Pay off house?

[ERD50]

Quote:
Originally Posted by ERD50
OK, so how can anyone in this thread claim it is "almost a no-brainer" to do an early pay-off?

For some folks, no-brainer-ness involves feelings rather than numbers.

OK, but he didn't say "I listened to my heart/gut instead of my brain". The context really sends the message that it is obvious that the pay-off was better.

It would sound snarky for me to reply "So you didn't use your brain?" I don't think that's what they meant.

-ERD50

 

[joeea]

OK, but he didn't say "I listened to my heart/gut instead of my brain". The context really sends the message that it is obvious that the pay-off was better.

It would sound snarky for me to reply "So you didn't use your brain?" I don't think that's what they meant.

-ERD50

Right. But your question was "so how can anyone in this thread claim it is "almost a no-brainer"" - and that's what I explained.

Your brain doesn't make decisions solely based on the financial math. Often that isn't even a major consideration. And that isn't the same as "not using your brain".

Plenty of folks in this thread could claim it is almost a no-brainer. Not me, but plenty.

 

[COcheesehead]

I had a really low mortgage, 3.125% for 30 years. I had planned to let it ride. Then as FIRE approached we decided to move to a LCOL area and downsize. So we sold our house in June and are in the hunt for a new one in our new town. Based on what we are looking at, we'll pay cash.

 

[ivinsfan]

Too many unanswered questions, for example let's say you retire before 65 and HI is a concern...you might want that 350 from the rental house to live on and keep your income below the ACA cliff. In that situation paying off your primary home could be a big mistake.

I f you want to elaborate and give a broader picture of your ER plans people can give a more informed opinion.

 

[SmallCityDave]

You are right, it is two separate decisions. I should have thought this through a little better before posting. That’s what I love about this forum.

We are leaning towards selling the rental. We expect to yield $350,000 after paying taxes, which is close to what we owe on our primary house. Our current interest rate is 4.25%. The breakdown of principal/interest is $600/$1400 per month. Our primary house is the only debt that we have. We have 7 years left until we retire at age 59.

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, you are completely debt free, you keep the rent money & the grass is greener.



If you really hate the feeling of being completely debt free you could always get a HELOC and use that money to invest.

 

[RetiredAt55.5]

Too many unanswered questions, for example let's say you retire before 65 and HI is a concern...you might want that 350 from the rental house to live on and keep your income below the ACA cliff. In that situation paying off your primary home could be a big mistake.

This is exactly why I'm VERY glad I did not pay off our mortgage.

Paying off your mortgage before retiring is not a "one size fits all" rule, although some people (you know who you are) keep trying to insist it is.

 

[ERD50]

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, you are completely debt free, you keep the rent money & the grass is greener. ...

The pay-off crowd so often misses one part of the equation. Let's restate that:

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, but missed out on investment gains, and in either case, at the end of the loan you are completely debt free.

If I read OP right, " you keep the rent money" doesn't make sense - I thought he said he had to sell the rental to pay off the home mortgage.

Yes:

If we sell the rental, we would have enough cash after the capital gains and depreciation recapture to pay off our primary house

So strike that part you added about 'keep the rent money'.

-ERD50

 

[booey]

I've been making double payments (or more) on my 15-year mortgage to get it paid off in 6.5 years. I have 4 payments left. For me it's a mental/emotional thing. I feel that I can't truly be "FI" if I'm obligated to make monthly payments on something.

 

[ERD50]

,,,, Just the other day I ran a Portfolio Visualizer analysis that started with a portfolio equal to our mortgage in January 2012 with monthly fixed withdrawals equal to our monthly payments. That portion of our portfolio, after paying ~7 years of payments is $100k more than our mortgage balance... so I am way ahead...IOW, that's $100k that I wouldn't have if I had used that money to pay off my mortgage 7 years ago instead of refinancing.

I posted a while back that I did the same thing following your suggestion. Then I thought about it in a more general way.

Maybe someone can come up with better sources, but these show 20 and 30 year rolling average total returns for the stock market:

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf

https://awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/

From what I can see, only three 20 year periods dropped below 5%, and only one barely below 4% (out of 78).

Thirty year returns were all above 7.75%.

So if you can get a mortgage below those rates (pretty easy these days), history is way on your side.

Some people may still not want the slight risk that they could under-perform their mortgage. That's fine, their decision. Just don't try to sell it to me as any sort of great financial decision, or that almost everyone should pay off their mortgage.

-ERD50

 

[pb4uski]

We paid off our house as we started retirement in 2008. Our pension/SS/dividend income easily covers our expenses but would not have covered our mortgage payments, so we would have had to pull a little $$ from the nest egg for it, and that would have meant selling low when there was a little downward excitement (I think this is the basis of the old conventional wisdom of not having a mortgage in retirement). Perhaps you can invest the proceeds of the sale of the rental and then pay off the mortgage when you do retire? You will have made seven more years of payments against the mortgage as well by that time.

I'm sure it's six of one, half dozen etc in the end from a financial standpoint, but I do love the feeling of having zero debt the past ten years.

Actually, that made me think... what would my results have been if I took on a mortgage at one of the worst possible times... Jan 2008. So I did a Portfolio Visualizer run assuming that my mortgage had started in Jan 2008 rather than Jan 2012.... the balance in my investment account today... after making 11 years of payments from the investment account... would be 170% of the mortgage balance... so even starting at a horrible time one would be 70% ahead. That is with 60/40 indexed funds.

 

[BeachOrCity]

I am at a similar crossroads. About to close on selling my rental house. What to do with all of the cash?

The tax bill is huge. Have you looked at opportunity zone funds for the gain that is not part of recapture? You could get a 7 year deferral plus a reduction and other long term benefits too detailed to discuss right here. (Google it for an intro).

I did not see anyone else mention it but I would decide on your asset allocation and treat any existing mortgage as a negative against what should be in bonds based on your target aa.

Comparing a certain mortgage interest expense to a very uncertain stock appreciation is not sound financial logic (my opinion).

Given the new lack of real deductibility for most of us for mortgage interest there is a new wrinkle to consider and that is your other alternative for the cash has a lower hurdle to make financial sense because the mortgage interest is most likely not deductible.

All of this tilts the decision more toward payoff than it used to be but for some because of liquidity or just an emotional desire to have the cash decide to keep the mortgage.

Final thoughts. You don’t have to decide right away. You can’t Undecide paying off a mortgage easily if retired. So take your time. And if you sell the rental house take a look at opportunity zones.

 

[pb4uski]

Isn't the tax bill just 15% federal on the gain excluding depreciation recapture and the lower of 25% or your ordinary income tax rate on the depreciation recapture?

What did you expect it to be? A free pass?

 

[BeachOrCity]

Isn't the tax bill just 15% federal on the gain excluding depreciation recapture and the lower of 25% or your ordinary income tax rate on the depreciation recapture?

What did you expect it to be? A free pass?

15 percent or 20 percent federal. Plus 8.75 percent state. Plus 3.8 percent aca tax on a big part of it. The depreciation recapture will be at 25 instead of 15/20.

Add it all up and when there is a large real estate gain in a high tax state and one is looking at sending about a 1/3 back to the govt if they already have base income eliminating all the low bracket space under 100k income.

Not complaining just stating he reality.

 

[JDARNELL]

I too have a couple of rentals that I have been approached about selling. When cpa ran the numbers the tax hit was more than I am willing to absorb. Don’t see much of a way around it other than 1031 exchange or passing through my estate. Not interested in either one at this point.

 

[pb4uski]

I guess another argument when we have the next stocks/bonds vs real estate debate... looks like real estate locks you in more. That said, I have some highly appreciated stocks that I'm unwilling to sell because of the gain and tax... but that is only at 15%... ok,all me cheap.

 

[brucethebroker]

Given the new lack of real deductibility for most of us for mortgage interest there is a new wrinkle to consider and that is your other alternative for the cash has a lower hurdle to make financial sense because the mortgage interest is most likely not deductible.

I decided to read all of the posts before commenting (maybe a first for me??).
This comment is dead on, also the one regarding ACA considerations, if applicable.

Rental mortgage interest should still be deductible, even if you take the standard personal deduction, if I understand it correctly. Would it make sense to put the mortgage on the rental and pay off your home? Who knows??

Your CPA does.

I have a rental we are preparing to sell. I emailed the CPA with the details (presumed selling price and fix up costs). He presented 3-4 scenarios for what we should do, along with estimated tax consequences.

For a small cost, your CPA can help you also.

 

[SmallCityDave]

The pay-off crowd so often misses one part of the equation. Let's restate that:

Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, but missed out on investment gains, and in either case, at the end of the loan you are completely debt free.

If I read OP right, " you keep the rent money" doesn't make sense - I thought he said he had to sell the rental to pay off the home mortgage.

Yes:So strike that part you added about 'keep the rent money'.

-ERD50

You missed out on the investment risk.


Mortgage payment /rent payment for this point it's all the same and you own the home the bank doesn't.

 

[ERD50]

You missed out on the investment risk.


Mortgage payment /rent payment for this point it's all the same and you own the home the bank doesn't.

OK, instead of "Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, but missed out on investment gains, " I should have written "but missed out on the (overwhelmingly positive historic) investment opportunity".

The risk is there, but it is often grossly overstated. As I posted a few back:

Maybe someone can come up with better sources, but these show 20 and 30 year rolling average total returns for the stock market:

https://www.crestmontresearch.com/do...Yr-Returns.pdf

https://awealthofcommonsense.com/201...arket-returns/

From what I can see, only three 20 year periods dropped below 5%, and only one barely below 4% (out of 78).

Thirty year returns were all above 7.75%

Those are really good odds. You can pass on them if you wish, but history looks good. Even a worse future still has significant margin over a low rate mortgage.

I'd bet that plenty of pay-off people here will reject those numbers (100% success for 30 year history, and 98.7% success for a 20 year history and 4% mortgage) , but accept a 95%, 30 year success from FIRECalc for their WR%.

-ERD50

 

[SmallCityDave]

OK, instead of "Worst case scenario if you pay off your home you saved 4.25% over the life of the loan, but missed out on investment gains, " I should have written "but missed out on the (overwhelmingly positive historic) investment opportunity".

The risk is there, but it is often grossly overstated. As I posted a few back: Those are really good odds. You can pass on them if you wish, but history looks good. Even a worse future still has significant margin over a low rate mortgage.

I'd bet that plenty of pay-off people here will reject those numbers (100% success for 30 year history, and 98.7% success for a 20 year history and 4% mortgage) , but accept a 95%, 30 year success from FIRECalc for their WR%.

-ERD50

You seem to be forgetting that 100% of the people that were foreclosed on by banks had a mortgage. The OP is talking about buying individual stocks, is the success rate also 100% on all individual stocks over a 30 year period?



That same success rate of having a paid off home is 100% for any time frame, not 5,10,20 or 30 year period, the return may be less but it's guaranteed.



The OP can invest the money he's saving in rent/mortgage payments.

 

[Cassius King]

Agreed. Those numbers can't be argued. The 20-30 year numbers would be a sound argument if one was buying a house. It's a no-brainer to take a 20 or 30 year mortgage vs paying cash. But that's not the OP's case.
In most instances brought up on this board, it's being asked if one should pay off the remaining 7 years on their mortgage. Although it may still be financially smarter to keep the cash, statistically the returns change quite a bit over a 7 year period as compared to a 20-30 year time frame.

 

[joylesshusband]

In most instances brought up on this board, it's being asked if one should pay off the remaining 7 years on their mortgage. Although it may still be financially smarter to keep the cash, statistically the returns change quite a bit over a 7 year period as compared to a 20-30 year time frame.

You are making the quite common mistake of assuming that the investment return period matches the remaining years on the mortgage loan.
It does not.

The investment returns period to be considered is whatever the remainder of the debtor's lifespan is.
Which is longer than 20 years in most scenarios of early loan payoffs discussed on this board.

 

[youbet]

Our pension/SS/dividend income easily covers our expenses but would not have covered our mortgage payments, so we would have had to pull a little $$ from the nest egg for it, and that would have meant selling low when there was a little downward excitement

Wow.... ! Didn't realize you were such an aggressive investor Bestwifeever! If you'd have to sell low to make a mortgage payment, I guess that mans ALL your assets are tied up in equities as opposed to a diversified portfolio where there would be a menu of opportunities to come up with some cash. But in this case, I see your point of keeping your periodic cash needs as low as possible. A 100/0/0 AA pretty much calls for that strategy!

 

[pb4uski]

.... The risk is there, but it is often grossly overstated. As I posted a few back: Those are really good odds. You can pass on them if you wish, but history looks good. Even a worse future still has significant margin over a low rate mortgage.

I'd bet that plenty of pay-off people here will reject those numbers (100% success for 30 year history, and 98.7% success for a 20 year history and 4% mortgage) , but accept a 95%, 30 year success from FIRECalc for their WR%.

-ERD50

That is a good way to quantify the risk... I put in my 15 year, 3.375% mortgage in FIRECalc. Spending = 0, assets = mortgage amount, years = mortgage term, off-chart spending = fixed annual mortgage payments, AA = 60/40. Results:

FIRECalc looked at the 133 possible 15 year periods in the available data, starting with a portfolio of [100% of initial mortgage] and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 133 cycles. The lowest and highest portfolio balance at the end of your retirement was [-16% of initial mortgage] to [214% of initial mortgage], with an average at the end of [73% of initial mortgage]. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 15 years. FIRECalc found that 2 cycles failed, for a success rate of 98.5%.

I'll go all in and "bet the house" on those odds.... especially since the mortgage was ~10% of invested assets.

 

[Bestwifeever]

Wow.... ! Didn't realize you were such an aggressive investor Bestwifeever! If you'd have to sell low to make a mortgage payment, I guess that mans ALL your assets are tied up in equities as opposed to a diversified portfolio where there would be a menu of opportunities to come up with some cash. But in this case, I see your point of keeping your periodic cash needs as low as possible. A 100/0/0 AA pretty much calls for that strategy!

You know, I can see presenting one’s reasons in good faith for making a decision when someone like the OP is considering his or her own decision. I can’t see ridiculing people who present those reasons, especially considering that decision was made and acted on long ago and obviously works for DH and me. But maybe that’s just me. So I’ll stop.

Happy holidays.

 

[kgtest]

Wow.... ! Didn't realize you were such an aggressive investor Bestwifeever! A 100/0/0 AA pretty much calls for that strategy!

That's why we are at 99/0/1 AA Keep a lil to handle a 6month unemployment spell. Anything longer and we would need to get creative.
It would take both of us losing out jobs and not being employed for at least 6months before we would need to resort to 0% Credit Cards and other potentially worse and potentially interest bearing options.

With this unemployment rate, I am willing to take the 99/0/1 risk as I accumulate... only 13 long years to go.