Mortgage(s) in Retirement

[foxfirev5]

My DW and I paid off our houses several years ago and haven't looked back. We have a Heloc in case we need it but haven't so far. I have no interest in financing my home to make potentially higher returns than the mortgage%.
The way I see it a 30 year treasury is yielding about the same as the 30 year mortgage. In other words its a wash in my eyes. My home is where I live. I can take a drop in my investments but don't want to take on additional risk on my home.

[nun]

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Originally Posted by ShokWaveRider So for our particular situation, I find it very difficult to think of having a mortgage now when we have not had one for 13+ years. (Hence my original comments at the start of the thread) I guess it is the English in me (Second Reason), I (and I have now convinced my Canadian Wife over the years) do not like any form of debt. The Mortgage was the only debt we ever had. We just bought cars we could afford to buy outright, or as I was in Sales I wrote off my business cars and always leased those at the time. (A Lease is classified as a rental and is 100% tax deductible, or at least it was and I had a car allowance from work). SWR

+1 I'm from Yorkshire so thrift comes naturally as well as a distain for debt. I've only ever had mortgage debt and I've never really liked that. I've owned 3 cars in my life and I paid cash for them all. I've never carried a credit card balance, and as I went to college in the UK back in the 1980s I graduated with money in the bank and no debt. With the mortgage is paid off the house produces net income from the downstairs rental. I'm free and clear.

[ERD50]

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Originally Posted by rbmrtn ... You seem to be assuming you'll have some excess return from your larger portfolio. That may or may not happen. Paying of the mortgage is a sure thing.

Sure, as I said before, if you don't think you have some reasonable chance of your long-term portfolio returns exceeding these historically low mortgage rates, than pass.

Does your SWR reflect such pessimism? If not, it seems like a rather selective observation.

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Originally Posted by foxfirev5 The way I see it a 30 year treasury is yielding about the same as the 30 year mortgage. In other words its a wash in my eyes. My home is where I live. I can take a drop in my investments but don't want to take on additional risk on my home.

My portfolio isn't in 30 year treasuries, and I wouldn't suggest that it is a good idea to take out a mortgage and invest it in something like that.

It's hard to see how having a mortgage that makes up maybe 10% ~ 20% of your portfolio will put your home at risk. That $215K mortgage I talked about earlier - if that $215K dropped in half (unlikely in a diversified portfolio), you can still pay the mortgage for ~ 9 years before touching any other principal. And you still need to pay your property taxes and maintenance and utilities out of that depleted portfolio. I don't think the paid for house protects you in such black/white terms, might even be a negative if inflation is the monster we face.

-ERD50

[Animorph]

Sounds like a lot of guys are adding the mortgage to their expenses and seeing how much it increases the portfolio they require to pay it off at a 2% to 3% WR. That's always going to favor paying off the mortgage.

[nun]

I always included extra principal payments as part of my AA. My mortgage was 4.5% and I figured that it was a guaranteed return, I just thought of it as part of my fixed income investments.

[WestLake]

It bothers me that I am paying principal PLUS interest with a mortgage. That interest over many years (and indeed mostly interest for many years) seems a waste to me.

[pb4uski]

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Originally Posted by WestLake It bothers me that I am paying principal PLUS interest with a mortgage. That interest over many years (and indeed mostly interest for many years) seems a waste to me.

More of a waste than paying rent?

Do you really expect to borrow money for free?

Or better yet, give me an amount equal to your investments and I'll make regular payments of principal to you (but no interest).

[l2ridehd]

I am retired. Have a mortgage on my primary home, my will move to retirement home when DW stops working, and two rental properties. Might payoff future retirement home when we sell current primary home. Then again might not. It all depends on taxable income and tax codes at that time.

It is a fairly easy calculation to make the determination. Current tax bracket, current mortgage rate, effective mortgage rate and current investment rate of return. If and when the effective mortgage interest rate becomes higher then the investment rate of return over a sustainable period of time then and only then will they be paid off.

I have moved then all but one to 15 year very low interest loans. The one I did not I am paying as if it were, but the savings didn't justify the actual refinance based on the low remaining balance.

So IMHO there are some very good reasons why someone might be retired and still have a mortgage. Each person needs to look at their current situation and make the best financial decision for them.

[nun]

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Originally Posted by l2ridehd It is a fairly easy calculation to make the determination. Current tax bracket, current mortgage rate, effective mortgage rate and current investment rate of return. If and when the effective mortgage interest rate becomes higher then the investment rate of return over a sustainable period of time then and only then will they be paid off.

I don't think it's that simple. What about your AA. Why not use the mortgage as part of your bond allocation. Paying it off will net you the mortgage interest rate. The return you get from equities isn't really applicable here, you should be comparing your mortgage rate with the return you get from your bonds.

[ERD50]

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Originally Posted by WestLake It bothers me that I am paying principal PLUS interest with a mortgage. That interest over many years (and indeed mostly interest for many years) seems a waste to me.

I see this as another example of only looking at one side of the equation. Sure there is interest, but there are also gains from the added money in your portfolio. Do the math, but take off the blinders first.

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Originally Posted by nun I don't think it's that simple. What about your AA. Why not use the mortgage as part of your bond allocation. Paying it off will net you the mortgage interest rate. The return you get from equities isn't really applicable here, you should be comparing your mortgage rate with the return you get from your bonds.

Many 'pay-off' people make this statement that you need to compare the mortgage to 'safe' bonds. I don't agree - I look at my overall AA. Sure, you can think of a mortgage payoff as '100% safe', but does that mean the money you invest HAS to be 100% safe? That is too much compartmentalizing for me. As an analogy, say you had a $1M portfolio invested 50/50 and you were happy with that AA. Then you inherited $500K that was invested in treasury bonds. Would you feel you HAD to keep it in treasuries, because that is how it came to you, or would you stick with your AA?

And if one really feels that mortgage = safe bonds, does that mean that you never invested a penny in stocks until the mortgage was paid off? Would you recc that to a young earner? To be consistent, it seems you are saying not to have any stocks at all until you pay off a mortgage, right?

-ERD50

[someguy]

I know most of the folks on here are way past this in terms of sophistication, but keep in mind paying off the mortgage doesn't mean you are free and clear, either in terms of having no monthly costs for basic housing, or that you are completely safe from losing your home.

Obviously it depends where you live, but, for example, at 3.5% and with LTV a little under 80%, over 40% of our monthly payment is for RE taxes and insurance. So if we paid off our balance today, it would remove 60% of our current payment, not 100%.

On the second front, if we fail to make our RE tax payments (which are the majority of the 40% that remains), we still eventually lose our house, just like if we don't make the PI payment to the bank when having a mortgage.

As far as the debate going on about cash flow and funds in some kind of retirement account versus going to pay the mortgage, I think the main factor that I haven't seen mentioned directly is the ratio of the PI portion of mortgage payment to liquid net worth. Or ratio of PI to income being saved if you are pre-retirement.

If you are saving a large portion of your income and your mortgage expense is a small percentage of your income, I think you're more likely to want (emotionally and financially) to carry a mortgage into and through ER/R.

For example, if our PITI is 6 or 7% of income and we're saving 50% or more of our income, carrying that 6-7% into ER/R isn't really a big deal. And based on the fact that paying off a mortgage (for us) only eliminates 60% of PITI, that is actually 3.6-4% being carried into retirement.

On the other hand, if our PITI is 35% of income and we're saving 15% of our total income, carrying that 21% (35 * 60%) PI into ER/R is going to be a lot more of a burden.

Obviously this is just a fancy way of restating the idea of L(way)BYM. The other factor, rate of return on other investments versus the mortgage rate has been pretty thoroughly discussed, so I will simply add that being in the first example above may allow one to tolerate more risk and therefore widen the gap between a 3.5% mortgage and whatever the other options are. Certainly for us it has. I expect traditional equity/bond investing to somewhat beat 3.5%. Our real estate investments have thus far substantially beat 3.5%, and investments into our small business have destroyed 3.5%. But that obviously varies widely from person to person.

[nun]

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Originally Posted by ERD50 Many 'pay-off' people make this statement that you need to compare the mortgage to 'safe' bonds. I don't agree - I look at my overall AA. Sure, you can think of a mortgage payoff as '100% safe', but does that mean the money you invest HAS to be 100% safe? That is too much compartmentalizing for me. As an analogy, say you had a $1M portfolio invested 50/50 and you were happy with that AA. Then you inherited $500K that was invested in treasury bonds. Would you feel you HAD to keep it in treasuries, because that is how it came to you, or would you stick with your AA? -ERD50

I'd stick with my AA. If you have a 50/50 AA why not just take the money you dollar cost average into bonds and apply it to the mortgage. You're keeping the AA if you think of the mortgage and it's return as part of your bond allocation.

[Danmar]

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Originally Posted by foxfirev5 My DW and I paid off our houses several years ago and haven't looked back. We have a Heloc in case we need it but haven't so far. I have no interest in financing my home to make potentially higher returns than the mortgage%. The way I see it a 30 year treasury is yielding about the same as the 30 year mortgage. In other words its a wash in my eyes. My home is where I live. I can take a drop in my investments but don't want to take on additional risk on my home.

Same point of view as I have. People may be able to earn more on their investments than the mortgage cost but this is not guaranteed and increases risk as any leverage does. Furthmore even if you made a few percentage points on your spread is it reall worth the risk? I say no. It think it does get tougher to pay your mortgage off after retirement as you worry about reducing your portfolio and like the prospect of higher security gains. Much easier to pay it off while working out of employment cash flow that otherwise would have been spent on other things. Any ways in a perfect world wouldn't you rather be debt free?

[Bestwifeever]

Call me stupid but I really like not having a mortgage for us (I think it's just splendid for everyone who is good at leveraging a mortgage to achieve investment income to do so). For us it doesn't come down to the money we might be forgoing by not having a mortgage--if it did, we'd still be working (look how money we're all forgoing by er'ing). We're just done with debt, any debt, even debt that might work in our favor.

[ShokWaveRider]

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Originally Posted by Bestwifeever We're just done with debt, any debt, even debt that might work in our favor.

Here Here, and have been for the last 15 years!

[rayvt]

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Originally Posted by nun I'd stick with my AA. If you have a 50/50 AA why not just take the money you dollar cost average into bonds and apply it to the mortgage. You're keeping the AA if you think of the mortgage and it's return as part of your bond allocation.

It is simply incorrect to think of your mortgage as part of your bond allocation.
This is an extension of the fallacy that paying extra principal is the same thing as earning X% on that amount.

Bonds pay interest to you. Your house doesn't.

And, if you are retired and don't get a paycheck, you are not "dollar cost averaging" anything.

[WestLake]

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Originally Posted by pb4uski More of a waste than paying rent? Do you really expect to borrow money for free? Or better yet, give me an amount equal to your investments and I'll make regular payments of principal to you (but no interest).

That's why I pay cash or pay it off ASAP (bought several rentals on 5 year notes, two on 7 year notes).

[ERD50]

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Originally Posted by Bestwifeever Call me stupid but I really like not having a mortgage for us (I think it's just splendid for everyone who is good at leveraging a mortgage to achieve investment income to do so). For us it doesn't come down to the money we might be forgoing by not having a mortgage--if it did, we'd still be working (look how money we're all forgoing by er'ing). We're just done with debt, any debt, even debt that might work in our favor.

Well, I don't think anyone here has suggested that anyone is 'stupid' for paying off their mortgage. That would also violate Community Rules. And I hope you aren't implying that anyone did any such thing. That would be a rather round-a-bout and subtle (or maybe not so subtle?) bit of name-calling in itself.

That said, I do think that some of the reasons given for paying off a mortgage are, ...not well thought out, or maybe unsubstantiated? But as I've often said, pay-off or not is probably the least important question facing the ER or ER wanna-be. But maybe understanding that is important?

-ERD50

[youbet]

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Originally Posted by ERD50 I've often said, pay-off or not is probably the least important question facing the ER or ER wanna-be. But maybe understanding that is important?

And that's really the bottom line. Paying off or keeping a mortgage (at competitive, current rates) is likely to not mean very much to the financial success of an early retiree. If it makes you feel good (and it clearly does for a number of the posters), pick a time when your AA makes it convenient to come up with the cash and pay off the mortgage. I did, but yawn, it was no big deal.

[pb4uski]

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Originally Posted by WestLake That's why I pay cash or pay it off ASAP (bought several rentals on 5 year notes, two on 7 year notes).

If it is rentals that you are talking about it seems to me that by not carrying a mortgage you are missing out on a great opportunity to use leverage to increase return. I'm talking about modest and prudent leverage, not foolishness.