Dying With a Huge Mortgage

[tulak]

Of course estates can be complex, nobody is arguing that nor is it relevant to dying with a mortgage.

Servicing debt, paying bills, as part of an estate is not complicated. That’s all that is required if you have a mortgage or any other bills that will need to be paid.

Anyways, I think this topic has run its course and it’s time to move on. Cheers!

 

[daylatedollarshort]

But unless some other living person is on those accounts, they are frozen upon death. You still have to wait for the estate to settle to access the funds, regardless of whether they are on auto-draft or not.

There is a big difference between settling the estate to distribute the money to beneficiaries and opening up an account in the name of the estate in order to pay bills like mortgage or funeral expenses from that account with the deceased assets. I have never heard of the opening up the estate account part taking years or even many months to get started.

If you have any articles or posts on it taking many months or years to open an estate account for paying bills from the deceased assets, I would appreciate the links to understand that issue better.

 

[daylatedollarshort]

I also don't see in the long haul that there is any savings financially to go to the grave with a large mortgage.

Did you read the article in the OPs link? Did you find an issue with the math in the link?

 

[l8_apex]

Exactly. And Fidelity or Vanguard or whoever is not going to make funds readily available for transfer. They require death certificates which take time. Then you mail them in and they are promptly lost. So you mail them in again, etc. Yes, some estates close quickly and easily without issue. Others do not. I don't have a crystal ball to know how it will go when we die. I choose to keep it as simple as possible for my kids.

Since you're doing this all for your kids, did you offer them the choice of 'more inheritance + more up front costs + more hassle" vs "less hassle + less money"?

 

[ncbill]

Don't just assume an estate will have plenty of liquid assets left to continue to pay the mortgage after death.

I buried a close relative a few years ago who did her best to do everything right...e.g. when the kids moved out she refinanced to a 15 year mortgage (so it would be paid off by the time she planned to retire)...but unfortunately her entire department was outsourced less than 5 years later.

She tried going back to school but no one was willing to hire a female her age after her graduation.

So she had to refinance to a 30 year mortgage & cash in her pension to make it to Social Security at age 62.

With the aid of a modest inheritance and by adding a HELOC she was able to stay in her home of ~35 years until just a few months before her death, but there sure wasn't any great surplus of liquid assets when she died.

Fortunately I was able to realize roughly half of the equity left in her home for her heirs by lending the estate enough funds to pay off the mortgage/HELOC before her home sold.

 

[CO-guy]

I'm enjoying this discussion. Our mortgage will be paid off in the next few years. Our property has appreciated a great deal since we bought it and now makes up more than half of our net worth.

A close friend hassles me constantly about refinancing to cash out and invest some of the equity. However, I'm focused on reducing my monthly overhead. We have two rentals on the property. The income from those rentals pays for many of our monthly expenses: maintenance on the property, mortgage, insurance, taxes, gas/electric/water/sewer, internet, cell phones, hulu/netflix subscriptions, etc. Without the mortgage payment, our rental income should cover food, travel, and other expenses that will reduce the need to tap savings for the first part of my retirement.

I know the simplicity of not having a mortgage comes at the price of lost opportunity for that equity, but my ER is not depending on tapping that equity.

Currently 50. Firing at 52.

 

[RetiredHappy]

I understand the rationale for doing that. That is a lot of money to keep in a low/no interest bearing account though.

That also exposes a lot of money to possible fraudulent ACH transfers, depending on how vigilant your bank is.

Not a large amount for us because our expenses are very high, monthly credit card bills average $8k a month, club membership dues another couple of thousand dollars, high HOA dues, insurances etc.

 

[street]

Did you read the article in the OPs link? Did you find an issue with the math in the link?

I did, but the problems and or issues with the process wouldn't be worth it to me. I'm sure not trying to convince you that it isn't right for you or anyone else. For me and my view only I wouldn't want to go that route. Those numbers could happen but there again, there is no guarantee that it is a bullet proof way for a financial success every time someone goes to the grave with a huge loan.

 

[daylatedollarshort]

Don't just assume an estate will have plenty of liquid assets left to continue to pay the mortgage after death.

But we're not talking about estates in general in this thread. The article that started this thread is about large mortgages for people who invest the proceeds from the mortgage.

 

[brett]

My experience may differ from others. I had one death certificate within 3 days. The second was four days.

Absolutely no issue with the financial institutions or the insurance company. I found every FI that I had to deal with very accommodating and responsive. Helpful since I lived in a different city than either estate. They all seemed to be well set up to handle this. I expect that it is routine for them.

Opened an account to settle the estate and funds flowed through relatively quickly. Life insurance on one was paid within 15 business days. What helped was that in both cases there was an up to date will. Pensions, etc were all stopped immediately so no monies had to be repaid.

For one of the estates the bank term deposit in the deceased's name was cashed deposited to the estate bank account within two business days after receipt of the probate certificate.

One estate had to go to probate, the other did not. The paperwork was so well organized, up to date will, etc was such that I did not need a lawyer.

I handled the paperwork (had a DIY book to guide me), obtained the necessary signatures, affidavits, made the undertakings regarding tax clearances,,etc and then submitted them for probate along with a cheque to cover the court fees.

The court granted probate clearance about three-four weeks later. The rest was straightforward. Paying bills, depositing monies, and the initial payments to beneficiaries. I was quite surprised that it went so well and so quickly.

 

[RobbieB]

But were not talking about estates in general in this thread. The article that started this thread is about large mortgages for people who invest the proceeds from the mortgage.

The only problem is if the investments tank and the property is hard to sell and the heirs are not involved re POA, trusts or wills.

 

[daylatedollarshort]

The only problem is if the investments tank and the property is hard to sell and the heirs are not involved re POA, trusts or wills.

Investments can tank and properties can be hard to sell whether or not you have a mortgage, so I don't really get the issue. No one here is talking about putting the house proceeds into bit coin. The article is about taking a good odds, calculated risk that your investments will earn more than the mortgage interest expense.

I don't know what you mean by the heirs not being involved re POAs, trusts or wills and how that relates to having a mortgage.

 

[meleana]

We are 65 and 67 and haven’t had a mortgage since 2004 when we paid off the home we owned at the time. ( 15 year mortgage).

We paid cash for the downsized house we are now in since Jan. 2020. My hope is to leave the house to our son when we pass on.

 

[jw72]

It's truly not one size fits all. Would I have made more pulling money out of my house and investing sure, If i knew what to invest in. I lost my ass in the dot.com days, lost on weed stocks, lost on oil, wind, car manufactures, Airlines, Sambo’s restranuts in 1980, and lots of other things. Yes, Sambos my second stock purchase, 1 week after purchase protests out front, racist company. My first stock, TWA (another loser). I figured pay my house off and that’s guaranteed 4 percent, I will work 3 jobs to make the payment if needed. I have had my home paid off for many years, lots of cash and still can’t pick a stock. Those of you that can pick stock, more power to you. You are better than me.

 

[samcat]

Oh my gosh! The first finance class I took was taught by the author's father, George Marotta, in 1989 near Palo Alto. I started my first IRA because of him. He taught me that I could divide the total IRA yearly amount by 24 and invest a set amount each paycheck. I was 23.

I'm now 56 and semi retired at the end of 2021. My husband and I are home office managers for wealthy people. We had six clients and now have three easy ones. I have often thought of George and that class and how he put me on the road to financial freedom.

BTW, we paid off our house in 2011. Totally happy that we don't owe anyone anything. It has allowed us to save a lot of money each year.

 

[ERhoosier]

Taking out a big mortgage that you are unlikely to outlive and investing the $$$ sounds great in up markets.....or if you have no heirs you wish to leave an inheritance to. But most are not in that situation. And there is absolutely no assurance that the next 10-15+ yrs are going to be as equity-friendly as the past has been.

I paid off my (10.6%!) mortgage some years ago and did not re-fi'd to put $$ into the market. Have never regretted that I could have made money doing so. To me that would be a bit like kicking myself for not putting my IRA $$ on Pass at the craps table just after the shooter has made his (her) point.

 

[corn18]

I guess I'll say it again. The Net Present Value of a $500k 30 year 2.25% fixed rate mortgage assuming 2.25% inflation is exactly $500k. The cost of money is zero. You don't have to make a dime in the market to make the math come out to ZERO.

Where's the beat my head against a wall emoji?

 

[RobbieB]

Yup. I paid mine off early because it was 8%.

 

[texasdiver]

I haven't read every post here, but a whole lot of analysis here misses the issue of taxes, especially if the bulk of your retirement savings is in tax-deferred IRA or 401(k) accounts. What do I mean by that? Assume I am retired and have the bulk of my savings in a tax-deferred 401(k)

Choice A: Retire with a mortgage payment of $2000/,month ($24,000/yr)

Choice B: Retire with zero mortgage but a comparatively smaller 401(k) balance because I took out a 15 year mortgage rather than 30 year when I bought the house or refinanced at age 50.

Under Choice A I have an additional $24,000 per month of living expenses in retirement which forces me to withdraw an additional $24,000/year from my 401(k) which generates an additional $24,000 in taxable income on which I will owe taxes at whatever my marginal tax rate is. If I'm somewhere in middle or upper middle class that will probably put me in the 22% tax bracket which means my decision to take my mortgage into retirement is costing me an extra $5,280 in Federal income taxes per year plus whatever state taxes I might owe.

Under Choice B I have a $24,000 lower cost of living so I need withdraw less retirement savings and owe less taxes or can do alternative things like Roth conversions rather than make mortgage payments.

Obviously most people's situations are more complex than that. This is just a simplified example to illustrate the tax issues related to carrying a large mortgage into retirement. The same calculation doesn't apply in your working life because your income tax is determined by your salary regardless of how large or small your mortgage is. So carrying a larger mortgage while working doesn't equate to owing more taxes like it might in retirement if your retirement savings are largely tax-deferred.

 

[Samsung4321]

... the issue of taxes, especially if the bulk of your retirement savings is in tax-deferred IRA or 401(k) accounts.

7% / y average capital gain, 3% / y imputed rent for owned home:


Buy home, normalised to $1, with 100% cash returning 0% / y:
= ((1 + 7%) * (1 + 3%) * 1) - (100% * 0%) - 1
= +10.2% / y

Buy home, normalised to $1, with 100% lump sum withdrawn from 0% tax superannuation returning 11% / y at age >= 60:
= ((1 + 7%) * (1 + 3%) * 1) - (100% * 11%) - 1
= -0.79% / y

 

[Out-to-Lunch]

The same calculation doesn't apply in your working life because your income tax is determined by your salary regardless of how large or small your mortgage is.

But the funds you put into the tax-deferred savings vehicle while working were not taxed! Your taxes are not determined by your salary, but by your realized income.

Your premise seems to be that you are better off realizing the income and paying taxes while you are working in order to pay down the mortgage, in order to avoid realizing that income after you are no longer working. But, IMHO, it seems more likely that one would be in a higher bracket during one's working years than in retirement, even given the need to take withdrawals to pay the mortgage.

 

[sengsational]

Oh my gosh! The first finance class I took was taught by the author's father, George Marotta, in 1989 near Palo Alto.

I didn't know George was an instructor of finance. I met him on a cruise where he was doing lectures on personal finance. But I credit him with solidifying my path, as it led me to David's site, which has been around forever and has consistently good advice, IMO.

 

[kgtest]

I don't know if I am doing it wrong or right. 15yr at 2.75%, still accumulating and home will be paid in full before I ER latest at 55, soonest at 50. I don't care to retire any earlier than 50, my kids will be 16, 14 and 12 if I FIRE@50.

I just know I want to pay the least amount of interest as possible, while balancing my investing opportunities. I probably did it wrong by switching from the 30yr @4% to the 15 yr. Time will tell. I doubt we see interest rates below 3% for a long long time. I might take a heloc later in life to put a downpayment on one of my kids places. But that would be what, at least 15 yrs from now. I like the idea of leveraging the banks money when it makes sense and often run a 30 to 40k @0% balance on my credit cards. If I was doing that AND having the 30yr maybe I would feel its more risk, as it is.

I feel like I did the right thing. But actuarially, I never ran the numbers. The appeal of not having interest on a note 15 yrs after ER is appealing as it free's up more equity which is options for me. I have a rental property as well that is paid off, could easily take that money and pay my mortgage off, but put the $ into the market instead, and BTD on spendy vacation and family fun. You only get one life, my as well RobbieB this b$@#! and BTD now and again.

Speaking of RobbieB, you let me know when you snag that boat and I'll come out and wax her up for ya for a little ride sometime down the road

 

[texasdiver]

But the funds you put into the tax-deferred savings vehicle while working were not taxed! Your taxes are not determined by your salary, but by your realized income.

Your premise seems to be that you are better off realizing the income and paying taxes while you are working in order to pay down the mortgage, in order to avoid realizing that income after you are no longer working. But, IMHO, it seems more likely that one would be in a higher bracket during one's working years than in retirement, even given the need to take withdrawals to pay the mortgage.

Like I said, everyone’s situation is different. I’m just pointing out the tax implications of paying your mortgage in retirement from retirement savings.

For a whole lot of people, the choice between paying off the mortgage isn’t a choice between paying off the mortgage or saving for retirement. It is between paying off the mortgage vs doing an expensive remodel, or buying a boat, or some such. How many Americans slide into retirement with big HELOCs or 2nd mortgages used for such purposes?

Not everyone takes the money they woiuld have used to pay off a mortgage and dumps it into a Vanguard index fund. I would suggest most who choose between a 15 vs 30 year mortgage just spend the extra savings on other things.

 

[texasdiver]

7% / y average capital gain, 3% / y imputed rent for owned home:


Buy home, normalised to $1, with 100% cash returning 0% / y:
= ((1 + 7%) * (1 + 3%) * 1) - (100% * 0%) - 1
= +10.2% / y

Buy home, normalised to $1, with 100% lump sum withdrawn from 0% tax superannuation returning 11% / y at age >= 60:
= ((1 + 7%) * (1 + 3%) * 1) - (100% * 11%) - 1
= -0.79% / y

Do the math based on whatever set of assumptions you want. All I’m doing is pointing out the potential tax implications of carrying a mortgage into retirement. If you enter retirement with a large mortgage and intend to pay it out of tax-deferred retirement savings (which is mainly the sort of savings that most Americans have) Then you will be generating a larger tax bill for yourself than if you enter retirement mortgage-free.