Paying off the mortgage early grows in popularity

[REWahoo]

Wow, it's been a while since we've stirred up this mosh pit!

Yep. Here's more mosh...

Boomers turn home equity into 401(k) funds: big risks and big reward

The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.

 

[Sirka]

finance 401k accounts

The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.

wow, that's crazy - I bet some of these guys are walking away from the house & loans, but the 401k is safe.

 

[sirion]

Thought I'd chime in here as I'm currently paying down our mortgage. I made the decision after careful thought. I determined that I definitely wanted it paid off before daughter heads to college. And definitely before retirement. My husband works a job he dislikes and has no good prospects for changing jobs due to a significant disability. I didn't want to have to generate income to pay the mortgage monthly if I could avoid it. I'd love to be in a position to tell him he can quit his job and we can live on my salary. Sure, I could always pull from investments to generate monthly income, but it seems like a PITA.

I determined that I would only pay down the mortgage with income after the following:
--Max out all tax deferred retirement accounts (one 401k, one SIMPLE IRA, two Roths = $38,500 this year)
--Max out state tax deduction on 529 ($5k)
--Emergency fund with six months expenses
--Sinking funds for all planned expenses, e.g., vacations, auto repair, Christmas, etc.

Our mortgage has a balance of about $151k at 3.25%. Maybe some would say we're foolish to pay it early, but it makes sense to us. I could sell some investments to pay it off, but we're not doing that. It keeps us lean, too. We live on about 38% of our income because paying off the mortgage gives us a tangible goal to work for. We expect it will be gone in three to five years. After that, I'm not sure what we'll do with the extra money when it's gone, but I'm sure we'll come up with something.

 

[Nords]

Yep. Here's more mosh...
Boomers turn home equity into 401(k) funds: big risks and big reward
The article discusses the positives and negatives of the strategy used by some boomers to finance 401k accounts with mortgage debt.

wow, that's crazy - I bet some of these guys are walking away from the house & loans, but the 401k is safe.

Interesting. Seems the researchers can't really tell directly what's happening:

The study authors say they found that taxpayers who itemize were more likely to have high mortgage debt and they also found that investing in a tax-sheltered retirement account was related to higher mortgage debt.
“The results seem to indicate that the more sophisticated households are responding to government tax incentives by borrowing against their house and investing in their 401(k),” he said.
To be sure, there’s nothing illegal here. “The government has created this incentive,” said Finke, who also noted that researchers have previously expressed wonder why even more people don’t take advantage of this arbitrage.
In 2007, for instance, Gene Amromin of the Federal Reserve Bank of Chicago and others suggested in a presentation that households were, somewhat irrationally, leaving about $1.5 billion on the table annually by prepaying their mortgage debt instead of saving in their tax-deferred accounts.

I think the researchers are going way out on a limb to suggest that smart people are intentionally mortgaging their homes to fund their 401(k)s.

Maybe it's more likely that the only people who can itemize are the ones who have huge mortgage debts-- because their jobs qualified them to borrow huge mortgage debt to buy too much home. And, coincidentally, they're funding their 401(k)s for the minimum match.

I'm so confused. Are these the same researchers who are claiming that nobody is saving for retirement, and we're all going to work until we die?

Maybe the better data would come from the people who are funding Roth IRAs just because they're saving for retirement, not for the employer match.

 

[brewer12345]

Interesting. Seems the researchers can't really tell directly what's happening:

I think the researchers are going way out on a limb to suggest that smart people are intentionally mortgaging their homes to fund their 401(k)s.

On the margin, that is exactly what I have been doing for the bulk of my adult life. Yep, I could have been directing my funds toward mortgage paydown, but instead I have been strongly incented to max out my 401k and just make the the minimum payment on the mortgage.

 

[brewer12345]

Thanks guys, for giving me a little insight into how the whole property tax/seizure thing works. Makes me feel a little better, that it's not as easy for the gov't to screw the little guy over as much as I thought!

For the record, tax sales are one way municipalities deal with delinquent real estate taxes, but they are only used in some jurisdictions. In other states, what happens if you do not pay your taxes is that the municipality or county sells the lien to an investor for cash on the barrel-head. If you don't pay up, the investor has the legal right to foreclose on the property after a set period of time. Come this Fall, I plan on investing in a few tax liens in my neck of the woods.

 

[LRDave]

I have two mortgages.

One is on my current vacation/future retirement home. DW and I are working to pay off that mortgage ASAP. Having no mortgage on what we want to believe will be our final home is integral to our ER plans

The other is on my current residence - a suburban boat anchor. (I still have fledglings...) I have enough equity in it so that I am comfortable we won't be upside down when the time comes to unload it. But I have zero interest (a pun...get it? :^) ) in acquring the rest of the equity - ever. I don't want to live there any longer than I have to.

I guess I am pre-supposing, but let me ask the question:

Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?

 

[REWahoo]

Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?

Provided I had a decent interest rate on the mortgage, I wouldn't feel much urge to pay it off early.

 

[Bestwifeever]

This article was in Sunday's paper:

Seniors wise to avoid lump-sum mortgage payoff - chicagotribune.com

A 74-year-old asks if he/she should pay off the $98K balance on the mortgage in a lump sum. The RE professional says no because that money might be needed one day but to refinance if possible. But then says at the end of his answer, regardless of refinancing:

...consider making larger monthly payments on your mortgage. This way, you have your proverbial cake and eat it also; you keep your money in your bank but start reducing the outstanding loan balance at a more rapid pace.

This seems like contrary advice--why would you do that if you follow the strategy not to pay it off so you can stay liquid?

 

[W2R]

Does one still feel as obsessive about early mortgage pay-off if one is likely to unload the asset within, say, 3-5 years?

One nice thing about having a paid off mortgage, is that if/when I move I can use the proceeds from the sale of this house to buy the next house in cash too. Basically, one paid off mortgage can mean that one need never have a mortgage again on any house. So for me, the motivation is the same regardless of "unloading the asset" (selling my home that I love), or not.

 

[Budman]

Refuse to Payoff

To pay off my home mortgage, I would have to liquidate tax deferred investments, causing a taxable distribution and corresponding tax bill at an incremental State and Federal tax rate of 39 cents on the last dollar. I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free. The emotional pain of giving up the earnings on the lost tax deferred principal far exceeds the emotional pain of the loan cost over the long term. My pretax portfolio return last year was 6.8% vs a mortgage rate of 4.11%. All things equal, this 2.7% margin is huge over 30 years in my portfolio. Consequently, I am in the "carry the loan" camp and I agree with ERD50. Do I like the debt...no, but it has become a necessary evil and I have ample fixed income with which to service it.

 

[W2R]

I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free.

(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.

 

[Budman]

(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.

Ten years ago I was debt free for about 4 years. It really wasn't that much more fun . Now I have a bigger, better house by a pond that is more fun!

 

[ripper1]

To pay off my home mortgage, I would have to liquidate tax deferred investments, causing a taxable distribution and corresponding tax bill at an incremental State and Federal tax rate of 39 cents on the last dollar. I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free. The emotional pain of giving up the earnings on the lost tax deferred principal far exceeds the emotional pain of the loan cost over the long term. My pretax portfolio return last year was 6.8% vs a mortgage rate of 4.11%. All things equal, this 2.7% margin is huge over 30 years in my portfolio. Consequently, I am in the "carry the loan" camp and I agree with ERD50. Do I like the debt...no, but it has become a necessary evil and I have ample fixed income with which to service it.

+1

 

[W2R]

I'm unwilling to reduce my investments by the amount of the mortgage payoff + the tax payoff, simply to say I'm debt free.

(emphasis mine)

No problem! You don't have put any money at all into your house in order to say you are debt free. You just have to in order to actually experience being debt free.

Ten years ago I was debt free for about 4 years.

Well good for you. Now you can SAY you are debt free without actually putting any significant money back into "your" house and while mailing off that mortgage payment on time month after month. I give you permission.

 

[Budman]

Well good for you. Now you can SAY you are debt free without actually putting any significant money back into "your" house and while mailing off that mortgage payment on time month after month. I give you permission.

Yes, and I do so knowing that I earned an annuallized 2.7% return on each payment I make! You can't say that!

 

[W2R]

Yes, and I do so knowing that I earned an annuallized 2.7% return on each payment I make! You can't say that!

Why do you think that 75% of retirees decide not to carry a mortgage? I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

 

[Budman]

Why do you think that 75% of retirees decide not to carry a mortgage? I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

So they can say they are debt free and "feel safe", while giving up a leveraged return and other qualitative benefits. I could argue this point all day long, but the real kicker is I would have to liquidate tax deferred investments which I am unwilling to do for reasons stated above.

 

[ERD50]

One nice thing about having a paid off mortgage, is that if/when I move I can use the proceeds from the sale of this house to buy the next house in cash too. Basically, one paid off mortgage can mean that one need never have a mortgage again on any house. ...

How's that math work?

Let's see, say a $200K house with a $100K mortgage and the $100K pay-off amount in your portfolio, versus a $200K house paid off (so therefore $100K less in the portfolio).

With mortgage, at closing you receive $200K minus the $100K payoff, net $100K. Add that to the $100K from the portfolio, and you can buy another $200K house with or w/o a mortgage.

Selling paid-off house, you take your $200K proceeds. It's all the same, isn't it?

Unless I overlooked something there(1), I think you should stick with the 'emotional' reasons for paying off

(1) - What if you have to pull the money out during a downturn? Well, that risk was there for the prepay money also. And if you take a mortgage on the new place, you don't have to pull any large sum anyhow (you might even take out a larger mortgage to take advantage of the relatively low value of equities!)

-ERD50

 

[REWahoo]

I would have to liquidate tax deferred investments which I am unwilling to do for reasons stated above.

But many of us didn't.

 

[Budman]

But many of us didn't.

I'm speaking point forward, not past. All of my investments are tax deferred

 

[ERD50]

Why do you think that 75% of retirees decide not to carry a mortgage?

I believe you are reading a whole lot into that number to fit your views.

Is it really a number that reflects the "% that decided not to carry a mortgage", or is the "% that do not carry a mortgage". Big difference.

Many retirees choose to rent, a mortgage is not a choice for them.

Plus, I bet that many are just inertia driven. The term of the mortgage ended, and so that was it. Few people would delve into the actual numbers to determine if another 30 year term might make sense for them.

Regardless, when did the majority doing something make it right? You and I may understand the benefits of LBYM, and not carrying a credit-card balance. So should we change our decision based on a poll? No thanks!

I think the reason is that, unlike you, most of us are not making > 4.xx% on FDIC insured savings accounts - - the only investment I can think of that even approaches the lack of risk that owning a property entails.

There is risk in owning a property whether you have full equity or partial equity with those debt $ in a portfolio. It's red herring to compare to FDIC accounts - you invest the money according to your AA.

-ERD50

 

[rayvt]

Why do you think that 75% of retirees decide not to carry a mortgage?

My (retired) neighbor doesn't have a mortgage. He paid off the new house off when their old one in Chicago finally sold.

So now they have no mortgage, but also nothing invested in, say, preferred stocks or bonds paying ca. 7.4% interest. Without the mortgage payment, they have enough to live on. Except that, so they can do more than "just get by", he got a part-time job as a janitor and she cleans houses twice a week.

 

[EvrClrx311]

I'm definitely in the ERD50 camp...

one thing I haven't seen mentioned yet in the math is inflation and the part it would pay on both sides under different circumstances (e.g. A-the high 9% numbers we saw in the 70s, or B-the steady 3% numbers we hope to always see in a healthy economy).

any thoughts?

 

[ripper1]

Mortgage or no mortgage there is always going to be carrying cost with a house that never ends. Upkeep, taxes, utilities, etc. I currently have enough to pay the house off twice but I prefer not to do that. I also have a public pension so my situation could be different from others. I just don't see the logic in paying off a mortgage on an illiquid depreciating asset. It may have been a good idea several years ago but now with these ultra low historic rates it is practically free money to me. Again, my situation can be quite different from others.