paid off mortgage yesterday

[scrabbler1]

Congrats to paying off your mortgage!


I have always had an aversion to debt and have been eager to pay it off quickly or avoid it altogether. I have bought cars 3 times and paid cash each time, including the first time in 1986 when I had about $20 to my name after I bought the first one. At the time, I was living with my parents and got a paycheck from work 2 days later so it wasn't like I was "broke" or anything. Six months later, I had gotten my bank balance back to where it was before I bought the car.


I paid off my student loans in 18 months including just over half of it within the 6-month grace period after college graduation in which no interest accrued nor any payments were due. I happened to have a small blob of money in an old bank account I had forgotten about so I just used that. Nice find, huh?


I took on the mortgage in 1989 when I bought my co-op apartment. Interest rates, especially on co-op loans, were high, even for adjustable rate mortgages (ARMs). I was paying nearly 11% for a 5-year ARM so when interest rates crashed in the early 1990s, I refinanced the loan into a 1-year ARM at 6%, saving me $200 per month.


That, along with a fast-rising salary, enabled me to save and invest a lot in the booming 1990s markets. The ARM rose, too, in the next few years, nearing 8% by 1997. I used some of the market gains to pay down the mortgage. But when I saw in my mortgage paydown spreadsheet that the tax increase and investment earning reduction from losing the interest deduction was less than the savings from paying the interest itself, I paid off the loan. A key element of that was noticing that I would hit the standard deduction on my state income tax return, so there was no state income tax increase by paying the loan off.


I paid off the mortgage just around my 35th birthday in April of 1998. This was a key step in putting ER onto my radar. With my monthly expenses greatly reduced, I saw that I would not need to generate a lot of income to cover them. With my wage earnings in their peak years of the late 1990s, I was basically living on one paycheck now and saving/investing the rest of it, boosting my savings rate to over 50%.


By 2001, I would reduce my weekly hours worked (i.e. semi-retirement) and work part-time for the next 7 years, still more than covering my reduced expenses (due to paying off the mortgage, of course) and able to save any surplus anyway.


My ER plan was born and began to grow in the early 2000s thanks to paying off the mortgage. By 2008 the ER plan was ready to fly and I ERed at the end of October that year.

 

[littleb]

Paying off your mortgage is a high accomplishment and the feeling of being debt free is even better! Congrats!

We paid off our home 5 years ago and paid off our vacation home last year. What a great feeling to no longer have a mortgage hanging over your head.

 

[youbet]

I think the following chart illustrates a large reason why paying off a mortgage is ingrained into society as a great accomplishment:

Most people's net worth is, by and large, their home and little else. That's not the case for many on this site and similar places, but that doesn't mean people haven't been influenced by the amount of financial freedom "most" people feel when they get out from under a mortgage payment that likely accounted for 20-40% of their monthly spending for most of their lives.

Thanks for posting that exnavynuke!

I was aware that much of middle class America is mired down with their home equity representing the bulk of their worth. But, that chart pictures it very clearly! I do wonder where you got it and what year the data is from.

BTW, I'm certainly not knocking the feeling of euphoria many are expressing when that big day comes and they retire whatever balance of their mortgage they have remaining. It's just been a bit puzzling for me over the years since I never thought of it as a big deal.

You choose to take a mortgage initially because you believe that is a better solution to home ownership than continuing to rent and save until you can pay cash. That is, at the beginning you make a decision that having a mortgage and owning a house is the best thing for you to do.

Then you methodically make the periodic payments over the years while hopefully investing whatever excess doesn't go to the mortgage or day to day expenses.

Eventually, you either make the final payment or you decide that since savings balances are now higher and the mortgage balance lower (than at the beginning) you'll move some money around the balance sheet and have fewer assets but also less debt. That is, you pay off the mortgage. And you shout HORRAY!

I guess I get it. It's just that in my case I was much more euphoric about the asset side of my personal balance sheet growing than in the debt side shrinking since the asset side was much larger and more meaningful in terms of my ability to FIRE. That is, paying off my $10k mortgage balance meant little while building up the asset side to 7 figures meant a lot in terms of achieving FIRE.

 

[Music Lover]

That chart is eye opening.

When I bought my house in 1997 it was inexpensive so the numbers worked...mortgage at the time was less than rent, and one of my "non-negotiables" was to live in a house, so it was the right choice.

The housing market has since changed and I'd have to live in a dump in a less desirable neighborhood to make it work if I was starting out today. My existing house would be out of reach.

 

[socaldonnan]

Congratulation and welcome to the club. I cannot add anything further to what has been said in all the various postings. For DH and myself, it was the peace of mind of not having that debt and we were not realizing any great write-off since we had a low mortgage balance. It freed up monies for additional investment and travel a bit more.

 

[exnavynuke]

youbet - the chart was made based off data from 2011 from the Census Bureau. Here's one of the articles about it Americans' Average Net Worth by Age -- How Do You Compare? - NASDAQ.com

 

[rayvt]

paying off a mortgage allows you to double or triple your monthly disposable income. So, yes, it may be reason to celebrate.

But that's my point -- it doesn't increase your monthly disposable income. Not if you have a significant retirement investment portfolio and you are paying the monthly payment from your 4% withdrawal.

Money is fungible.

 

[Meadbh]

But that's my point -- it doesn't increase your monthly disposable income. Not if you have a significant retirement investment portfolio and you are paying the monthly payment from your 4% withdrawal.

Money is fungible.

Perhaps it might be more accurate to say that paying off the mortgage improves your cash flow.

 

[exnavynuke]

But that's my point -- it doesn't increase your monthly disposable income. Not if you have a significant retirement investment portfolio and you are paying the monthly payment from your 4% withdrawal.

Money is fungible.

If you're paying the mortgage from your paycheck you get from your job on the other hand, then what happens to your monthly disposable income when you get rid of the mortgage? For many people, it isn't necessarily a case of the money is "either in investments/going into investments OR it's going to the mortgage". Keep in mind, the guy who's happy with his 40% gross savings rate and spends his remaining take home pay can have a bump in quality of life when he pays off his mortgage by spending that money on himself. He "could" decide to put that money towards retiring earlier, but may not prefer to. There are options outside of the money going into investments or towards the mortgage for many people.

 

[Marita40]

I'm not retired yet so paying off the mortgage will increase my monthly income. This is the third (and final I certainly hope) mortgage I've held; the first two were paid off in record time, and each time I moved "up" (nicer home, better neighborhood) I took a small mortgage to cover the difference. I have perhaps two more years to pay this one off--am doing so aggressively which keeps me on a tight monthly budget. Once done I'll enjoy the extra monthly cash. I won't need to save it as my retirement savings are fully on schedule.
Honestly, I don't care at all whether it is a good move to keep the mortgage or pay it off. I just want it GONE to be debt free. Been there, done that--I know how good it feels.

 

[Music Lover]

If you're paying the mortgage from your paycheck you get from your job on the other hand, then what happens to your monthly disposable income when you get rid of the mortgage? For many people, it isn't necessarily a case of the money is "either in investments/going into investments OR it's going to the mortgage". Keep in mind, the guy who's happy with his 40% gross savings rate and spends his remaining take home pay can have a bump in quality of life when he pays off his mortgage by spending that money on himself. He "could" decide to put that money towards retiring earlier, but may not prefer to. There are options outside of the money going into investments or towards the mortgage for many people.

And, if that person has a COLA pension, then their end goal may be different than those who don't have one. For those people, paying off a mortgage reduces monthly expenses so that when they do retire, their monthly needs are easily met.

 

[Montecfo]

I have a small mortgage. When i am fully retired, I will pay it off, even though it is at a low rate. The reason is loss of interest deduction will make it more costly. If you have money invested conservatively, you are not likely to beat the after tax cost of your mortgage consistently. And, if you do not have any conservative-type money then you probably are not retired, or you are very aggressive as an investor.

 

[ERD50]

I have a small mortgage. When i am fully retired, I will pay it off, even though it is at a low rate. The reason is loss of interest deduction will make it more costly. If you have money invested conservatively, you are not likely to beat the after tax cost of your mortgage consistently. ...

You don't need to beat it consistently, you only need to think you have a good chance of beating it over the remaining term of your mortgage. And be willing to accept the few times that it doesn't.

FIRECalc shows an average return of ~ 5.5% after inflation over all the 10 year periods with a 60/40 AA. I plugged in $1M , zero spend, 10 year period. Average end balance was $1,718,906 - so ~ 1.055^10.

With mortgages in the < 3% range, that seems like a reasonable investment. You may chose to pass up the opportunity, but I don;t think you can reasonably say that "you are not likely to beat the after tax cost of your mortgage" over the term of the mortgage.

Also, I don't think there is any place to get 3% consistently these days. So what will you do after you pay down the mortgage, how will you invest?

-ERD50

 

[Montecfo]

You don't need to beat it consistently, you only need to think you have a good chance of beating it over the remaining term of your mortgage. And be willing to accept the few times that it doesn't.

FIRECalc shows an average return of ~ 5.5% after inflation over all the 10 year periods with a 60/40 AA. I plugged in $1M , zero spend, 10 year period. Average end balance was $1,718,906 - so ~ 1.055^10.

With mortgages in the < 3% range, that seems like a reasonable investment. You may chose to pass up the opportunity, but I don;t think you can reasonably say that "you are not likely to beat the after tax cost of your mortgage" over the term of the mortgage.

Also, I don't think there is any place to get 3% consistently these days. So what will you do after you pay down the mortgage, how will you invest?

-ERD50

You left out part of my statement. I said "If you have money invested conservatively, you are not likely to beat the after tax cost of your mortgage consistently. And, if you do not have any conservative-type money then you probably are not retired, or you are very aggressive as an investor."

As far as your approach, it is not that theoretical IMHO. What is the money earning that you would use to pay down the mortgage? It is probably not earning 3%+ risk-free, then you can stop right there, and consider paying off the mortgage.

Unless you are in 100% stocks, and most retirees are not, the paying down the mortgage will provide a better return than continuing the debt, in most cases.

Now you could argue risk-free rates will rise. But you could have argued that a long time based on the past, and you would have been wrong. It is speculation. And if your mortgage is at 3%, it is probably going to adjust higher when rates adjust. If it is 30 year fixed, it is probably higher rate, which makes the payoff case stronger, in my view.

And understand, your bonds have to earn 3.45% on a risk-free basis if you are in the 15% bracket to equal the cost of funds at 3% (with no tax deduction). if you find a risk-free rate of 3.45%, I would be interested, let me know.

And since that risk-free rate is not out there, your "hurdle rate" is higher than 3.45% that, since you need a premium to offset the risk of loss you would need to be taking.

After I pay down the mortgage, I will leave the rest of the funds invested as they are, since the purpose of the funds is to pay down the mortgage when it makes sense.

thanks for the discussion.

 

[ERD50]

You left out part of my statement. I said "If you have money invested conservatively, you are not likely to beat the after tax cost of your mortgage consistently. And, if you do not have any conservative-type money then you probably are not retired, or you are very aggressive as an investor."...

I said 60/40 - I consider that pretty conservative, and I think pretty typical here, though I lean more 75/25, and there are some who are comfortable with 100/0, and I don't see any problem with that either.

I'd be more concerned with being too conservative, that has been shown to result in more failures historically.

I don't 'compartmentalize' and I try to look at the big picture. My mortgage is ~ 5% of my portfolio, I would not change my AA over paying that off. AA is not a very sensitive thing anyhow, at least in the 45/55 ~ 95/5 range.

edit/add - actually I didn't leave 'conservatively' out of your statement - it's right there (and I didn't edit it either!)

-ERD50

 

[ERD50]

... What is the money earning that you would use to pay down the mortgage? It is probably not earning 3%+ risk-free, then you can stop right there, and consider paying off the mortgage. ....

I meant to add that this whole idea that the only comparison is to risk free returns is a false one, IMO.

The risk free thing is just an offshoot of how a mortgage works. It's not like anyone takes out a mortgage with the idea that they someday in the future, they can 'invest' the payoff money at a risk-free 3% 'return'. It's a by-product.

And not every comparison needs to be totally apples-apples. I can decide to take some risk with the money, risk free investment is not my only choice. And as I said, I look at that risk on a portfolio-wide basis.

Do you have any money invested in the equities at all? If so, why? How do you justify the risk over CDs or Treasuries?

-ERD50

 

[Music Lover]

But that's my point -- it doesn't increase your monthly disposable income. Not if you have a significant retirement investment portfolio and you are paying the monthly payment from your 4% withdrawal.

Money is fungible.

I understand. However, not everyone is living off a 4% withdrawal rate.

 

[Backdraft57]

Very cool and congrats!! That's the Holy Grail for me

Sent from my SM-G935V using Early Retirement Forum mobile app

 

[SpinDr]

Congratulations! I am a few years away from doing so, and have been torn about trying to pay off early. But...that has got to be a fantastic feeling not having that payment every month!

 

[Montecfo]

I meant to add that this whole idea that the only comparison is to risk free returns is a false one, IMO.

The risk free thing is just an offshoot of how a mortgage works. It's not like anyone takes out a mortgage with the idea that they someday in the future, they can 'invest' the payoff money at a risk-free 3% 'return'. It's a by-product.

And not every comparison needs to be totally apples-apples. I can decide to take some risk with the money, risk free investment is not my only choice. And as I said, I look at that risk on a portfolio-wide basis.

Do you have any money invested in the equities at all? If so, why? How do you justify the risk over CDs or Treasuries?

-ERD50

That paying off the mortgage generates a risk-free return is just a fact. Debt is just a tool, with a cost.

If there were 3.5% CD's out there, retirees and others would be buying them. And most retirees are invested in short and mid-term bonds which are yielding far less than 3.5%, and with more risk.

Most people invest in equity AND debt. 3.5%, for example, is a higher return than most people can reasonably expect from their bond portfolio right now. And most analysts expect future returns for the next decade or so to be below historic averages since stock and bond prices are elevated here.

And yes, you are free to take risk. But you should expect a risk premium to induce you to take the risk. So your hurdle rate is not 3.5% (continuing the example), it would be 2-4% higher, since you know you will lose money for some periods. This is basic investment theory.

In my own portfolio I have debt, equity and cash. But no margin, because that is excessive risk for someone in my financial situation. In short, I do not need to take excessive risks at this point, and that should be true for most prudent retirees.

But you may calculate differently. I am ok with that.

Cheers!