I think I know, but...

[Montecfo]

At any time you can know your monthly interest payment by multiplying loan balance by interest rate and dividing by 12.

Compare that to your loan payment (ignoring escrows of course) and the difference is the portion going toward the loan balance.

It changes every month.

 

[athena53]

It's a personal decision. You can see the variations above- many just want to live in a paid-off house and not owe anybody anything. I get that.

I'm in the "save your money" camp. That means volatility, of course- if you put all the extra into an index fund it could drop like a stone. But, with 5% CDs there for the taking, I wouldn't be in a hurry to pay off the mortgage. My own situation: $100K mortgage, 15-year fixed at 3%, taken out 8 years ago. Monthly P&I is only $700. Balance is about $50,000. I can itemize so the tiny bit of interest is a tax deduction. I am SO tempted to pay it off but to me it would be a bad decision.

OTOH, some neighbors posted on FB how happy they were that they paid off their mortgage early- and the interest rate was 2.5%!

 

[Montecfo]

One thing seldom mentioned is that paying down or paying off a mortgage has another financial benefit; it lowers one's non-discretional monthly expense thus lowering any amount necessary to hold in a low interest-bearing emergency fund if one keeps an EF.

Slight quibble: paying down the mortgage does not change your monthly payment. But it does change then composition of that payment. Instead it shortens the loan term while leaving the payment unchanged.

It does reduce interest which is a way to say it reduces expenses.

 

[CRLLS]

Slight quibble: paying down the mortgage does not change your monthly payment. But it does change then composition of that payment. Instead it shortens the loan term while leaving the payment unchanged.

It does reduce interest which is a way to say it reduces expenses.

Correct, my err. Paying off the loan does reduce the EF amount required but not prepaying. I was multi tasking and lost my thoughts. Good you found it.

 

[Texas Proud]

Something to keep in mind through all of this: Rejoice in the fact that you are choosing between two great choices! I paid off my 3.25% mortgage a few years ago and don't regret it, but I know we likely would have ended up with more money if we hadn't.

Having said that, try this mental exercise: If you owned the home free and clear, would you take out a HEL at 3.125% and invest it? Why or why not? You don't have to answer here, but your answers might give yourself more insight.

Not the question as HEL have variable rates sooooo...


But if I could mortgage my house up to 80% of its value at 3.125% 30 year fixed.... heck yea... the problem comes in that when it is 3.125% rate the alternative is not as attractive as it is now...


Another question is if you were to buy a new car and they offered 1.9% would you take out the loan? I would... I know some here would not..

 

[LateToFIRE]

I'm taking a two-tiered approach. Keeping the 3% mortgage for several years and then reevaluate repaying it if the tax benefits of the mortgage interest-deduction diminish. I totally understand the psychological benefits of being debt-free, but the economic benefits of using cheap tax-friendly debt to leverage investments and create financial flexibility are hard to resist. Either way, we have options. This is a luxury problem for sure.

 

[pacergal]

Emotional decision, I think.
Don't like debt, bothers your "sleep at night comfort"=pay it off
Low interest rate on mortgage, likelihood of $ earning more than 3.125% invested=keep mortgage and invest what's left.
How likely are you to stay in this house for many years?

Check financial calculators to see how much interest you would pay over 28 years, vs how much interest you would earn on the $ if you invest. See which one makes you feel better/richer/smarter, etc.

There is no wrong answer here. That is a great mortgage rate. Congratulations on your house!

 

[firemediceric]

Thank you all again for your viewpoints. For now I’m leaning towards keeping the $100k in the money market account.

 

[latexman]

Keeping the mortgage is financially savvy, and being debt free is emotionally satisfying. Either way, you can't really go wrong.

 

[firemediceric]

Keeping the mortgage is financially savvy, and being debt free is emotionally satisfying. Either way, you can't really go wrong.

I think those two sentences sum it up. Thank you.

 

[gwill1010]

I wish I could borrow about $100M tomorrow at 3.25%.

 

[COcheesehead]

I wish I could borrow about $100M tomorrow at 3.25%.

Me too. I know right where it would go.

 

[athena53]

I wish I could borrow about $100M tomorrow at 3.25%.

I know, right? A couple of years ago I got an unsolicited mailing offering me a cash-out refinance, paying off the balance PLUS $100K to me, for 30 years at 4.1% fixed. Monthly payment didn't increase by much, mostly because my mortgage would no longer be on track to be paid off when I was 77, but when I was 97.

No, I wouldn't have taken it, even given what I know about current conditions (too much debt for my comfort level at this age), but it would have been a bad deal for the bank!

 

[Walt34]

I think this debate falls into the same category as "Are you really FIRED if you still have a job even though you don't need to work?"

Yes, no, maybe, depends... etc.

I'd be comfortable having a mortgage as long as I also had the cash on hand to pay it off whenever I felt like it. So if the cash is earning a higher rate than the mortgage, there's no reason to rush on paying off the loan. But when the interest rate the cash is earning drops to near or below what the loan costs, then it's easy to pay the thing off and be done with it.

 

[madatrub]

We are timing paying off our home/rental to coincide with anticipated retirement. It may not be the best decision financially, but theres something to be said for the emotional/plan aspects and not just how the numbers work. To us, at least.

 

[Texas Proud]

I'm taking a two-tiered approach. Keeping the 3% mortgage for several years and then reevaluate repaying it if the tax benefits of the mortgage interest-deduction diminish. I totally understand the psychological benefits of being debt-free, but the economic benefits of using cheap tax-friendly debt to leverage investments and create financial flexibility are hard to resist. Either way, we have options. This is a luxury problem for sure.

I have not had any tax advantage with mortgage interest deduction for many many years... and even when I did it was not that much...


I think people get it in their mind that it is tax deductible and think they get the full amount of their tax rate back... but there is a big standard deduction you get that you have to overcome before you get anything back... so even when I did itemize it was not a big percent of my money...


The last few years I have been at zero tax... so no benefit at all...

 

[LateToFIRE]

I have not had any tax advantage with mortgage interest deduction for many many years... and even when I did it was not that much...


I think people get it in their mind that it is tax deductible and think they get the full amount of their tax rate back... but there is a big standard deduction you get that you have to overcome before you get anything back... so even when I did itemize it was not a big percent of my money...


The last few years I have been at zero tax... so no benefit at all...

Congrats on your zero tax status. I'm jealous, as I do not think I will be anywhere near as fortunate in retirement. In my case, I am very comfortable managing r.e. debt, will have the assets to pay off the mortgage if and when it makes sense, and also comforted that the debt is conservatively booked under a 50% loan-to-value, so unlikely to ever be underwater.

Everyone's circumstances and tolerances are a bit different - have to say that zero-taxes never even remotely occurred to me, so appreciate the alternate perspective.

 

[thatguy]

Our general cost of living is covered by pension & SS. For us, keeping a small low rate mortgage keeps more cash available to spend. Most of our money is tied up in pre tax accounts. Increasing available cash is a good thing. The payment is <10% of our monthly after tax income. I also see it as shifting debt to the future when more will be available from younger DW's delayed benefits.
I was able to refinance my ARM to a fixed 2.74% just before the rates went up.

 

[Phroig]

Thank you all again for your viewpoints. For now I’m leaning towards keeping the $100k in the money market account.

If you want to complicate things a bit, you could put the first year’s payments in the money market and buy one year treasuries with the rest. Those should get you about 5.4%, free of state taxes.

 

[clifp]

I'm firmly in the if you can borrow money cheaper than you can invest it do that.

I've have had mortgages in retirement and been debt free. I think not having a mortgage gives you an illusion of safety that doesn't make much sense.

Even if there is no financial benefit I'd rather have a 100K mortgage and 100K in a money market than no mortgage. There are zillion reasons why it is handy to have $100,000 that you have access to within a day or so, bail out your kid brother, pay a ransom, or buy that cherry 1957 T-Bird at a bargain price to name 3. It takes at least a month and often two months to take out a mortgage, and its much harder to qualify for a mortgage after you are retired.

Back around 2010, Pentagon Federal Saving offered 10 year CD that paid 5%, when most CDs were near 3% or less. I and many others on the forum jumped at the chance. I invested I believe $150,000. Interest rates continued to decline. In 2013, PenFed offer car loans for 1.9%. I splurged and got one of them new fangled Tesla, and borrowed $50K. Now financially spending $57K (mine was a cheap Tesla and there were tax credit) on a car is financially stupid. But it was a helluva fun car to drive and back in 2013 Teslas were rare

What made me feel financially less stupid was looking at Penfed statement paying me 5% on my deposits, while only charging me 1.9% on the loan. The $1,000 a year after tax I earned through interest arbitrage, was particularly sweet. Beating banks at their own game is pretty gratifying.

 

[Retired Expat]

Lots of ways to slice this up. In my case: Bought a new house (well new for us anyway) and renovated it during the Pandemic. My brokerage firm was offering loans against my portfolio at 2% or less for 3 years. Returns were averaging 8-14% on my investments. So pretty easy math.... Now a few year later I could renew them at around 7% so will pay it off. It is just numbers after all and you can even put a number to what your peace of mind is worth if you want.

What pretty much doesn't make sense if you have cash you could spend is a formal mortgage. Loan origination fees, appraisal fees, and a slew of others. A LAS (loan against securities) usually costs nothing besides the interest payment and is super quick and easy. Or a Credit line which you can pay off at any time should the rate go up....

good luck!

 

[zippy2020]

A slightly longer POV:

We were fully retired by Jan 1, 2010. Had paid off the mortgage. House worth about $650K. Pension covered all our expenses, plus good discretionary income. Did have a small HELOC: $125K with great terms, paying interest only, balloon payment was due in 23 years. It was closed, already at its limit after a much-needed kitchen/bath updating. Left that loan intact, since even with modest interest fluctuations, it was only costing us about $200/mo. Needless to say, no bank would ever write such a loan nowadays!

So now it's late 2019. We were toying with the idea of selling and moving to a condo rental or senior living facility. But then we discovered a POSSIBLY severe foundation problem. If we were lucky it will be less than $50K, if not, it might easily hit $120K. Remember, this estimate was pre-pandemic/lockdown/supply chain/interest increases!

We decided to take out a very modest mortgage, rather than liquidate out of our portfolio and get hit with income and Medicare taxes. Our CFP firm agreed, and we took out $250K at 2.75% fixed in March 2020. The house appraised at $1.09M at that time - today, Zillow puts it at $992K. Our original purchase price was $140K.

Foundation work was completed (fortunately it was just a small section that needed rebuilding) so the rest will be put to work finishing up other projects. You never know what's going to happen once they open those walls!!

We view it as pulling out some of the equity. We lucked out in getting such a low mortgage rate, and in view of what has happened since, we feel we made the right decision.

 

[pb4uski]

.... The last few years I have been at zero tax... so no benefit at all...

Congrats on your zero tax status. I'm jealous, as I do not think I will be anywhere near as fortunate in retirement. In my case, I am very comfortable managing r.e. debt, will have the assets to pay off the mortgage if and when it makes sense, and also comforted that the debt is conservatively booked under a 50% loan-to-value, so unlikely to ever be underwater.

Everyone's circumstances and tolerances are a bit different - have to say that zero-taxes never even remotely occurred to me, so appreciate the alternate perspective.

IMO zero tax is suboptimal if you will be paying taxes once RMDs start. YMMV and there are situations where zero tax is wise.

My recently retired friend has SS and rent income, but the rent income is offset by expenses and depreciation, so net just SS. He will do tIRA withdrawals of about ~14% of his tIRA over the next 7-9 years at zero-tax. Given his income and tax status, Roth conversions don't make a lot of sense for him because in the long run his non-SS income will not be taxed anyway.

 

[Texas Proud]

IMO zero tax is suboptimal if you will be paying taxes once RMDs start. YMMV and there are situations where zero tax is wise.

My recently retired friend has SS and rent income, but the rent income is offset by expenses and depreciation, so net just SS. He will do tIRA withdrawals of about ~14% of his tIRA over the next 7-9 years at zero-tax. Given his income and tax status, Roth conversions don't make a lot of sense for him because in the long run his non-SS income will not be taxed anyway.

I was one where it applied... I was getting a boat load of credit for my ACA plan.. having more income would have been unwise...


Heck, a couple of times I was able to get the silver subsidy which reduced my deductible and copay...


Now that I am on medicare I can start doing some conversion etc. and just pay the higher cost on DW and DD...