House rich?

[pb4uski]

I view having a mortgage in retirement only as being a leverage play and earning a spread on what I invest over the interest I pay on my mortgage based on the relative risk of the investments (60/40 AA) and my mortgage interest rate.

Historically, a 60/40 AA has returned 8.9%, but for planning purposes I haircut this historical return significantly, to 5.5%. Since I am comfortable with the risk and view it as a "good" bet, I refinanced at 3.375% just before I retired and have a mortgage in retirement. So far, it has worked out well.

One caution however. I'm my case my mortgage is less than 10% of my portfolio. If my mortgage were 50% of my portfolio or more then I would not be so comfortable carrying a mortgage in retirement.

I did find the firecalc results of having a mortgage surprising. Let's say that you refinance for $200k and invest the proceeds in a 60/40 balanced fund and the balanced fund pays the mortgage payment of $1,000/month (30 years at ~4.4%). Firecalc suggests that 104 of 114 trials (91.2%) the fund would survive the mortgage. In only 2 of 114 trials the fund would be significantly underwater, and would end up slightly underwater in another 8 trials. However, the upside is significant with an average ending balance in the fund of $476,124 after paying off the mortgage.

FIRECalc looked at the 114 possible 30 year periods in the available data, starting with a portfolio of $200,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 114 cycles. The lowest and highest portfolio balance throughout your retirement was $-390,594 to $2,181,032, with an average of $476,124. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 10 cycles failed, for a success rate of 91.2%.

Withdrawals 12,000
Plan End 30.....
Starting Portfolio 200,000
Percent in Stocks 60%
Expense Ratio 0.18%.......
Inflation Rate selected* 0%
Fixed income model * LongInterest
Override start year* 1871
Terminal Value* 0.....

 

[Bestwifeever]

?...But, to the OP question.... it is valid... my BIL did a refi and took money out... in 2007... he died late in 2007... so, my sister now had a mortgage to pay down... 30 years... (BTW, he spent the money on living large...)...

Now, DS has a good pension... she can afford to do all the travel she wants and spend money without touching savings... and that includes making her monthly payments... she has refied to a much lower rate and extended the payments... she is happy... as she said, the payments are less than rent, so she just thinks of it as rent...

I think a lot of people in my town are refi'ed like your BIL, but to the max at the top of the market so are also still underwater and unable to refinance. Your Sister is lucky to be able to refi at a lower rate, so payments are below rent equivalent. Timing is everything.

Our paid off house is sort of the real estate part of our AA . Its equity might or might not reliably generate enough $ to make payments on a mortgage so we woukd be scaredy cats every time there was even a small market correction that we'd be selling off other investments to make the mortgage payments.

 

[Rustic23]

For me, inflation is the biggest threat to my retirement. Therefore, I came to the own side of the coin rather than the rent side.

Now, a little different angle is, do you pay off your mortgage. Having a low thirty year mortgage could be an advantage if inflation goes crazy. However, ours is paid off, and I don't plan on taking one out.

 

[walkinwood]

...In any case, how terrible is that a home might only appreciate with inflation? Not much else will reliably do that, and if you own the home no income tax will be due on the money that you pull out of other investments to pay rent.
...
Ha

No argument there. We own our home.

 

[Senator]

It really all depends on where you ultimately want to live, and how long. If I did not already own a home, I would consider renting. The difference between buying and renting is not really that much. Buying has the fixed cost advantage, renting has the mobility advantage.

If you rent, you may pay $200 - $300 more than owning, or not. But you have the flexibility of moving if the area becomes not what you want. Or move if you like the businesses on the other side of town. You will likely save fuel if you rent, because you will live closer to the area that you frequent.

You will not have an interest rate write-off, but that might not be a major factor in RE.

 

[friar1610]

Reduced expenses for all time and the peace of mind in knowing that no matter what happens to the market, you always have a place to live?

Couldn't agree more. Also knowing that if I predecease my wife (which the actuaries say I will) resulting in lower income*, she won't have to sweat where she lives.

* Her survivor benefit will be quite a bit less than my pension.

 

[jkern]

There is no "one" correct answer. The way I see it, you have three choices:

1) Own home, no mortgage - Lower investment portfolio, low fixed costs for housing
2) Own home, mortgage - Higher investment portfolio, higher fixed cost for housing
3) Rent - Highest investment portfolio, higher variable costs for housing

It really comes down to a personal choice. For me, I chose to own my home with no mortgage even though my home is worth $900K. I just prefer it that way and I always have my home as an ace in the hole.

With respect to a home not being a good investment, that is highly dependent on where you live. Growing up in the SF Bay Area, the mantra was always to get your first home as soon as you can afford it. Most of my friends, including me, bought their first home in the late 70s to early 80s. Those that moved up rolled their equity over and continued to payoff their mortgage. Virtually everyone of them has a boatload more money than those who decided to rent. I'm not talking about selling and buying every few years or using your house as a piggy bank. If I were to sell now, I would probably net about $800K in addition to what I already have. I highly doubt that if I rented my whole life I would have the same amount.

 

[Andre1969]

For me, inflation is the biggest threat to my retirement. Therefore, I came to the own side of the coin rather than the rent side.

Just out of curiosity, I looked up some rents in my old neighborhood, where I used to own a 3br/2ba condo. There are three of them listed on Zillow.com, all for $1500 per month, but they're smaller, 2br/1ba units. One is 1107 square feet, two are 945. Mine was 1254.

I originally paid $84,000 for that condo in late 1994. Smaller units were asking around $78-84K (mine was originally $86.5K). Rents, in general, were around $700-800 per month.

So, over the course of ~20 years, it looks like rents have roughly doubled in that community. But, so have housing prices. A friend recently bought a 945 square foot unit in there, for $159K, and it had had a lot of work done to it, so the seller was probably taking a loss. Condo fees have more than doubled. I remember paying $119.58/mo in 1994, and it was up to $238.61/mo by the time I sold in 2004. They vary by unit size, but I'd guess mine would be close to $300/mo by now. My friend pays about $275 I think.

If I had stayed in that condo, I'd be about 3 years from having it paid off, in full, as I had switched to a 15 year mortgage in 2002. And my payment would be about $600/mo, plus property taxes, plus the condo fee.

So, in the long run, if you buy, and stay put for a long time, inflation should work in your favor, versus renting. Unless the neighborhood really goes south, I guess.

 

[daylatedollarshort]

In addition to the rent vs buy, mortgage or not decision, how much house to buy is also a consideration. One of the Millionaire Next Door authors points out that most millionaires own their homes, but after a certain point housing can be an impediment to wealth, especially if you live in a neighborhood where you are trying to keep up with the Joneses, instead of being the Joneses:

Avoiding the Money Pit
http://www.thomasjstanley.com/blog-articles/61/Avoiding_The_Money_Pit.html

The Money Pit and The Decline of Enhanced Millionaires

 

[Texas Proud]

I think a lot of people in my town are refi'ed like your BIL, but to the max at the top of the market so are also still underwater and unable to refinance. Your Sister is lucky to be able to refi at a lower rate, so payments are below rent equivalent. Timing is everything.

Our paid off house is sort of the real estate part of our AA . Its equity might or might not reliably generate enough $ to make payments on a mortgage so we woukd be scaredy cats every time there was even a small market correction that we'd be selling off other investments to make the mortgage payments.

It was not timing but luck.... first, houses did not go up that much here... so they did not go down much either... second, he only took out as much as he could and NOT pay PMI... so he was at 80% at the time... DS did put in some money when she did the refi... not much, but it was worth it...

 

[Blue65]

I think about this often as well. I am 50 and am planning on selling our big family house in 2 or 3 years when last child heads for college and then downsize without a mortgage due to our high equity. I would then stay in that house till I'm 80 and then go into an apartment. If we don't need the money I would enjoy giving it to the kids....while I'm alive!


Sent from my iPad using Early Retirement Forum

 

[LARS]

Like others have said, I come down on the side of ownership as housing inflation protection.

From 2003 to 2011, we rented, having sold our home based upon i) moving out West and ii) a firm view that there was a housing bubble. In the end, our period of naked home ownership worked out quite well. However, I would be lying if I said there weren't a few anxious years where it looked like we had made a mistake and might be priced out of what we wanted. But the housing crash did happen (but it took much longer than I thought to occur) so we did well.

 

[kaudrey]

There is no "one" correct answer. The way I see it, you have three choices:

1) Own home, no mortgage - Lower investment portfolio, low fixed costs for housing
2) Own home, mortgage - Higher investment portfolio, higher fixed cost for housing
3) Rent - Highest investment portfolio, higher variable costs for housing

It really comes down to a personal choice.

+1 We will retire to a lower cost area. By then, we will sell our primary residence, our rental condo, and our mountain cabin. The money from those 3 sales will allow us to pay cash for the house to which we move. In theory, there will also be money left over. I am NOT counting on that, so this is my way of being conservative as to how much money we will actually have when we retire.

I just want our fixed expenses in retirement to be as low as possible, so no mortgage for me. As for renting, inflation of rental expense would worry me.

 

[daylatedollarshort]

The New York Times has an online calculator to help with the rent vs buy decision -

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

 

[rodi]

What percentage of your NW is in house?

So much wealth....sounds to me like more then 20%.

I've been thinking about this thought since it was posted.

If you don't count the equity in your home, in your retirement calculations, but do count the cost of running/maintaining your home in your spending figures.... does it matter what percentage it is?

Our paid for home is about 35% of our networth. But it includes a rental unit on the same parcel - which provides 15% of our annual spending budget. Since we have enough non-home-equity investments to cover our retirement, does it matter that our paid off home is in a super expensive area and therefore a larger percentage of net worth? We could move to a lower COLA area - but why? We like where we live for climate and activities. We could downsize - but our primary home is only 2k sf, so it's not huge to start off with... and we still have 2 minor-age kids at home... so moving to a 1200sf or 1500 sf home is less appealing that it might be when they are launched.

So what is magic about 20% of networth being in a home? I'll admit I'm sensitive about this since mine is quite a bit higher.

 

[NW-Bound]

If you don't count the equity in your home, in your retirement calculations, but do count the cost of running/maintaining your home in your spending figures.... does it matter what percentage it is?...

No, it does not matter.

Some people may look at an expensive home as something that could be liquidated to reduce the living cost and to generate more investable cash, which opens other choices such as more travel for example. But if you are happy with where you are, it's a personal choice just like people who spend a lot on travel.

 

[haha]

So what is magic about 20% of networth being in a home? I'll admit I'm sensitive about this since mine is quite a bit higher.

Nothing. Debating about this is just another pastime for ERs.

Ha

 

[rodi]

I will admit - having a lot of home equity does give me a good plan B and plan C if my retirement plans go south.

Plan B - downsize and get some equity out to fund more retirement expenses.

Plan C - cash out entirely if we both move into nursing homes. We can fund quite a few years of 2 people in a nursing home with our home equity.

 

[Koolau]

If you are paying rent or a mortgage when retired, then you will need to create cash flow to pay that bill. If that requires you to withdraw from a 401(k) or IRA, then that will add to your adjusted gross income which could put you in a higher tax bracket or make you lose tax credits or increase your long-term capital gains taxes or give you a bigger tax hit on your Roth conversions or a bigger tax hit on SS benefits or ….

So if you can live the lifestyle you want in the place you want yet with a lower adjusted gross income, then your taxes will be lower, too, and possibly way, way lower.

As they say, "Run the numbers …."

This is part of the argument that Burns and Kotlikoff make in their 2005 book: Amazon.com: The Coming Generational Storm: What You Need to Know about America's Economic Future (9780262612081): Laurence J. Kotlikoff, Scott Burns: Books IIRC, B & K have a name for income which the gummint does not recognize (so does not tax) but IS generated by owning a home. It could be "implied" income, but I forget their actual term. Suffice to say, owning a home gives the owner the "value" of the equivalent rent. IOW one does not need to "earn" the money for this "rent". Fortunately, the gummint does not (yet) tax such implied "income."

While there are financial (and other) downsides to owning, B & K make their case with special attention to their belief that generational changes will (more and more) favor owning. You can accept or reject their conclusions, but their logic and documentation is impressive (to me).

Personally, we cover all the bases. We own (mortgage now paid) AND rent. Our "full time" home is owned and we rent a crash pad for our continuing forays back to the heartland. So far, it seems the right mix for us. YMMV