Borrow Just Before Retirement

[RetireAge50]

Will retire later this year and still have a mortgage of $50,000 and roughly $50,000 in college expenses I want to pay. My plan has been to pay these expenses as they come due over the next 4 years. I would be using Roth IRA money (tax and penalty free since it is contributions not earnings).

My credit union is offering a 10-year mortgage loan at 2.95% with absolutely no closing costs. My current mortgage is 3.375%. Was thinking of taking a $100,000 loan for the above items and then pay it off over 10 years instead.

In the end it probably doesn't really make much difference but will likely come out ahead by borrowing at such a low rate and thereby keeping it in the Roth (in Wellington) for a bit longer.

What is your vote, Yay or Nay?

 

[RobbieB]

Sounds good to me, less interest expense.

 

[2017ish]

It comes down to comfort level as much as anything, given a less than 3% rate. Many/most prefer the feeling of no mortgage debt. Others see the low-cost leverage as a benefit.

We are also retiring this year and are in the benefit camp; just refi'd to 15yr 2.75% conforming loan in Oct--and am setting up a large HELOC right now, which will require us to draw 100,000 out for 3 billing cycles to achieve maximum discount on future draws. (At present prime rate, this puts us below the 2.75, but that is obviously subject to change.)

Nonetheless, if it weren't for DW's strong leaning toward taking advantage of the low rate, I would have been just as (if not more) comfortable paying off the first mortgage while still setting up the backstop HELOC.

 

[Meadbh]

I borrowed after retirement to purchase a rental property at an APR of 2.59% (fixed for 5 years). I also renewed two other mortgages at 2.39% and 2.19%. At those rates, I can't resist borrowing for good debt.

 

[Another Reader]

I would probably take that deal. The yield on Wellington covers most of the interest anyway, assuming no huge drop in value.

 

[COcheesehead]

Not sure of the rest of your financial situation, but I think having a mortgage deduction (if it stays) gives you more flexibility with taxes. It could help put you over the top of just the standard deduction and can help to keep you in the lower tax bracket. All, of course, dependent on the rest of your financial situation.

 

[RetireAge50]

Excellent. I'll go for it then. Thanks for replies. I can always change my mind and pay it off.

 

[RobbieB]

Yup. If there are no "setup" fees and no pre-payment penalties why not?

All you can do is save dough.

 

[pb4uski]

Yea for me. 2.95% is tough to beat and you get to retain the tax-free attributes of that Roth money for longer.

 

[W2R]

If it was me, I'd simplify my life by paying them both off before I retired. No debts, no worries. But then, that's the way I am. You all know me by now.

 

[mystang52]

doing that seems like a no-brainer.

 

[laurence]

+1 sounds like a sound plan.

 

[zedd]

Sub 3% rates? Those are some really good rates. Must be paying some pretty high points tho -- right? My CU is in the 4.5 range on a 30-year conventional

 

[RetireAge50]

Sub 3% rates? Those are some really good rates. Must be paying some pretty high points tho -- right? My CU is in the 4.5 range on a 30-year conventional

No points or closing costs of any kind. They give me $100k, I give them $963.30 for 120 months or pay off early no penalty.

 

[Gumby]

If it was me, I'd simplify my life by paying them both off before I retired. No debts, no worries. But then, that's the way I am. You all know me by now.

 

[laurence]

HA!

 

[zedd]

Don't get it. Must be an inside joke.

 

[W2R]

Love that song! And, I'll admit it was running through my head when I wrote that line. See? You DO know me by now.

 

[Johanson]

I'd take that loan in a heartbeat. The interest is deductible (and I don't think that will change except possibly for those at the highest income levels) and it's possible the inflation rate runs at around 3% for many of those next 10 years. Plus, the return you get the amount you would have withdrawn from the Roth could greatly exceed that 3% on an annual basis.

 

[JP.mpls]

RetireAge50,
Your existing loan has a slightly higher interest rate, but depending on how close you are to paying it off, you might actually pay less interest just paying off the existing 50K loan, and taking out a new loan for the remaining 50K.


My example:
I kept an amortization spreadsheet of my home loan. At one point I was going to refinance from a very mature 7% loan down to a new 4.5% loan. I was all fired up to reduce the amount of interest that I was going to pay. I thought for sure reducing the interest rate was an obvious good decision.


It turned out that I would have paid more interest taking out the new loan at the much lower interest rate, because the new loan had me paying primarily interest the first few years. The loan amortization information helped me make the correct decision, so I paid less interest, and got my house paid off sooner.


Good luck,


JP