the hardest question and one I never considered until marrying an emigrated Russian who lived under the Soviet Union. Her philosophy (and mine now as well) is to live debt free as much as possible. Assume the government and banks are corrupt and trying to take your money and you will err on the right side of caution. We have a complex situation as we both brought properties to the marriage. The house we live in is paid off and in Hungary we have no property taxes and insurance is about $200 a year. We still own 2 homes in Northern Virginia which both carry mortgages. Both are rented with positive cash flow and one actually earns $2700 a month. We don't need or want to tap into that. When I married her I carried a bit of credit card debt and all of that is paid off. We pay cash for everything now and in Europe they actually only have debit cards and don't use credit cards per se as the interest rates are in the high 40% range. So we have quite a bit of equity still in our homes in VA ($100K [my 20% down] in one and $650K [paid down by selling 2 apartments in Moscow] in another) but are waiting for the housing market to completely recover before we try and sell. We did sell our third house last year and have invested the equity [$250k] from that. We also built up a lot in our 401k accounts which she manages more or less as a brokerage account and trades with on the market. None of that is necessary or needed so is pretty much our reserve capital for emergencies. I can say 3 years now after retirement that being debt free (excluding 2 mortgages) is a wonderful relief and from my perspective the only way to go. Of course, I have my military retirement which is all we live on and even then only spend about 60% a month and live extremely well. Once social security kicks in that will double our income and I suppose that will be put to work as well. But being debt free is a great feeling and you never have any financial stress.

[Danmar]

While I was working we had a mortgage, line of credit, and investment loans which always totalled in the $1-$2million range. When I retired about 5 years ago we paid them all off with incentive compensation awards. We have been debt free ever since and think this is the safest way to go in retirement.

[Old Microbiologist]

I agree with Danmar. Debt free is the best way to go. Remember you will only get 30% of your interest back in your taxes so it isn't all that great. Also, recently it was being tossed out by Congress to eliminate mortgage interest as a deduction in our income taxes. Remember back when credit card interest was deductible? They took that out and it looks like this will eventually go as well. It is something to consider for future planning. When I was working I had a serious problem with one of my 3 houses and the tenants stopped paying in one house. It took 6 months to get an eviction through the courts and they had damaged the house with over $20k in damages and another $25k in back rent owed. During the trial they accused us of all kinds of heinous things but in the end we won a judgement against them but it was only partial and the courts awarded us a $25K judgement. But, I could only garnish 10% of their wages and they moved from Virginia to Maryland to avoid this so I had to go through this all over again in Maryland. Now I get a monthly check from their employers (actually our attorney in the US gets it as we live in Hungary now, yes we had to do all of this from Europe). They also didn't pay their utility bills so we had to go through that hassle as well. We were very close to just surrendering the house as it was by this time $150k under water. But, I couldn't as I had a Top Secret clearance and defaulting on a mortgage is grounds for loss of your security clearance for financial problems. When I retired I negotiated with the bank to refinance the loan at a lower rate and now I am at least breaking even on the rent vs mortgage payment on that house. Once the market improves a bit more I will sell it and get out from under this debt. The housing market in Northern VA is slowly recovering and the house is no longer under water. Now if it rises just another 5% I can get back out my down payment as well. We have a second house but in this house we (stupidly) paid down the mortgage which cost us $1.2M in 2005. But, it is on a very good ARM and the LIBOR has fallen so much we were only paying 2.5%. It has recently been discovered though that the LIBOR is actually manipulated in London so there is some scandalous behaviors that are being investigated as criminal offenses which may shake up the LIBOR. In the meantime the LIBOR itself is suspect and we are coming up on our re-adjustment so it is hard to say what is happening. We can't refinance it as I am not working any longer thus don't have the qualifying income. On the other hand it is rented with a positive cash flow of $2700 a month so we are in no hurry to sell this home. Once we get rid of these houses we will be completely debt free and have no worries at all for the rest of our lives. It would be wonderful to get back out of them our equity but we have mentally adjusted to the fact that we may never see that money again. We still have a lot of money invested which we can pull out in an emergency.