Opinions on paying off mortgage needed....

[sheldon cornped]

Age: 67
Mortgage: $300k @ 3.6% 25 yrs remaining. $1565/mo. payment
Annual guaranteed income sources (SS, pension): 105k plus 35k dividend income.

Sources:
Cash - 100k
Tax deferred investments: 1.7 mm
Taxable investments: 2.8mm

In taxable, about 1mm has a higher cost basis (thus lower cap gains tax) and the remainder has a lower cost basis (higher cap gains tax)
AA is about 82/17/1

Am thinking about taking 50k from cash, and selling 290k of stock from higher cost basis taxable holding. This would cover the payoff of remaining 250k mortgage and satisfy the 40k owed in cap gains taxes. Would you pay off this mortgage this way, some other or not at all? Thank you.

 

[ivinsfan]

No not from taxable because you aren't that far from your RMD, If anything I'd start taking the payoff money from tax deferred. Spread it over several years starting in 2021 .

Let the taxable ride and let your heirs get a stepped up basis.

 

[jollystomper]

I would be tempted, given your income and the amount of that income you use to pay the mortgage, to refinance to a 15 year mortgage, rates for which these days seems below 2%, and let the investments keep growing for a while. Perhaps when RMDs hit use that forced withdrawal to pay it off.

I say this as someone who did pay off the mortgage, but only when the balance fell to a relatively low level, and cash interest rates fell below my mortgage rate. But, there is great emotional satisfaction in having a paid-off mortgage,in which case I would agree with ivinsfans to use your tax-deferred money to pay it off.

 

[skyking1]

I would say no, as you have enough interest there to itemize. You don't say how you are doing with spending that 105K +35K.

 

[sheldon cornped]

We spend most of the income. I failed to mention that most of the taxable is in a single pharma stock that has appreciated greatly. We thought it could lower our exposure to pull from there.

 

[Luvtoride]

We spend most of the income. I failed to mention that most of the taxable is in a single pharma stock that has appreciated greatly. We thought it could lower our exposure to pull from there.

Sheldon, a good "problem" to have. I would say don't pay off the mortgage if handling the payments isn't an issue. I got a mortgage for a 2nd home, 4 years ago at a good rate and I thought the only thing crazier than ME and my wife taking out a mortgage at our age (60 at the time) was that a BANK was willing to give us a 30 year mortgage! The interest deduction makes this one of the few deductions we can still take advantage of (after the SALT limitations).

I would recommend diversifying from the concentration in the pharma stock. From someone who worked for a "too big to fail" insurance company when the 2008 shake out hit and at one time had a lot of my wealth invested in that company stock (I had liquidated most of it prior to the 2008 melt down thankfully) just diversify!

Good luck!

 

[Closet_Gamer]

We spend most of the income. I failed to mention that most of the taxable is in a single pharma stock that has appreciated greatly. We thought it could lower our exposure to pull from there.

You need to break apart your AA analysis/discipline from the mortgage question.

If you're overly concentrated in a single security, you should address that issue regardless of whether you use it to pay off the house.

Once addressed, if there is resulting cash, then its worthwhile to assess whether putting it on the house is a better idea that other alternatives.

My $0.02.

 

[ivinsfan]

You need to break apart your AA analysis/discipline from the mortgage question.

If you're overly concentrated in a single security, you should address that issue regardless of whether you use it to pay off the house.

Once addressed, if there is resulting cash, then its worthwhile to assess whether putting it on the house is a better idea that other alternatives.

My $0.02.

+100 the two things are not connected

 

[SnowballCamper]

I would be tempted, given your income and the amount of that income you use to pay the mortgage, to refinance to a 15 year mortgage, rates for which these days seems below 2%, and let the investments keep growing for a while. Perhaps when RMDs hit use that forced withdrawal to pay it off.

This sounds very appropriate to me... but I paid off my mortgage several years ago, and I'm a couple decades from RMDs.

 

[Texas Proud]

The problem is there is not 'real' answer as emotion comes into play and everybody has a different emotional response to debt.


This has been debated many times and the best answer is 'what do you want to do?'.

 

[pb4uski]

What is the 17% in fixed income earning? I assume that it is in your tax-deferred?

What I would consider is using a combnation of cash and sale of shares in taxable or tax-deferred withdrawals to pay off the 3.6% mortgage... the decision between sale of shares or tax-deferred withdrawals would be based on whichever has a lower tax cost. Then adjust your AA selling fixed income in tax-deferred and buying diversified stocks in tax deferred so fixed income/cash componenets are 12% after paying off the mortgage.

The overall impact is using a combination of fixed income and cash to pay off your mortgage. ($4,600k*18%)-($4,300*12%) = $312k

This presumes that $250k of fixed income and the $50k of cash combined is earning much less than 3.6% you are yielding less than 3.6%.

 

[Bamaman]

I'm 13 years into ER, and will have to begin RMD's next year. At this stage in life, I just don't desire to watch a calendar to make any kind of monthly house payments. When I receive a utility bill, I enter it into my bank's bill pay and it's done. Otherwise, all other expenses are on my Visa account that pays back enough for a free flight to Europe yearly.

I only keep 5-6 diversified investment accounts, and I've picked some of the best accounts in their market segments. I am essentially on cruise control with Fidelity spending minimal attention to my investments.

I like the simple life, and am very fortunate to have the resources to own two substantial homes outright. Although my payments were always less than renting an apartment, I was like a bird out of a cage when I paid off that mortgage.

 

[Midpack]

The problem is there is not 'real' answer as emotion comes into play and everybody has a different emotional response to debt.


This has been debated many times and the best answer is 'what do you want to do?'.

+1. There’s the financial aspect and that’s important, and there’s the emotional aspect. The economics were nearly a wash for us but we paid off our 30 year mortgage in 16 years on our last house, and we’ve never regretted it at all. We paid cash for our current house. We haven’t had any interest debt for at least 10 years.

 

[FANOFJESUS]

We spend most of the income. I failed to mention that most of the taxable is in a single pharma stock that has appreciated greatly. We thought it could lower our exposure to pull from there.

Sounds like you need to sell 300k of this stock every year. I would pay off the house the first year.

 

[pb4uski]

I'm 13 years into ER, and will have to begin RMD's next year. At this stage in life, I just don't desire to watch a calendar to make any kind of monthly house payments. When I receive a utility bill, I enter it into my bank's bill pay and it's done. ....

When we had a mortgage, I set up the mortgage payments one time on my bank's bill pay... $x per month on the yynd of the month for 180 months. Payments happened automatically... easy peasy. I just had to turn them off when we paid the mortgage off.

 

[RetiredAt55.5]

When we had a mortgage, I set up the mortgage payments one time on my bank's bill pay... $x per month on the yynd of the month for 180 months. Payments happened automatically... easy peasy. I just had to turn them off when we paid the mortgage off.

I'm also set up with auto-pay but with the mortgage company directly. They just do an ACH out of my checking account every month.

I assumed those is how most people would pay their mortgage these days.

 

[Texas Proud]

I'm 13 years into ER, and will have to begin RMD's next year. At this stage in life, I just don't desire to watch a calendar to make any kind of monthly house payments. When I receive a utility bill, I enter it into my bank's bill pay and it's done. Otherwise, all other expenses are on my Visa account that pays back enough for a free flight to Europe yearly.

I only keep 5-6 diversified investment accounts, and I've picked some of the best accounts in their market segments. I am essentially on cruise control with Fidelity spending minimal attention to my investments.

I like the simple life, and am very fortunate to have the resources to own two substantial homes outright. Although my payments were always less than renting an apartment, I was like a bird out of a cage when I paid off that mortgage.

Wow, use your bill pay.... when we refinanced our house to a 15 year mortgage I set up an auto pay and put down 179 payments.... this is the ONE bill I do not worry about at all... set it and forget it...

 

[ERD50]

Wow, use your bill pay.... when we refinanced our house to a 15 year mortgage I set up an auto pay and put down 179 payments.... this is the ONE bill I do not worry about at all... set it and forget it...

Yes, I always laughed at the idea of paying off the mortgage would "simplify" one's life.

I had it on auto-pay, to pay off the mortgage would be more work than doing nothing!

-ERD50

 

[sheldon cornped]

Thank you for all the sharing and advice. So it looks like to us the best course would be this: Already paid 40k principal in cash. 260 remains. To stay under 171k income level and retain all of our deductions, avoid irmaa medicare premium increase we can sell about 150k of stock this year and still be well under the 171 limit. Cap gains and other taxes on the 150k would be 36k reducing to 114k towards principal. Throw about 20k available cash later this year reducing payoff to 126k. Pay off rest next year while still remaining under the 171k.

 

[RetireeRobert]

We spend most of the income. I failed to mention that most of the taxable is in a single pharma stock that has appreciated greatly. We thought it could lower our exposure to pull from there.

It would be good to lock in some profits on that single pharma stock and lessen your exposure to it. That is a laudable goal in its own right. And if you are going to do that anyway, then some of the proceeds could then be used to pay off your mortgage making you debt free. Being out from under that $1500+ a month mortgage payment frees you up to invest those funds on a monthly DCA basis in other than the pharma stock.

 

[ERD50]

.... Being out from under that $1500+ a month mortgage payment frees you up to invest those funds on a monthly DCA basis in other than the pharma stock.

Isn't this circular logic? Use money to 'free up' money?

If he doesn't pay off the mortgage, that is $260K that he can invest over the course of less than two years (he says ~ 150K/year to limit tax hit of cap gains).

If he does pay off the mortgage (over the course of less than two years to limit tax hit), the $1500/month 'savings' will take 14 years to become invested.

Yes, he has the $1,500/month payment, but some of that goes to principal, and I get the impression he has the cash flow to support it, so why not? Could also refi, and [probably lock in a lower rate.

-ERD50

 

[Jerry1]

Mathematically it probably makes sense to hold a mortgage. Especially with today’s low interest rates. However, emotionally, it feels really good to have ones house paid off. Once we had things on auto pilot, we started doubling our mortgage payment. Then, when it got down to around $50K, we just went ahead and paid it off.

Recently, we put in a pool and we borrowed the money for that. Interest rates are low and paying cash would have reduced or cash cushion lower than we wanted and drawing from our IRA would have put us in the next tax bracket. We don’t like owing money, but it makes sense for now.

 

[ERD50]

Mathematically it probably makes sense to hold a mortgage. Especially with today’s low interest rates. However, emotionally, it feels really good to have ones house paid off. ...

People should be careful with these broad brush statements. Maybe say that " some people feel really good to have the house paid off"?

For many of us (and I'm one), it feels really, really good to have our money working for us, in what has historically been a very, very good bet.

-ERD50

 

[tulak]

I’m also in the camp of feeling good about my money working for me. I’m in the process of refinancing to a 2.75% 30-year fixed mortgage. No complaints here.