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Hard to get a loan in the future if I payoff the mortgage early? Other disadvantages?
Old 06-25-2020, 08:52 AM   #1
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Hard to get a loan in the future if I payoff the mortgage early? Other disadvantages?

Thinking about paying off the mortgage on my primary residence for the peace of mind and to get a better ROI on the idle cash (mortgage rate vs. CDs).

Anyway, I'm specifically wondering if there are any drawbacks such as it being harder to get another loan in the future for say another house, car etc?

Also, from a legal point of view I understand it's safer for the money to be tied up in the primary residence because in most states primary houses are off-limits in a lawsuit etc. However, perhaps if you get say a flood damage the bank may have more leverage to ask the insurance company to pay vs. if you ask the insurance company?

Just making sure I'm not shooting myself in the foot by paying off early
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Old 06-25-2020, 10:47 AM   #2
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We paid off the mortgage on our first house in 3 1/2 years in 1993. We paid cash for our current house. We've had no trouble getting car loans (only when it was to our advantage, otherwise pay cash) or several cash back credit cards. Our credit scores are over 800.

As far as the legal liability, umbrella insurance is an option. The amount of house value that's off limits varies by state law. Google your state's limits to find out where you stand. IANAL.
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Old 06-25-2020, 10:57 AM   #3
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We haven't had a mortgage in a number of years and both DW and I have had no issues getting approved for car loans (used one through USAA a couple of years ago to get an incentive, then paid off) and our credit scores are also over 800.

As far as to liability and protecting your home, this varies wildly by state but umbrella coverage is a pretty good idea.
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Old 06-25-2020, 12:11 PM   #4
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We paid off our mortgage early a number of years ago and last year decided to move. We bought a new home before putting our old one up for sale. We had plenty of IRA type assets but our income was too low for the mortgage we needed on the new home. We were able to get an asset based mortgage loan without too much trouble at a competitive rate. Seven months later we sold the old house and used the proceeds to pay off the new mortgage.
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Old 06-25-2020, 01:47 PM   #5
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We paid off our mortgage early a number of years ago and last year decided to move. We bought a new home before putting our old one up for sale. We had plenty of IRA type assets but our income was too low for the mortgage we needed on the new home. We were able to get an asset based mortgage loan without too much trouble at a competitive rate. Seven months later we sold the old house and used the proceeds to pay off the new mortgage.
Similar story here. Mortgage paid off for ~10 years. Built a new house in a different state and wanted to close without selling first house. We got a conventional 30 year mortgage for the new house with 20% down. All we had to do was set up a big enough monthly withdrawal from our retirement funds to show enough income. Could have paid cash, but would have had to liquidate significant amounts of Roth money to avoid the big tax bill associated with a large regular IRA withdrawal.
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Old 06-25-2020, 02:16 PM   #6
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Thanks all - sounds like I'm not giving anything up by paying the mortgage off early. Well minus the advice 'put it in the stock market for better returns' -but I see this as me 'diversifying' my assets
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Old 06-25-2020, 03:50 PM   #7
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Originally Posted by dvalley View Post
Thinking about paying off the mortgage on my primary residence for the peace of mind and to get a better ROI on the idle cash (mortgage rate vs. CDs).

Anyway, I'm specifically wondering if there are any drawbacks such as it being harder to get another loan in the future for say another house, car etc?

Also, from a legal point of view I understand it's safer for the money to be tied up in the primary residence because in most states primary houses are off-limits in a lawsuit etc. However, perhaps if you get say a flood damage the bank may have more leverage to ask the insurance company to pay vs. if you ask the insurance company?

Just making sure I'm not shooting myself in the foot by paying off early
With CD interest rates so low I think think that is a smart idea. I did something similar in December... used up online savings money earning 1.7% at the time (would be 1.0% today) to pay off 3.375% mortgage.

I don't see any of your other concerns as being problematic.
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Old 06-25-2020, 04:11 PM   #8
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From OP: "Anyway, I'm specifically wondering if there are any drawbacks such as it being harder to get another loan in the future for say another house, car etc"

Two problems in showing income to qualify for a new loan if you are RE: 1) Rent income is now tax return income (cash income less cash expense less DEPRECIATION) used to be some percent of cash income. I think around 75%. 2) IRA income does not count unless it is a regular monthly stream. Having $1 million in IRA's with no distributions means you have no qualifying income from this source. Having $200,000 in IRAs with $4,000 a month of distributions over some regular period means you have $4,000 of monthly income, even though that level is NOT sustainable.

I don't know if the above matters to you, but it presented a problem for me.
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Old 06-25-2020, 04:21 PM   #9
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Thanks all - sounds like I'm not giving anything up by paying the mortgage off early. Well minus the advice 'put it in the stock market for better returns' -but I see this as me 'diversifying' my assets
The main thing you'd be giving up is a few points on your credit score. Since the credit rating agencies like diversity of utilized credit, then having no installment loans (car or mortgage) actually lowers your credit score.

Because I don't have any installment loans, my credit scores are 'only' about 95-96% of the maximum.

If you wanted to buy another place with a loan, then you might have to set up regular payments to your checking account from investments to show 'income', which means you can pay your bills, in the illogical thinking of the credit agencies.
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Old 06-25-2020, 05:12 PM   #10
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Paying off a mortgage could make it easier to get a new mortgage on a new place, as you will not be anywhere near the new lower credit utilization percentage, that some places are doing due to massive layoffs.
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Old 06-25-2020, 05:36 PM   #11
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Originally Posted by pb4uski View Post
With CD interest rates so low I think think that is a smart idea. I did something similar in December... used up online savings money earning 1.7% at the time (would be 1.0% today) to pay off 3.375% mortgage.

I don't see any of your other concerns as being problematic.
I don't disagree with this for the most part, but it's a funny thing. Maybe I'm remembering the wrong person, but in the past you've made the point that you shouldn't be measuring CD/MM/Svgs rates vs mortgage rates, you should use your portfolio return rate, unless you'd really change your AA with the mortgage paid off. Isn't that correct?

Now, I think I remember that you are all cash now, but it doesn't sound like the OP is.

It's not the savings vs. mortgages rates that's the difference here. Mortgage rates generally lag savings rates. Banks don't like to lose money so they pay you more interest to use your money than they can make loaning it back out.

The difference as I see it is the increased risk most people see with the stock market today. It's probably not worth hoping to make a couple % more investing that money with a decent chance that we're going to take another big dip.

One thing you are missing out on though, is that if you are in cash and the market takes a big dip, you've tied up that cash in the house and can't jump back in as much as you might like.
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Old 06-25-2020, 05:47 PM   #12
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Originally Posted by Z3Dreamer View Post
From OP: "Anyway, I'm specifically wondering if there are any drawbacks such as it being harder to get another loan in the future for say another house, car etc"

Two problems in showing income to qualify for a new loan if you are RE: 1) Rent income is now tax return income (cash income less cash expense less DEPRECIATION) used to be some percent of cash income. I think around 75%. 2) IRA income does not count unless it is a regular monthly stream. Having $1 million in IRA's with no distributions means you have no qualifying income from this source. Having $200,000 in IRAs with $4,000 a month of distributions over some regular period means you have $4,000 of monthly income, even though that level is NOT sustainable.

I don't know if the above matters to you, but it presented a problem for me.
In our case we were told by the mortgage broker what monthly amount we would have to withdraw from the IRA to have the income to qualify for the loan. So we set that up and once we could show those deposits going into our bank account the loan went through. Once we had the loan, we stopped the monthly withdrawals, easy-peasy.
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Old 06-25-2020, 06:04 PM   #13
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I don't disagree with this for the most part, but it's a funny thing. Maybe I'm remembering the wrong person, but in the past you've made the point that you shouldn't be measuring CD/MM/Svgs rates vs mortgage rates, you should use your portfolio return rate, unless you'd really change your AA with the mortgage paid off. Isn't that correct? ...
That is correct... I believe that if the money to pay off the mortgage is coming from the "portfolio" overall and there is no change in the AA target then the overall portfolio rate should be used... and if the money to pay off the mortgage is coming from one part of the portfolio resulting in a change in the AA that the return of the assets reduced should be used.

In my case, the decision to use 1.7% earning cash to pay off a 3.375% mortgage was accompanied by a commensurate change in my AA to reflect the use of the cash.

Just prior to paying off the mortgage I was ~60/35/5 and my mortgage was ~5% of my portfolio... so I used the 5% that was in cash in an online savings to pay off the mortgage leaving me with a revised AA of ~65/35... 60/95 rounded to 65% in stock and 35/95 rounded to 35% in fixed income.... and 0% in cash... hence the 65/35/0 in my signature line.

Because I adjusted my AA going forward to reflect the use of the cash to pay off the mortgage then the relevant comparison for the decision is what I was the 1.7% that I was earning on that cash to the 3.375% I was paying on the mortgage. If one doesn't adjust their AA then I think the overall portfolio return is the more relevant comparison for the decision.

And the 65/35/0 in my signature line is struckthrough because in March I did bail and am currently more like 65 fixed income and 35 cash.... and I'd still thinking through what my new target will be.... hence the "TBD".
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Old 06-25-2020, 06:14 PM   #14
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....Banks don't like to lose money so they pay you more interest to use your money than they can make loaning it back out. ....
Most banks no longer hold mortgages so I'm not sure what you wrote above makes sense even though it would have 30 years ago. Today, most banks originate mortgages and collect an origination fee for doing so but the mortgage isn't on their books. I would like to see them have at least some "skin in the game".... like 10% or so, so they have to live with the results of their underwriting decisions, but that's the way it works.
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Old 06-25-2020, 06:18 PM   #15
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.... One thing you are missing out on though, is that if you are in cash and the market takes a big dip, you've tied up that cash in the house and can't jump back in as much as you might like.
True, but my WR is also a lot lower because I no longer have mortgage payments.... our mortgage was ~18% of our spending.

If/when if comes time to jump back in, most likely I'll do so by buying long dated SPY calls or perhaps long dated calls on individual stocks that I like.
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Old 06-27-2020, 04:58 PM   #16
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The main thing you'd be giving up is a few points on your credit score. Since the credit rating agencies like diversity of utilized credit, then having no installment loans (car or mortgage) actually lowers your credit score.
Although we hear this from the financial talking heads all the time, I don't think it's very true...at least in practice. My DW is in the process *right now* of buying a new Toyota. There is a rebate that is tied to financing through Toyota and they ran her credit TODAY..and it was scored (the auto loan score, there are many different scores) at 844. She hasn't had a car loan in over 10 years and no mortgage (with a balance) since 2012. The only credit showing is about $200K of "available credit" on her credit cards (with a reported balance of about $200). The score can't get much higher than 844, and in the grand scheme of things, you will get the best rates with anything over 760 or so.

*edit: I opened a car loan in 2018 when I bought my vehicle. It was paid off within 30 days. Like the DW, no mortgage debt since 2012. Credit Karma shows my score(s) at 839 and 837.
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Old 06-27-2020, 06:48 PM   #17
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...I don't think it's very true...at least in practice. ...they ran her credit TODAY..and it was scored (the auto loan score, there are many different scores) at 844. She hasn't had a car loan in over 10 years and no mortgage (with a balance) since 2012. The only credit showing is about $200K of "available credit" on her credit cards (with a reported balance of about $200). The score can't get much higher than 844, and in the grand scheme of things, you will get the best rates with anything over 760 or so.

*edit: I opened a car loan in 2018 when I bought my vehicle. It was paid off within 30 days. Like the DW, no mortgage debt since 2012. Credit Karma shows my score(s) at 839 and 837.
Credit scores evaluate:

1. Payment History (late/missed/on time payments)
2. Amount of debt
3. Utilization (most prefer <30% of credit limit to be utilized)
4. Credit age
5. Credit diversification (revolving, credit card, mortgage, etc).
6. Credit inquiries/new credit

I read the credit agencies descriptions of how to improve my credit scores, and I've read each agency's description of evaluated factors. My payment history is perfect, I have less than 30% utilization of each credit card, my oldest cards are >20 years old, and I don't have many recent inquiries; however, I'm constantly dinged on diversification since I don't have installment loans.

My Experian score is 823/850.
My FICO Score 8 is 819/850.
My FICO score is 856/900: they specifically say that a factor affecting my score is "Lack of recent installment loan information".
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