Pay of mortgage ?

[Chris24]

I don't think there is any easy , right or wrong answer to this question; Is it worth it paying off your mortgage, lump sum, before retirement or to keep a monthly payment and put said sum in the bank?

The amount in this case is 230k. The monthly payment is just under 2K for the next 12 years.

Pros.. (as I can see so far) . Need 2k less to live on a month. If you use a withdrawl rate of 5%, (of the 230k), it is a net gain of about 1k a month. Tax benifit is minimal, but peace of mind of one less bill a month is big. Money will be in the "house" and can always re-mortgage/sell if things don't work out the way they are meant to.

Cons ... Less lump of cash in the bank to work with. Loan is fixed at 4 1/2 %.

Chris

 

[playaman]

This has been a much debated issue for which the right answer is unique to the individual.

As for me, I'm paying my mortgage off in full just before I retire in two years. I simply don't won't to worry about it.

 

[JB]

I'm normally in favor of paying off the mortage but at these rates I'd keep it. You can buy 3 year CDs from the Pentagon Federal Credit union that pay 5%. If interest rates rise, you'll find even better deals. If rates fall, you can always pay it off later.

 

[cute fuzzy bunny]

AIYEEEE!

 

[Mountain_Mike]

Dave,

Your "every other year" itemization is novel, to say the least.

I thought of one more advantage. On the "standard deduction" years, you can just fill out the short form for taxes and save time (or tax prep costs).

Good idea!
-Mike

 

[TromboneAl]

I'm a fan of paying it off. But remember that this isn't an all or nothing decision. If you find yourself torn between paying it of and not paying it off, pay off half of what's remaining.

 

[Texas Proud]

My two cents...

If you have a 4 1/2% fixed rate there is NO reason to pay it off. The interests rates are rising and you will be earning more than that on bonds (and maybe even CDs) soon... If you want peace of mind you put it in a short term bond fund and make the spread...

I am a fan of paying off debt, but that interest rate is too low to do that...

 

[laurence]

Some one should post that other thread, I'm having trouble finding it.

Going for the spread during accumulation seems doable, methinks. But once you retire, I would think a paid off mortgage would be worth it just to reduce withdrawal rates on your portfolio. The less money you have to draw out during down years, the better.

 

[Nords]

A 4.5% loan puts you in the catbird seat when you can buy 5% CDs.  

If the monthly payments don't force a high SWR, then larger retirement portfolios (swollen by mortgage money) are generally more survivable than smaller ones.  But you'll want to run the FIRECalc numbers both ways.  

Take a look at the FIRE & Money thread linked here:  "Covering a mortgage without losing your ass(ets)."

(BTW, Dory, you would think that the Search feature would find keywords like "mortgage" or "ass(ets)". It couldn't.)

 

[laurence]

Thanks, Nords! That thread almost deserves sticky-status, or some sush thing to keep it visible. High utility and relevancy.

 

[Patrick]

I don't think there is any easy , right or wrong answer to this question; Is it worth it paying off your mortgage, lump sum,  before retirement or to keep a monthly payment and put said sum in the bank? 

The amount in this case is 230k. The monthly payment is just under 2K for the next 12 years.

Pros.. (as I can see so far) . Need 2k less to live on a month. If you use a withdrawl rate of 5%, (of the 230k), it is a net gain of about 1k a month. Tax benifit is minimal, but peace of mind of one less bill a month is big. Money will be in the "house" and can always re-mortgage/sell if things don't work out the way they are meant to.

Cons ... Less lump of cash in the bank to work with. Loan is fixed at 4 1/2 %.

Chris 

Hmm. 4.5% - 1/3(4.5%) = 3% after-tax cost (if you're in appx. 33% bracket and can itemize).  What return can you get on the money if you invest it elsewhere?  Is it more than 3% after taxes?  If interest rates continue to go up, you might be better off putting it in bonds or cds, or if you think the stock market will do better, you might want to put it there. 

If you pay off the mortgage and decide to refi later, what interest rate will you be able to get then?  Probably higher than 4.5%, I would think, plus you'd have to pay fees to do it.

 

[Spanky]

Why pay off your (fixed at 4 1/2 %) mortgage when you can purchase I bonds or CDs that pay a higher yield?

 

[moghopper]

I was thinking about setting up a charitable foundation.
...
Does anyone here know about foundations? Has anyone set up anything like this?

Something like these work for you?
http://moneycentral.msn.com/content/Retirementandwills/Retireinstyle/P40073.asp
http://www.charitablegift.org/
http://www.vanguardcharitable.org/

 

[uncledrz]

Normally I favor paying off the mortgage on your residence. However, given the low fixed rate, if you continue on employment so that the write off makes sense, I would probably keep the loan.

 

[JB]

I'm sure someone will correct me if this is wrong...

I don't get why employment matters. If you are still paying off significant interest the tax deduction is a wash -- you might be able to deduct the interest on the mortgage, and you'll pay taxes on the earnings on the bonds or CDs. They pretty much cancel each other. If you're a high earner, you might even reach the limit of schedule A deductions.

 

[moghopper]

I don't get why employment matters.

I don't really think it does either. At least not to me... it seems to be totally a personal decision. I believe that many people simply feel better with as few fixed costs as possible.

Lets say you had a 200K loan / 30 years / 5.5% interest
That should work out to a monthly payment of $1135.58, or $13626.96/year.

Going with a 4% Withdrawal rate, one would need $340674 to support that monthly outlay. If viewed this way, you can pay off the balance of the loan easily, and have extra left over.

On the other hand, you can make the argument that since this is a fixed number, you can have the balance of the loan in CDs, and liquidate as needed. Works especially well if interest rates have risen significantly since loan origination.

 

[uncledrz]

I'm sure someone will correct me if this is wrong...

I don't get why employment matters. 

JB
Only because I believe that on full retirement their should be no debt.
Just the way that I look at it.
Uncledrz

 

[laurence]

For me, employment matters in the sense of being in the accumulation phase. Once retired, you are in distribution/withdrawal phase, which for me means taking less risk. I don't want to have to take large withdrawals when my portfolio is having a down year. If you could get CD's for more than your mortgage rate + tax implications....well, I guess. But this has all been talked out in the above linked thread. There are people going both routes.

 

[JB]

I am retired, I have no income other than withdrawals from my savings. I have no debt. If someone offers to lend me money at a rate that is lower than the rate I can get using ultra conservative investments I'll no it in a hearbeat. It reduces my risk.

I can understand why people go both ways. The best way (in terms of return) can be calculated and depends on interest rates. If the rates are close (like they are now) balance the psychlogical factors with your tolerance for risk.

I paid off my mortgage in 2000. I was working making a hefty income, and the decision was easy. Even though I'm not working, at todays rates I'd be very tempted by a low rate mortgage (especially if I already had it).

I'm not in the (Nords) camp that would put my mortgage money into the stock market. That's too risky. But paying off a 4.5% loan off make no sense when you can easily and conservately get 5%. It's lower risk to keep the mortgage.

 

[REWahoo]

I can understand why people go both ways.

To each his/her own, but I think you are on the wrong board to be posting this material...

REW

 

[davidmull]

I'm not in the (Nords) camp that would put my mortgage money into the stock market. That's too risky.   But paying off a 4.5% loan off make no sense when you can easily and conservately get 5%.  It's lower risk to keep the mortgage.

I agree.  Granting that you'd get some significant psychological comfort from being free of the monthly mortgage payment, wouldn't you get even greater comfort from knowing that you were making more money through safe investments?

 

[renferme]

Most examples here are using a 4.5% interest rate for 30 years. Didn't know you could get that ! ! !?
.
My example, and I refinanced 2.5 years ago, is 5.25% for 15 years. We're paying the loan as if it were a 12 year mortgage (paying extra principle every month). So it will be paid off in 9.5 years from now, unless... we pay it off. My thinking is to pay it off when I turn 62 (about 3 years from now), and start drawing Soc. Sec. Don't know where CD rates will be in 3 years or so, but you can't get better than 5.25% right now, not even with Pen Fed. And most 'experts' seem to think the stock market may move sideways or up very little for the next many years. But who knows ? OH, almost forgot to mention, I have about 30k in CDs right now, half will mature in 1.5 years and half in 2.5 years. If I pay off the mortgage in 3 years, I would use that CD money as part of the payoff, so.... the question is: What to do with the 15K in 1.5 years and the next 15k in 2.5 years ??
Ray

 

[moghopper]

Most examples here are using a 4.5% interest rate for 30 years. Didn't know you could get that ! ! !?

I have 4.5% on a 7 year balloon with 30 amortization - originated ~25 months ago.

My brother has 4.5% on a 30 year fixed loan - originated ~20 months ago, iirc.

 

[Chris24]

Sorry been out of town, .. thanks for the posts. The Loan is 4 1/2 % for 15 years, been paying into it almost 3 years, and will for the next 2 while I am working. One of the few if not he only thing i aquired at the "bottom".

I need to look closer at the amortimization schedule more closely, .. ( heading out of town first thing in the morning agian so will be a few days) .. and figure how much interest is left, and also need to figure what tax bracket I'd be in when I start withdrawing from retirement funds, with the mortage paid off , and with out.

The idea of "critical mass" is appealing, as well as not having to wrote ou that 2k check every month. If cd rates head over 6+% in the next few years, quess it would be "case closed" for keeping it. Don't see the paper work being worth it for 1/2% at best , after all is said and done with rates in the 5=% area.

Agian thanks for your responses .. alot to think about. .. Chris

 

[laurence]

I have 4.5% on a 7 year balloon with 30 amortization - originated ~25 months ago.

My brother has 4.5% on a 30 year fixed loan - originated ~20 months ago, iirc.

Whoa, are you planning on moving? I ask because with historical low rates, why risk having to pay higher rates in the future? How many points did your brother pay?