mortgage in retirement

[Katsmeow]

Quote:

Originally Posted by Bestwifeever Perhaps, but income in retirement may be reduced so one might not qualify. Also, interest rates sooner or later will go up; someone with today's low interest rates would have much higher monthly payments as a result.

This is part of my current conundrum. I keep turning it over in my head as to what is best.

We currently own one house with mortgage. For long term financial viability we must sell this house. Right now I'm working part time and it covers the cost of the house and right now I enjoy working part time. But, I don't want to feel forced to do it. While we have a mortgage on House 1 we can't possibly qualify for a mortgage on the House 2 (the house we plan to build).

But-- sell House 1 and while working part time we could qualify for a mortgage on House 2.

Our options:

1. Build House 2 with a mortgage. To do this we have to defer building until House 1 is sold so will have costs for somewhere to live while we are building (we have 5 dogs and 2 cats so finding somewhere is not a trivial problem). Also, to long term have a mortgage even at low rates will certainly cut into our spending power. That is, money will have to go for interest on a mortgage that is an expense we wouldn't have without a mortgage. And, needing to take more money out of retirement accounts for a mortgage increases our taxable income each year with various negatives to that. The positive to this is that our taxable income is increased each year but the extra income to pay the mortgage may not throw us into a higher tax bracket. Also, we still have our complete portfolio to invest.

2. Build House 2 for cash (fundamentally this works out the same as paying off the mortgage on an existing house). I would prefer to do this in many ways. I think interest on a mortgage is an expense I don't want to have and I prefer to not forever have to have increased income to sustain a mortgage. The way I see it is that if I am paying say $15000 a year in a mortgage (after considering tax benefits), I need an additional $375,000 in my portfolio to sustain it. And if we do this and wanted a mortgage years from now, if I quit work at some point, we might not be able to qualify.

The big rub for me -- that not many talk about when debating whether to pay off the mortgage -- is that all of our funds are in tax deferred accounts. So let's say it will cost $275k to build the house we want to build. The total cost is closer to $400k once you include the taxes. And, in our case that is about 30% of our portfolio.

But doing this does reduce our expenses in retirement since don't have to service a mortgage. Also, it can be argued that it is false to include the entire $125k in taxes as part of the "cost" of building. To build in one year and pay the building cost in cash does result in us being in a higher marginal tax bracket for that year and higher taxes overall. However, if we have a mortgage we will have to draw out money each year to pay it and we will likely be in the 25% tax bracket. So, it really only the difference in taxes between the two scenarios that is an extra cost.

On the other hand, imagine we got a mortgage and decided to pay it off in 10 years. We would have some income taxes each year at a 25% tax rate versus probably at 33% tax rate if we build for cash. But, in paying it out over 10 years we get some benefit for having the money invested over that time (albeit a declining amount each year).

Every time I've tried to run the numbers on this, it still comes out that building for cash works out best. However, I do have conservative numbers for investment returns.

[samclem]

Quote:

Originally Posted by Katsmeow And, needing to take more money out of retirement accounts for a mortgage increases our taxable income each year with various negatives to that.

I think this is a sometimes overlooked "con" of having a mortgage--folks forget to figure the taxes on the $$ that remains in investments rather than being used to pay off the mortgage.

One other thing--the possible "other benefits" of being at the low end of the income scale. No one knows what the government may do, but there have certainly been rumblings of a need for the "rich" to pay more, and frequent efforts to transfer resources to those at the lower end of the income scale (tax credits that phase out with income, bigger subsidies for heath insurance, etc). For these reasons, some people may find that reducing their income (by reducing their investments through paying down the mortgage) might pay off better in the future than at present.

Indeed--so many unknowns and unknowables.

[Nords]

Quote:

Originally Posted by Danmar Sam: If you pay your mortgage off you can always get another. Agree there is a possibility the rate could be higher.

I can't agree with this one. We were able to get two mortgages (one a rental and the other our residence) because we had two honkin' big incomes at the time and the lender didn't ask about our ER plans.

Every refi since then has been a perpetual debate regarding our interest/dividend income as well as our rental income. (I had to explain to one mortgage broker how we were boosting our income by selling covered calls... that didn't go so well.) The lender's bottom line in each situation was that the lower payments (and the lack of a cash-out refi) was improving our cash flow. This logic would not have worked if we were trying to "always get another mortgage".

So the easiest answer is to get a mortgage before you ER.

Quote:

Originally Posted by Danmar I think you would always want enough liquidity on hand to cover emergencies. If the only way to do this is keep the mortgage I can see that. I would cover this by getting a HELOC and not drawing unless required.

We do that too, but I wouldn't be so eager to arb a HELOC because they tend to have variable interest rates and shorter draws. Nothing beats today's 30-year fixed rates.

But what kind of emergency are we talking about? Many of us ERs carry at least a year's expenses in cash (we carry two) and some carry up to seven. Between a cash stash and a HELOC I'd think the average ER would be awash in emergency resources.

Quote:

Originally Posted by Danmar In my opinion debt is debt and in retirement you are better without it. I understand the view that locking into a 30 year mortgage at these rates sounds good. However, I still think being debt free is a better place to be.Borrowing inherently increases your risk as you have increased your fixed expenses much like buying investments with a margin loan(albeit without the possibility of margin call).

Increasing fixed expenses is only a problem if the increase is likely to wipe out your safety margin-- for example a pension without a COLA or no pension at all. Lenders have debt guidelines like "mortgage P&I no more than 28% of net income" and "total debt no more than 36% of net income".

Perhaps the issue is vocabulary, or math vs emotions. I won't claim that one reason is better than the other, and emotions usually triumph because if you can't sleep at night then logic & math just don't matter. But someone who "feels" and "thinks" that debt-free is better than a mortgage is not willing to go with the math and the probabilities. It would appear that my primary motivation is greed putting a financial commitment behind my investment analysis.

Having a mortgage in ER comes down to a question of excess assets. If you have more money than you need... then should you take absolutely no risk at all with it, or should you take extra risk? I don't think there's a single (let alone simple) answer for everyone.

[lovinglife1]

During my earlier working years my strategy was to buy modest new homes, (15-200K), rent them out to produce income and support the mortgage payments, pay them off as soon as possible, then sell them at retirement to fund a 'dream house' for retirement.

As it turns out, i am a year from retirement, soaking up 40k in rental income a year. I have decided to buy the new home now and use the rentail income to pay the mortgage....so 6 of one, half a dozen of the other.

Since the value of the rental properties is more than the mortgage, I'm in like flint...

I am lucky in another respect. I have an excellent management company who has kept the rentals occupied 95% of the time and the fact the homes are pretty nice for the price levels and in good neighborhoods the tenants are very good. They are just people who may have high debt, or lower credit scores or something that keeps them from being able to buy a house at present.

[Danmar]

I think we are going to have to disagree on this one. Emotions/culture certainly play a role in this issue. Simply put, for me, being debt free is where I want to be now that I am retired. Had plenty of debt all through my working life and paying it off was always a major goal. Thanks for the thoughtful responses.

[Rustic23]

Debt is merely a tool. It is not good, despite what Dave Ramsey says, it is not bad, it is just a financial tool. It is how you use the tool that counts. And here I agree with Dave, most use it poorly.