Change in Mortgage Thinking in Retirement

[bobandsherry]

We paid off the house when we FIRED so we could reduce risk.

What risk?

I could make a point that you now have more risk, less free cash flow should something unexpected come up.

 

[bobandsherry]

In theory, the higher your obligatory payments/cash outflow, the higher the risk... because if TSHTF you may not have sufficient cash inflows or assets to make those payments and as a result bad things may happen (foreclosure, tax sale, reposession or whatever). By paying off the mortgage one reduces those obligatory payments which in turn reduces risk.

One also has less free cash to cover all other expenses and unexpected needs such as large medical, care for parent or other disaster.

 

[pb4uski]

It all depends on what the money used to pay off the mortgage was invested in. If it was invested in bonds, then you are correct but it could well be that the interest earned was lower than the mortgage interest. If it was invested in land that was bought for speculation and one sells the land and uses the proceeds to pay off the mortgage then there is not less cash flow.

 

[flintnational]

What risk?

I could make a point that you now have more risk, less free cash flow should something unexpected come up.

I still have the asset, the house. It could be sold or mortgaged in the future if the need arises. I just don't have the debt. I view our net worth in its totality. Paying off a mortgage provides a guaranteed return similar to cds or bonds (maybe greater). So, I can hold less of this asset class overall. I don't disagree with those that want to borrow and invest (we did so for 20 yrs). I am stating there is a price for the potential enhanced return. And, it is increased risk. Similar to the difference between a 70/30 AA and a 60/40 AA. Neither is wrong, but they have different risk/return profiles.

 

[bobandsherry]

I still have the asset, the house. It could be sold or mortgaged in the future if the need arises. I just don't have the debt. I view our net worth in its totality. Paying off a mortgage provides a guaranteed return similar to cds or bonds (maybe greater). So, I can hold less of this asset class overall. I don't disagree with those that want to borrow and invest (we did so for 20 yrs). I am stating there is a price for the potential enhanced return. And, it is increased risk. Similar to the difference between a 70/30 AA and a 60/40 AA. Neither is wrong, but they have different risk profiles.

Well, if I had the money to pay off my house I would still have the money later to pay off my house, so no risk reduced. Cash either sitting in investments (high grade investments) or in a house is just trading one asset for another, no real risk impact. And then don't forget that once cashing in an asset to pay off your mortgage may drive gains and then you have to figure in the tax impacts, perhaps loss of ACA subsidies, etc, etc, etc.

However I do find a risk of being costlier later to borrow. Many will find that securing a mortgage in retirement harder to get or more costly. And you'll then pay for cost associated with the debt, closing costs on a mortgage that will def drive up the cost of that borrowing. And then factor that if the market is struggling a bit that interest rates are rising, not a good position to be in.

Additionally, if you are in dire straights for money it will probably be you'll have some other financial stress and impact your credit rating further, driving up the cost of any debt you would then secure.

For me, I'm feel I have much less risk currently as I have funds to pay off my mortgage in an asset that has a guaranteed rate and no chance for loss of principal which has a rate that is minimally 1.5% higher than my mortgage rate (tax deferred earnings as well). I can easily access those funds, but honestly don't see the benefit to do so and pay off my mortgage as I end up with more risk and lower returns then.

Just no one size fits all answer, many variables that need to be considered too.

 

[flintnational]

..............For me, I'm feel I have much less risk currently as I have funds to pay off my mortgage in an asset that has a guaranteed rate and no chance for loss of principal which has a rate that is minimally 1.5% higher than my mortgage rate (tax deferred earnings as well). I can easily access those funds, but honestly don't see the benefit to do so and pay off my mortgage as I end up with more risk and lower returns then.

Just no one size fits all answer, many variables that need to be considered too.

I agree. If you can invest the money at a guaranteed rate above the mortgage rate you have enhanced your situation without increasing risk (and may have reduced it). When we invested the mortgage funds they were part of our overall AA, almost exclusively stocks during our w*rking years. In fact, if you can get me a deal similar to yours, I will go take out a mortgage.

 

[Freedom56]

To me, debt is like a voluntary form of taxation. It's one thing to use leverage in your younger years to build equity, but once you have sufficient capital, why bother? We paid off our mortgage on our primary home just over 10 years before retiring. We had a 15 year fixed at 4.875% at the time. We had lots of cash in a money market account earning less than our mortgage. We never used our home as an ATM machine and our mortgage always had a declining balance. It made no sense for us to keep this the only debt that we had. The net effect was that our savings grew even faster. Home prices are relatively high where we live and so are the average mortgage balances. A lot of our neighbors are drowning in debt with their primary mortgage and HELOC and they all used they same argument, they can earn more in the market. But do they really? To rent a home likes ours would be about $4800 - $5500 per month in our neighborhood for a long term lease. Most our our neighbors are paying about $4500 to $5500 monthly for home expenses (mortgage, HELOC, taxes, maintenance, utilities, cable, internet). These same neighbors complain that they don't have enough money to travel. It costs us an average of $930 (down from $2400) per month to live in our home in Southern California (taxes, maintenance, utilities, cable, internet). It all comes down to your cash flow during your retirement years and your lifestyle choices. Personally I would rather spend money on a business or first class seat on an overseas or trans continental flight and eat at fine restaurants than sit in coach and look for the cheap eats and voluntarily hand interest payments to a bank. So those that that claim they can make more money in the market and are flying in that cramped coach seat while your banker is sipping champagne laced with gold foil and flying first class, think about who is better off.

 

[pb4uski]

.... It's one thing to use leverage in your younger years to build equity, but once you have sufficient capital, why bother?....

2018 YTD: Average mtg balance: $140k
2018 YTD Investment earnings rate: 2.6% YTD
2018 YTD Estimated investment income: $3.6k
2018 YTD mortgage interest paid: $2.2k
2018 YTD "gain": $1.4k
(through June 15th)

2017: Average mtg balance: $149k
2017 Investment earnings rate: 14.1%
2017 Estimated investment income: $21k
2017 mortgage interest paid: $5k
2017 "gain": $16k

2016: Average mtg balance: $162k
2016 Investment earnings rate: 8.9%
2016 Estimated investment income: $14k
2016 mortgage interest paid: $5k
2016 "gain": $9k

To me, as an averages player, I'll take the bet in the long run as I expect to win and am unlikely to lose big enough that it would bother me... my average expected spread is ~2.7%... enough to pay for a lot of nice dinners out with DW and friends... or pay for first class upgrades.

 

[Freedom56]

We had an $84K balance on a $1.1M home. Most of my neighbors are carrying $800k to $900K balances. I don't see their arbitrage game working out too well for them. I see them digging themselves into a deeper hole. But they do have nice cars and boats. I can have anywhere from $300K to over $800K cash from bond maturities and interest payments floating in money market funds waiting, at less than current mortgage rates, waiting for my next investment. For your argument to make any sense, all of your investments, including cash balances, has to earn more than your mortage interest payments. Can you really make that claim?

 

[pb4uski]

Absolutely. In fact, I doubt that there has been a single year since I retired and got that mortgage that I didn't earn at least the 3.375% mortgage rate. The rates of return that I quoted were for a 60/35/5 portfolio that is rebalanced annually and are actual rates of return and includes 5% cash that is currently earning 1.6%.

The issues that you see with your neighbors is more a function of their lifestyle and spending choices and lack of financial discipline rather than their having a mortgage. I'm guessing that none of them are positioned to pay off their mortgage with a few clicks of the mouse like you and I are/would be.

 

[Freedom56]

So your mortgage interest rate is lower than the 1.6% you earn on your cash?

 

[pb4uski]

No, my mortgage rate is less than my portfolio earnings rate but more than what I earn on cash/bonds. IF I paid off my mortgage my cash would then be way below target and I would replenish cash and rebalance back to 60/35/5... so the proper rate to use fo the decision is the 60/35/5 portfolio rate.

IF I paid off my mortgage and subsequently changed my AA to be higher in equities and less in bonds/cash so effectively the money to pay off the mortgage was coming from bonds/cash then the cash/bond return would be the proper rate to use in making the decision.

 

[Freedom56]

No, my mortgage rate is less than my portfolio earnings rate but more than what I earn on cash/bonds. IF I paid off my mortgage my cash would then be way below target and I would replenish cash and rebalance back to 60/35/5... so the proper rate to use fo the decision is the 60/35/5 portfolio rate.

IF I paid off my mortgage and subsequently changed my AA to be higher in equities and less in bonds/cash so effectively the money to pay off the mortgage was coming from bonds/cash then the cash/bond return would be the proper rate to use in making the decision.

I don't use these silly asset allocation rules. I don't buy mutual funds or ETFs. I am 88% in individual bonds, CDs, treasury notes, and 12% in money market earning about 1.8%. So I decided 10 years before my retirement that I could not beat a 4.875% mortgage rate with 100% certainty with ALL my asset classes and therefore the paid it off. The moment you have any investments earning less than your mortgage rate, the banker sips another glass of champagne. That is fact.

 

[joeea]

I don't use these silly asset allocation rules. I don't buy mutual funds or ETFs. I am 88% in individual bonds, CDs, treasury notes, and 12% in money market earning about 1.8%. So I decided 10 years before my retirement that I could not beat a 4.875% mortgage rate with 100% certainty with ALL my asset classes and therefore the paid it off.

If you require 100% certainty for all your investments, then it makes sense never to get into debt and hope that inflation stays low.

 

[pb4uski]

.... The moment you have any investments earning less than your mortgage rate, the banker sips another glass of champagne. That is fact.

Nope. That's bullsh!t. For one, the banker doesn't have any idea what my investments earn since they are at another financial institution... and they could care less... all they care about is that they made the loan and will get some fat fees for originating the loan and periodic servicing fees.

I do agree with you that if your overall portfolio rate is less than your mortgage rate then you are best to pay off your mortgage as you did.

My MM fund is yielding 1.97%.

 

[ERD50]

We had an $84K balance on a $1.1M home. Most of my neighbors are carrying $800k to $900K balances. I don't see their arbitrage game working out too well for them. I see them digging themselves into a deeper hole. But they do have nice cars and boats. I can have anywhere from $300K to over $800K cash from bond maturities and interest payments floating in money market funds waiting, at less than current mortgage rates, waiting for my next investment. For your argument to make any sense, all of your investments, including cash balances, has to earn more than your mortage interest payments. Can you really make that claim?

You're rolling apples-oranges and straw-men all together in that post.

"But they do have nice cars and boats" - Irrelevant. Just because some people may make bad financial decisions with their debt, doesn't mean that responsible people can't make good use of it. If you apply that logic, just about everything in our daily lives is off limits to everyone (knives, chairs, cars, alcohol, etc).

And when someone resorts to bad arguments, it makes me wonder about their larger point.

I only keep enough cash for liquidity to pay bills. For the difference in a mortgage amount I would consider holding, I would not make adjustments to my AA. So the return from my entire portfolio is what makes sense to use for reference.

So yes, I'm betting the long term return on my portfolio exceeds the mortgage costs. I might lose that bet, but it's unlikely, and it's unlikely it would be by much. I'm willing to take that bet, as I feel the odds are in my favor. It's not my only bet, and it's not a huge bet. In the long run, the sum of those bets are very likely to pay off.

You can chose to not make that bet, nothing wrong with that. But please don't misrepresent it.

-ERD50

 

[bobandsherry]

I don't use these silly asset allocation rules. I don't buy mutual funds or ETFs. I am 88% in individual bonds, CDs, treasury notes, and 12% in money market earning about 1.8%. So I decided 10 years before my retirement that I could not beat a 4.875% mortgage rate with 100% certainty with ALL my asset classes and therefore the paid it off. The moment you have any investments earning less than your mortgage rate, the banker sips another glass of champagne. That is fact.

For me, i hold very little truly in cash. I have a sizeable nugget, more about 3 times my mortgage balance sitting very liquid that is principal protected and earns a minimum of 4.5%, tax deferred. My mortgage is 3.0875%, so worth me keeping my funds invested. My other investments have earned substantially more than the 4.5%, so def worth keeping my mortgage. If I were to pay off my mortgage I'd see significant tax on the capital gains and also be hit with huge hit for repayment of ACA subsidy.

Right now I'm building a withdrawal stream that will let me be positioned to pay off my mortgage, if i choose, when I hit 65. I won't have to worry about ACA subsidy loss as I'll then be on Medicare (hopefully). And won't be concerned with tax impact as that money will be after tax... However no tax actually paid on those $$ from that withdrawal stewm as that will be from LTCG at 0% tax rate. But as long as my investment rate exceed my mortgage rate I'm positioned to play the arbitrage game.

 

[RobbieB]

With todays low rates I wouldn't be in a hurry to pay it off.

I paid mine off early as it was 8%, a no brainer.

 

[ERD50]

If you require 100% certainty for all your investments, then it makes sense never to get into debt and hope that inflation stays low.

Freedom56: "The moment you have any investments earning less than your mortgage rate, the banker sips another glass of champagne. That is fact. "

Nope. That's bullsh!t. For one, the banker doesn't have any idea what my investments earn since they are at another financial institution... and they could care less... all they care about is that they made the loan and will get some fat fees for originating the loan and periodic servicing fees.

I do agree with you that if your overall portfolio rate is less than your mortgage rate then you are best to pay off your mortgage as you did.

My MM fund is yielding 1.97%.

Ahh, I didn't see Freedom56 recent post before I hit submit. Had I, I wouldn't bother. I agree with you two - if Freedom56's has a portfolio that is guaranteed to never exceed the mortgage rate, and that is the only portfolio Freedom56 will consider, then the answer is simple - do not hold a mortgage (well, maybe if liquidity is needed, but probably not even then).

But I do';t think there's any point for me in a discussion with someone who refers to "silly asset allocation rules" - they are on a different financial planet.

 

[flintnational]

^^ It's a new acronym for the forum. Instead of "My AA is 70/30", now we will say "My SAA is 70/30".

 

[pb4uski]

Freedom56's SAA is 0/88/12... but don't tell him that.

 

[HI Bill]

I won't have to worry about ACA subsidy loss as I'll then be on Medicare (hopefully).

You do realize that Medicare is worse off than SS funding? I expect it to take a harder hit than SS.

 

[Freedom56]

Freedom56: "The moment you have any investments earning less than your mortgage rate, the banker sips another glass of champagne. That is fact. "




Ahh, I didn't see Freedom56 recent post before I hit submit. Had I, I wouldn't bother. I agree with you two - if Freedom56's has a portfolio that is guaranteed to never exceed the mortgage rate, and that is the only portfolio Freedom56 will consider, then the answer is simple - do not hold a mortgage (well, maybe if liquidity is needed, but probably not even then).

But I do';t think there's any point for me in a discussion with someone who refers to "silly asset allocation rules" - they are on a different financial planet.

The financial planet I'm on involves comprhension of basic arithmetic, a net worth over 8 figures, three homes owned free and clear, zero debt, and an investment strategy that involves preservation of capital and still earning a healthy return through self directed investments. If you ever land on this planet you will begin to understand, I never said that I have an investment portfolio that will never exceed a mortgage rate. What I stated was , the moment you have ANY of your investments in an asset classes lower than your mortgage rate, you are losing. Why would I pay a mortgage and float money paying less in a money market fund?

 

[Silver]

With todays low rates I wouldn't be in a hurry to pay it off.

Unfortunately, today's mortgage rates are no longer low, IMO. We just bought a house and even with great credit (credit scores over 815 for both my DH and I) and 15 year mortgage, the best interest rate we could shop was 4.25% for a house in central Florida. Perhaps the rates are better in other parts of the country?

We close on the new house in early July and will move in early September once some work is done. We explored taking a home equity loan on our current home and we were told that we would probably be denied if the bank knew we were planning to sell it very soon. Since we were uncomfortable lying about that on the application, we chose to take a mortgage rather than withdraw from our investments.

Our current house has been paid off for many years, and we will put it on the market once we move out. When that sells we'll pay off the mortgage on the new house. At 4.25% interest, there seems like little to gain in keeping it.

 

[kite_rider]

Like others here; I paid off my mortgage in full (back in 2007) so I could 'sleep well at night'.

Then, interest rates started going down below 4% and at the time the interest was tax deductible. Since I live in a high state income tax state, itemizing was a 'no brainer'.

So, after all that work to get debt free I piled on as much mortgage debt as I could get - most of it around 3.3%. I've been doing great in the stock market with that leveraged capital which I mostly picked up around 2011 and 2012.

Now that the tax laws have changed and I feel the market is due for a correction; I'm thinking about paying down some of that debt.

The thing no one seems to bring up is that there is an 'inflation risk' to paying down mortgage debt. What if inflation jumps to 4%, or 8%?!? You would be really bummed that you paid off that 3.3% debt. That is what is keeping me from paying off the mortgage now...