I hate my mortgage but shouldn't pay it off

[free2020]

That's what my model screams at me every day: DO NOT PAY OFF YOUR MORTGAGE, YOU IDIOT! And if inflation ever gets above 2.75%, my mortgage is free.

+1

Historic opportunity with rates so low to pay as slowly as they will allow you to.

 

[Nick12]

I paid off my 30 year mortgage at year 11. After that for the next 13 years I poured more money monthly into my index funds. It was the best financial call I have ever made.

 

[Markola]

You could google "defeasance" for pleasure!

Thanks for the new word!

https://www.investopedia.com/terms/d/defeasance.asp

 

[ERD50]

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

But I don't think that is good advice at all if the sound sleep is built on a poor understanding of the issue.

If some one "hates" borrowing money at 30 year fixed historically low rates, I don't think they understand the issue. After they understand the issue, they may still decide to take a pass, but if "hate" is involved, there's something clogging rational thinking.

Financial interest (and most others) are best served with rational thinking. If something emotional is creeping in, figure it out. Often, fear is overcome once we understand and confront that fear.

-ERD50

 

[ERD50]

I paid off my 30 year mortgage at year 11. After that for the next 13 years I poured more money monthly into my index funds. It was the best financial call I have ever made.

Do you not see the shell game you (and others have) played on yourself here?

You poured money into your index funds with the increased cash flow after paying off the mortgage. But, where did the money come from to pay off the mortgage? You depleted something to pay it off, you ignore that, then talk about the advantage of refilling it.

If you didn't deplete it, you would not have to refill it! The mortgage pay off didn't appear out of thin air!

What year and what rate did you pay off your mortgage? A 60/40 fund has nearly tripled in the past 13 years ($100,000 goes to $279,483 - no guarantee of course, but historically investments have outpaced these low mortgage rates over any 20 or 30 year period).

https://bit.ly/2YCQXKe <<< link to 60/40 returns since 2007

-ERD50

 

[finnski1]

Do you not see the shell game you (and others have) played on yourself here?

You poured money into your index funds with the increased cash flow after paying off the mortgage. But, where did the money come from to pay off the mortgage? You depleted something to pay it off, you ignore that, then talk about the advantage of refilling it.

If you didn't deplete it, you would not have to refill it! The mortgage pay off didn't appear out of thin air!

What year and what rate did you pay off your mortgage? A 60/40 fund has nearly tripled in the past 13 years ($100,000 goes to $279,483 - no guarantee of course, but historically investments have outpaced these low mortgage rates over any 20 or 30 year period).

https://bit.ly/2YCQXKe <<< link to 60/40 returns since 2007

-ERD50

Yes and the extra paid to pay it down in the 11 years would have compounded for an even longer time since 1996 or so. Yes there were a few bad periods in there between 1996 and 2007 but still!

 

[corn18]

But I don't think that is good advice at all if the sound sleep is built on a poor understanding of the issue.

If some one "hates" borrowing money at 30 year fixed historically low rates, I don't think they understand the issue. After they understand the issue, they may still decide to take a pass, but if "hate" is involved, there's something clogging rational thinking.

Financial interest (and most others) are best served with rational thinking. If something emotional is creeping in, figure it out. Often, fear is overcome once we understand and confront that fear.

-ERD50

Great post. For me, it's the simplicity of my model. One less line in the expense category. Nothing more complicated than that.

The rational argument is fairly straight forward.

My 2.75% mortgage is actually a nominal rate. The real rate on the mortgage is 2.75% - inflation. Let's assume inflation is 2% over the next 30 years. So the real rate is 0.75%. All I have to do is make more than 0.75% over the next 30 years to beat the mortgage. Is that possible? Here's the 30 year average total real return for a 60/40 portfolio since 1871:

I'd say my odds are pretty good that I will beat 0.75% average over a 30 year period. And if inflation goes above 2.75%, the mortgage is free.

I did do some playing around with my historical model, and if you can pay off your mortgage right before a bear market, you can win that way. The perfect world is to take the mortgage right after a market crash and pay it off right before a market crash. I got lucky on the first one.

This is all rational and makes good sense to me.

But back to the hate. Maybe that is too strong of a word. Irritated, maybe. More like wanting to fit in with the ER crowd who generally don't like debt.

 

[Dash man]

Then there’s the scenario where you get sued and your after tax investments, that aren’t protected from a lawsuit, are wiped out. Yet, your house in many states is protected. Do you want to owe a mortgage then?
I know, unlikely. But owning my home outright helps me sleep better at night.

 

[rk911]

I paid off my 30 year mortgage at year 11. After that for the next 13 years I poured more money monthly into my index funds. It was the best financial call I have ever made.

+1

 

[aaronc879]

I don't think paying my mortgage off early or not will make a noticeable difference in my financial life but leaving a paid off home to my heirs rather than a mortgaged home will make life easier for them so I will pay mine off early(currently planning on age 49).

 

[cat4ever]

If I don't need enough income to make the payments, I can probably have low enough income that will qualify me for ACA subsidies and low taxes.

I don't quite follow the reasoning here. Why couldn't you use the big lump of already taxed money that you'll need to pay off the mortgage to lower your income needs (or increase roth conversions) instead? I would think that would be more effective in reducing needed income and effective tax rate each year than eliminating your measly (by comparison) monthly mortgage interest payment.

e.g. Paying a 2.75% rate over 30 years to keep a larger share of money in the 12% or lower bracket would seem to me to make sense. Or it could allow you to do much larger Roth conversions up to the top of the 22% bracket, which would be a win as well I would think. Or is my reasoning flawed (I'm not a spreadsheet guy). And that's not even bringing possible extra investment gains, which can be tenuous, into the picture.

 

[ERD50]

Originally Posted by Nick12 View Post
I paid off my 30 year mortgage at year 11. After that for the next 13 years I poured more money monthly into my index funds. It was the best financial call I have ever made.

+1

Could either if you please show the arithmetic on this? Account balances before/after the payoff?

I just don't see it as anything other than a shell game. How can it possibly be the "best financial call you have ever made" (assuming you' have made at least one reasonably good call)?

-ERD50

 

[W2R]

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

+1
Go ahead and pay it off if you want to! Nobody here is going to dictate that you MUST carry a mortgage. Almost all of the models and analysis you find online are based on historical economic conditions, that is on assumptions that the future will be like the past, which may or may not pan out. Who knows what the market will do next? Not me, for sure.

Whenever I read about scary current events, I am so glad my mortgage is paid off. I know that many of these articles are clickbait. Fear sells. Still, it is comforting to know that no matter what I can stay right here in my Dream Home, my safe refuge. If I had to I'd pay quite a bit for this situation, for sleep-at-night reasons.

 

[unclemick]

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

Plus I bought a house ( 12 years into ER) post Katrina with a big mortgage and 7 years later sold for a 25% loss. Nevermind that Mr Market covered my loss via my retirement portfolio - aka doing the math for the mortgage amount minus the credit.

Heh heh heh - So I earned extra credits toward my Curmudgeon Certificate winning about loss and picked up a wonderful DW with house. Grin.

 

[anothercog]

I don't quite follow the reasoning here. Why couldn't you use the big lump of already taxed money that you'll need to pay off the mortgage to lower your income needs (or increase roth conversions) instead? I would think that would be more effective in reducing needed income and effective tax rate each year than eliminating your measly (by comparison) monthly mortgage interest payment.

e.g. Paying a 2.75% rate over 30 years to keep a larger share of money in the 12% or lower bracket would seem to me to make sense. Or it could allow you to do much larger Roth conversions up to the top of the 22% bracket, which would be a win as well I would think. Or is my reasoning flawed (I'm not a spreadsheet guy). And that's not even bringing possible extra investment gains, which can be tenuous, into the picture.

I'm not quite following. I don't know the intricacies of Covered California yet but I believe I'll need to be under $80k/year in income to qualify for subsidiaries. My mortgage is about $25k/year. Taxes, hoa and insurance is another $20k/year. So that would leave 35k of income left for everything else which would not be enough unless I give up travel, however travel is the main draw of early retirement.

Also, while long term performance will likely exceed my mortgage rate, short term performance is less certain. I think I would feel more comfortable in retirement without any debt obligations.

 

[cat4ever]

I'm not quite following. I don't know the intricacies of Covered California yet but I believe I'll need to be under $80k/year in income to qualify for subsidiaries. My mortgage is about $25k/year. Taxes, hoa and insurance is another $20k/year. So that would leave 35k of income left for everything else...

The money you are going to use to pay off your mortgage is coming from somewhere. I'm suggesting to use that money to instead cover part or all of your travel and other discretionary spending for many years to come, thereby keeping your income low, or else use it to do bigger Roth conversions now at what I'm assuming what will be lower rates than in the future. This is what I'm planning on doing.

My model does make the assumption that taxes are only going to go up in the future, as well as assuming those Roth funds will grow (not shrink) at some nominal rate tax free, so I guess it's all a bit of a crap shoot, but I'll bet on higher taxes/positive growth over the long term every time. Let's meet back here in 20 years and see how it all worked out, which will of course tell us nothing about the next 20 years.

 

[RunningBum]

I'm not quite following. I don't know the intricacies of Covered California yet but I believe I'll need to be under $80k/year in income to qualify for subsidiaries. My mortgage is about $25k/year. Taxes, hoa and insurance is another $20k/year. So that would leave 35k of income left for everything else which would not be enough unless I give up travel, however travel is the main draw of early retirement.

Also, while long term performance will likely exceed my mortgage rate, short term performance is less certain. I think I would feel more comfortable in retirement without any debt obligations.

Income does not have to equal expenses. If, for example, you have $80K in a mutual fund with $60K basis, then by selling it you get $80K to cover your expenses on just $20K of taxable income.

I'm not saying you should or should not do this. Just showing an example of what I think was meant in the comment directed toward you.

If all of your money is in tax deferred, then of course it's all taxable as you withdraw for expenses. But if you withdraw a bulk sum to pay off your mortgage, you're really going to get whacked that year in taxes.

 

[corn18]

Income does not have to equal expenses. If, for example, you have $80K in a mutual fund with $60K basis, then by selling it you get $80K to cover your expenses on just $20K of taxable income.

I'm not saying you should or should not do this. Just showing an example of what I think was meant in the comment directed toward you.

If all of your money is in tax deferred, then of course it's all taxable as you withdraw for expenses. But if you withdraw a bulk sum to pay off your mortgage, you're really going to get whacked that year in taxes.

I got lucky because I was stupid and started saving very late. I don't have giant cap gains in my taxable account.

 

[cat4ever]

Exactly. In summary the 2.5% you're paying on your mortgage, and allowing you to keep your full taxable account in tact, will give you great power in the future to keep your effective tax rate lower for many years to come, not to mention possibly allowing you to qualify for ACA subsidies and other pluses of maintaining a low income. I'm guessing that power will more than make up for the 2.5% you're paying in interest, not even considering that your taxable account, if left in tact, would likely be growing during that time as well.

 

[anothercog]

Income does not have to equal expenses. If, for example, you have $80K in a mutual fund with $60K basis, then by selling it you get $80K to cover your expenses on just $20K of taxable income.

I'm not saying you should or should not do this. Just showing an example of what I think was meant in the comment directed toward you.

If all of your money is in tax deferred, then of course it's all taxable as you withdraw for expenses. But if you withdraw a bulk sum to pay off your mortgage, you're really going to get whacked that year in taxes.

Ah, I see. My plan was to use cash from bonuses over the next several years to pay it off so I likely wouldn't be selling anything to pay it off. It's a bit of a safety hedge, I'll still be investing a decent sum in the market each year but the cash from bonuses will go to a low yield sure thing.

 

[cyber888]

I have resolved this problem. I paid off my mortgage and got a HELOC at 2.24% (-1.01% of prime rate) .. gives me flexibility with the revolving credit.

 

[ncbill]

I won't carry a mortgage into retirement, even if I have to move...saw people get stuck with a hefty mortgage after they unexpectedly were laid off who never managed to find another job but couldn't give up the house where they'd been living for the past 30+ years.

And they did what they were supposed to do...e.g. my recently-deceased relative (single mother) refinanced to a 15 year mortgage once the kids were out of the house (trying to pay it off before retirement) but 5 years into it their entire department was outsourced, so they refi'd again to a 30 year, which meant they were stuck with it through retirement.

Given their only income was $1,800/month (SS-at-age-62) retirement servicing a mortgage (& later HELOC) payment of over $1,000/month made for a lean retirement.

 

[cat4ever]

I won't carry a mortgage into retirement, even if I have to move...saw people get stuck with a hefty mortgage after they unexpectedly were laid off who never managed to find another job but couldn't give up the house where they'd been living for the past 30+ years.

While not a good situation to be in, I don't see how this example could ever apply to someone already retired. Once you are retired how will you ever lose your job? If you decided to retire but didn't figure your existing mortgage in your expense calculations (or paying off of said mortgage for that matter) then you probably shouldn't be retiring in the first place.

 

[l8_apex]

I have resolved this problem. I paid off my mortgage and got a HELOC at 2.24% (-1.01% of prime rate) .. gives me flexibility with the revolving credit.

Can I ask - what bank is doing a HELOC at 2.24%?

 

[Months.in.Wyoming]

Taking cash at these rates is reasonable...

My first question on this is always: Right now, if you had no mortgage, would you mortgage the house to invest in the market? Because that is basically what you are doing.

That said, it depends on how much the mortgage is and what are the payments. If you have a large amount of cash earning less than 1%, maybe put some of that towards it.

Despite the fact that we (the FIRE community) LOVE to discuss the topic, paying off the mortgage is a very personal decision.

Full disclosure: We (DW and I) always had the attitude that all the money from a sale went into the next house, keeping the mortgage low. When the last house was paid off, we sold for a tidy profit, bought the current townhome/condo, and invested the rest.

I go back and forth dramatically on this one. Had house paid off 1.2M, got tired of it feeling like a giant gold brick doing nothing and took money out in March when pandemic hit - turned 500k into 800k just investing in a diverse basket of equities. Took another 250k just now for syndicated real-estate investment. It feels odd paying the 2k soon to be 3k payment (2.75% for 30)... but it really is essentially free money. Full disclosure also for consideration, have multiples of this so could pay it off whenever.