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Old 11-29-2016, 03:46 PM   #61
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October's CPI-U exceeded your interest rate, in other words you paid no real interest on your mortgage, in fact inflation alone was enough that you earned money by having a low-rate mortgage. Whether the consumer price index will continue near October's rate, is, of course, yet to be seen.
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Old 11-29-2016, 03:59 PM   #62
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Originally Posted by supernova72 View Post
Peace of mind of not having a pmt upon unplanned ER would make me sleep better at night.
I don't think I would do it myself in your shoes, but I quoted the most relevant part of your OP. That's really the issue for most people, I think. Do what makes you sleep at night.
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Old 11-29-2016, 04:19 PM   #63
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We actually paid off ours 5 years ago but recently were sorry because so much $ tied up in the home. So we just took a third of the equity out with a very low rate 30 year mortgage .
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Old 11-29-2016, 04:53 PM   #64
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My thought is that as long as your withdrawals, pension, (SS?) and other income are enough to currently maintain your standard of living (including mortgage payment), leave the mortgage in place. (We have.)

You can ALWAYS pay it off if your situation changes, and you start going backwards. But as previously mentioned, once the money it is out of the 401-k (and taxed!) it's gone, (or at least transferred into a different bucket and out of sight.) Besides, it is difficult and expensive to take out another mortgage. (IF interest rates rise, you will miss the "good 'ole days" of cheap mortgage money.)

Want to sleep better? Repeat "I'm OK. I have $880 in savings/investments." before closing your eyes each night.

Looks to me like you are going to be OK whichever way you go. Congrats!
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Old 11-30-2016, 07:19 AM   #65
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Teacher Terry had it right, saying: "We actually paid off ours 5 years ago but recently were sorry because so much $ tied up in the home"

supernova72, if you paid the house off from your 401K your asset allocation would be $690K investments and $565K house. That's 45% of your net assets in one piece of illiquid, non-income-producing real-estate and 55% in investments.
That strikes me as a pretty bad asset allocation.

If your mortgage is indeed a 15 year, that was your first mistake. A 15 yr mortgage commits you to a substantially larger monthly payment than a 30 yr. You threw away the flexibility of having a smaller payment with the option of paying extra principal when & if you chose to.

Much better to have a 30-yr note with $988 payment than a 15-yr note with a $1530 payment. You can always pay $1530 instead of the required $988. But you can't pay $988 when the note requires $1530.
Of course, the smartest thing to do is take the 30 yr, with its $988 payment and put the extra $542 in a savings/investment account. By now you'd have around $59,000 in that account and no worries about having the money to make the mortgage payments in case of unexpected occurrances ... like getting laid off.

Don't compound that mistake be making another two mistakes.
The 1st mistake is paying it off with money you need to keep invested to fund your retirement.
The 2nd mistake is paying it off from a retirement account, 401K/IRA. That itself is two mistakes:
The 1st is using a retirement account for non-retirement expenses.
The 2nd is the withdrawal is taxed as ordinary income, and probably 25% will go to income tax. Just because you don't have the 10% penalty, doesn't mean that it isn't a lump of ordinary income.

What you probably should do would be the opposite -- get a new 30-yr mortgage and take cash out, put that cash into a well diversified investment account.

People talk about the Sleep Well At Night (SWAN) financial situation, but there are really 2 different SWAN propositions.
1) SWAN knowing that you could pay off the mortgage without seriously reducing your investment accounts. And your investment returns are much larger (on average) than the mortgage payment.
2) SWAN because you are unknowingly taking on a much larger financial risk than you think.

If you don't know with absolute certainty that you are in category 1, you are in category 2. People who are agonizing about whether or not to pay off their mortgage are almost always in category 2.
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Old 11-30-2016, 09:21 AM   #66
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Originally Posted by supernova72 View Post
I've done several searches on the mortgage payoff and am leaning toward doing so myself in January 2017.

Stats:
Home value $565K
Mortgage balance $115K at 4% fixed, 6 yrs remaining, P&I $1530
Pension $43K annual
I ER'd in July of 2016 (corporate downsizing)
401K: $805K
Savings/stocks: $35K
Annual expenses: $55K

I would need to use ~ $100K of my 401K to pay it off : (

Peace of mind of not having a pmt upon unplanned ER would make me sleep better at night. Considering PT work in 2017 (former financial analyst/IT Project Management at Megacorp).

Cheers.
IMO, it would be foolish to do a $100k 401k distribution to pay your mortgage. If you were doing it with taxable account funds then that is a whole different story.

You will get killed on taxes because the $100k would be income. Take your projected tax return for the year you intend to pay it off, add $100k of income and reduce your deductions by the mortgage interest and see how much more in taxes you would pay.

Your mortgage rate is reasonably low and it is quite likely that your 401k investments will earn more than 4%. Put your mortgage on autopay and forget about it. If you need to, do periodic distributions for the amount of your mortgage payments so you are still paying it off with your 401k but spreading it out so the tax bite is lower.
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Old 11-30-2016, 09:33 AM   #67
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Originally Posted by rayvt View Post
Teacher Terry had it right, saying: "We actually paid off ours 5 years ago but recently were sorry because so much $ tied up in the home"

supernova72, if you paid the house off from your 401K your asset allocation would be $690K investments and $565K house. That's 45% of your net assets in one piece of illiquid, non-income-producing real-estate and 55% in investments.
That strikes me as a pretty bad asset allocation.

If your mortgage is indeed a 15 year, that was your first mistake. A 15 yr mortgage commits you to a substantially larger monthly payment than a 30 yr. You threw away the flexibility of having a smaller payment with the option of paying extra principal when & if you chose to.

Much better to have a 30-yr note with $988 payment than a 15-yr note with a $1530 payment. You can always pay $1530 instead of the required $988. But you can't pay $988 when the note requires $1530.
Of course, the smartest thing to do is take the 30 yr, with its $988 payment and put the extra $542 in a savings/investment account. By now you'd have around $59,000 in that account and no worries about having the money to make the mortgage payments in case of unexpected occurrances ... like getting laid off.

Don't compound that mistake be making another two mistakes.
The 1st mistake is paying it off with money you need to keep invested to fund your retirement.
The 2nd mistake is paying it off from a retirement account, 401K/IRA. That itself is two mistakes:
The 1st is using a retirement account for non-retirement expenses.
The 2nd is the withdrawal is taxed as ordinary income, and probably 25% will go to income tax. Just because you don't have the 10% penalty, doesn't mean that it isn't a lump of ordinary income.

What you probably should do would be the opposite -- get a new 30-yr mortgage and take cash out, put that cash into a well diversified investment account.

People talk about the Sleep Well At Night (SWAN) financial situation, but there are really 2 different SWAN propositions.
1) SWAN knowing that you could pay off the mortgage without seriously reducing your investment accounts. And your investment returns are much larger (on average) than the mortgage payment.
2) SWAN because you are unknowingly taking on a much larger financial risk than you think.

If you don't know with absolute certainty that you are in category 1, you are in category 2. People who are agonizing about whether or not to pay off their mortgage are almost always in category 2.
I "disagree" with your opinion on what is the best way to deal with a mortgage as I think it makes assumptions that may not be true. I refi'd to a 15 year because it saves money, even paying the same amount as I was paying anyway and there's no reasonable situation I can anticipate in which I would have dropped how much I was paying on the mortgage (already was at what the 15 year amount went up to).

Additionally, I already invest what I want to invest and have no need/desire to invest even more. Any money I stop putting toward my mortgage (ideally when it's paid off) is money that will go towards increased quality of living, i.e. spending, not savings. Since it wouldn't be going to investments anyway, there is no "lost" returns that "could" be higher than the savings I get from the lower rate. Also, I have plenty of "buffer" already built in to my budget so I don't have any need to fear the higher payment.

Just because it's "possible" to save more, doesn't mean it's required or desired. If you're choosing whether to put more money at a house OR invest, then the financial calculations are the only thing relevant. However, as in my situation, there are other options and with other options come other potentially "best" solutions.
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Old 11-30-2016, 10:33 AM   #68
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My two cents worth, do not pay it off.

We have a lot more in tIRA than we will ever need, but we are about to close a refi on our home at 2.625% jumbo 10/1 ARM. Leaving our investments to grow at least at the nominal yield of 2.7%, plus growth. We have a 3.875% fixed rate now, but I can get that down by 1.125% for 10 years,still get a tax break, and still grow our tax deferred investments at a greater rate. I am even taking another 100K on a line of credit in lieu of distribution, so my kids can buy a better house in Issaquah.

Since I am now 62, my SS will easily cover the mortgage and LOC and in 10 years when I am in the throws of RMD anxiety I will have the option to at least use it to payoff 100K or so each year if the ARM rate gets high enough to worry about. In the mean time I get to enjoy the deduction of interest, while my tax deferred grows. Leveraging the mortgage is what it is all about.

It is a unique time for many of us, so each may have a different way of leveraging. Does anyone have a comment on why this logic above could be in error?
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Old 11-30-2016, 10:37 AM   #69
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I took out a 15 year because the interest rate was substantially lower and in my case it was purely a leverage play. I didn't care what the payments would be..
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Old 11-30-2016, 10:42 AM   #70
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My two cents worth, do not pay it off.

We have a lot more in tIRA than we will ever need, but we are about to close a refi on our home at 2.625% jumbo 10/1 ARM. Leaving our investments to grow at least at the nominal yield of 2.7%, plus growth. We have a 3.875% fixed rate now, but I can get that down by 1.125% for 10 years,still get a tax break, and still grow our tax deferred investments at a greater rate. I am even taking another 100K on a line of credit in lieu of distribution, so my kids can buy a better house in Issaquah.

Since I am now 62, my SS will easily cover the mortgage and LOC and in 10 years when I am in the throws of RMD anxiety I will have the option to at least use it to payoff 100K or so each year if the ARM rate gets high enough to worry about. In the mean time I get to enjoy the deduction of interest, while my tax deferred grows. Leveraging the mortgage is what it is all about.

It is a unique time for many of us, so each may have a different way of leveraging. Does anyone have a comment on why this logic above could be in error?
My only comment would be that you seem to be including the mortgage deduction as a reason to keep the mortgage. IMO, paying $6k to save $1k isn't a reason to keep a mortgage. The savings from a mortgage deduction are generally less than the cost so I would never consider it anything more than an effective reduction in the overall cost of the mortgage itself.
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Old 11-30-2016, 10:48 AM   #71
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My only comment would be that you seem to be including the mortgage deduction as a reason to keep the mortgage. IMO, paying $6k to save $1k isn't a reason to keep a mortgage. The savings from a mortgage deduction are generally less than the cost so I would never consider it anything more than an effective reduction in the overall cost of the mortgage itself.
Exactly, the effective rate of the mortgage is in general reduced by the marginal tax rate, which in our case, fortunately or not, is quite high. This makes the ROI hurdle rate for tIRA investments much lower.
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Old 11-30-2016, 11:08 AM   #72
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Is a lender going to give OP a juicy new 30 yr rate given the current income?
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Old 12-01-2016, 06:57 AM   #73
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Is a lender going to give OP a juicy new 30 yr rate given the current income?
Likely not. They look at income, which for a retiree is generally Social Security, pension, and 401k/IRA withdrawals. For the latter, they are looking for an automatic constant monthly payout, and the account balance has to be large enough to sustain that payout for 3 years.
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Old 12-01-2016, 08:38 PM   #74
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Exactly, the effective rate of the mortgage is in general reduced by the marginal tax rate, which in our case, fortunately or not, is quite high. This makes the ROI hurdle rate for tIRA investments much lower.
OP here. Thanks for adding this. My savings from $4K for itemizing consideration is almost a push for 2017.

The peace of mind of not having a mortgage results in me looking beyond that "savings".
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Old 12-01-2016, 08:39 PM   #75
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Likely not. They look at income, which for a retiree is generally Social Security, pension, and 401k/IRA withdrawals. For the latter, they are looking for an automatic constant monthly payout, and the account balance has to be large enough to sustain that payout for 3 years.
OP here, I doubt I would get a juicy rate and I'm looking to pay the house off vs. a refi. I'm at 4% right now.
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Old 12-04-2016, 11:06 AM   #76
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rayvt - thanks for taking the time to explain the option/upsides to keeping a mortgage. I've taken this position in the extreme, with the primary reason being that by doing a cash-out mortgage I can invest monies at higher return rates than the loan's rate. I couldn't have explained the details as well as you have - hopefully people take a moment to chew on your posts.
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Old 12-04-2016, 11:35 AM   #77
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OP here, I doubt I would get a juicy rate and I'm looking to pay the house off vs. a refi. I'm at 4% right now.
Actually, many on this forum should qualify based on assets. They do implied income based on your total liquid assets. The total is divided by 30 (years) and multiplied by 75% to show an effective annual distribution. Some lenders may not offer this, but most credit unions, or investment companies that hold their own notes do this commonly.

In our case, they looked at pension and SS income which was far smaller than the implied income, and we qualified using a large portion of our assets from VG alone.

I still keep two HELOC's open for emergency on top of this refi, they are subordinated the one against our home for no cost.
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Old 12-04-2016, 11:45 AM   #78
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IMO, it would be foolish to do a $100k 401k distribution to pay your mortgage. If you were doing it with taxable account funds then that is a whole different story.

You will get killed on taxes because the $100k would be income. ........
........ If you need to, do periodic distributions for the amount of your mortgage payments so you are still paying it off with your 401k but spreading it out so the tax bite is lower.
I would vote for paying it off, as the tax benefit of having a 100K mortgage is minimal since OP is probably in 10-15% range, compared to the standard deduction.

Everyone talks like the stock market is going to go up 5% every year, but it could also fall hard for a while and OP is dependent upon the return due to expenses being higher than pension.

However, if paying it off, spread it out over a few years so OP does not hit the higher tax rate.
OP - check you taxes (do a return) with 1/2 of the money now, and 1/2 in January, it's probably too much of a stretch, as OP income in 2016 is higher than 2017 since go laid off in 2016.
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Old 12-04-2016, 12:41 PM   #79
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From what the OP posted it is likely that he over or near the top of the 15% tax bracket based only on his $43k of pension income... so his marginal rate will likely be 25%. Would that change your answer?

So he would need to withdraw $133 and pay $33 in tax to pay $100 of principal. Assuming that he is close to the top of the 15% bracket before withdrawals, doing it over time doesn't really help the tax bite.

At a minimum, I would wait and see which way the tax winds are blowing given tax reform chatter in DC.... it would be a shame to withdraw $133k and pay $33k in tax to pay off that $100k mortgage and then have rates go down.

He can always put $100k of his 401k in a stable value or cash equivalent within the 401k to mitigate market risk.
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Old 12-04-2016, 02:48 PM   #80
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From what the OP posted it is likely that he over or near the top of the 15% tax bracket based only on his $43k of pension income... so his marginal rate will likely be 25%. Would that change your answer?

So he would need to withdraw $133 and pay $33 in tax to pay $100 of principal. Assuming that he is close to the top of the 15% bracket before withdrawals, doing it over time doesn't really help the tax bite.

At a minimum, I would wait and see which way the tax winds are blowing given tax reform chatter in DC.... it would be a shame to withdraw $133k and pay $33k in tax to pay off that $100k mortgage and then have rates go down.

He can always put $100k of his 401k in a stable value or cash equivalent within the 401k to mitigate market risk.
OP here for this section of the forum.

For clarification besides peace of mind of owning the home (you can't put a calculation on that) a big 2nd priority is creating $18K in cash flow for me since I'm not certain I will go back to work yet.

A lot of responses say "you can make more than 4% in the stock market" but I would be taking my $100K (plus 20% fed tax) from my bond fund and stable value (currently making 2.4% and 2.1% respectively).

So technically no I'm not making more than 4%. Additionally where I live (Seattle WA) my home value is up 12% this year. My overall 401K is up 6.5%.

Again I appreciate all the feedback and wanted to add some additional information on my desire to payoff the house. If I do payoff the house my pension will cover most of my expenses. First world problems!
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