Should we pay off mortgage if it is a loss?

[Cheesehead]

I have two questions regarding the goal of paying off the mortgage. We are about two years from retiring. Does it make sense to pay off the mortgage if:

• We bought at the height of the bubble for $500K and now the value is $390K. Wouldn’t we in effect be “locking in” our loss? We are not underwater and have about $80K in equity.

• It’s not our forever home, in fact, we’d like to try other parts of the country.

So what sense would it make it pay it off if we would soon move? I feel we should only pay it off if we decide to stay in it, correct? That is a possibility and we could visit other parts of the country seasonally during our cold winters, make it a "lock & leave".

Paying it off would reduce our nest egg by about 22% and our present loan rate is at 4.8%


Thanks for your opinion.

 

[Dash man]

I don't think your decision should be based on whether you're locking in a loss or not. If you believe you can make more on your investments than you're paying n the mortgage, you should consider keeping your money invested. If you sleep better at night having the mortgage paid off as I do, then you should pay it off.

 

[Cheesehead]

Thanks. Our asset allocation is conservative and I made around 3% for the last 12 months compared to the mortgage rate of 4.8%. I would have peace of mind of not having a mortgage if we decide to stay here permanently but...

Wouldn't I be locking in the loss to pay off the house now when it is worth about $100K less than I originally purchased it? That's my logic.

 

[NgineER]

You'd be locking in your loss if you sold the house, not if you paid off the loan.

 

[NgineER]

Sold at less than you bought for.
Pay off the loan as you are earning less on your investments

 

[pb4uski]

Cheesehead, you'll find your question debated ad nauseam in threads. It depends on whether you are comfortable carrying a mortgage in retirement or not. Some people sleep much better at night without a mortgage payment hanging over their heads, others are fine with a mortgage.

No matter what, 4.8% is a bit on the high side to me. If you are comfortable carrying a mortgage then at a minimum, I would suggest refinancing to a lower rate. 15 year loans are in the low 3% range these days.

If you are less than comfortable carrying a mortgage, then pay it off and consider adjusting your AA to reflect the reduced financial risk you have.

I refied into a 15 year at 3.375% just before I retired and am quite happy with my decision so far since over the same period my investments have returned about 11% annually since I took out the mortgage so I am quite ahead of the game at this point.

 

[soupcxan]

If you are not underwater (have positive equity) then you are already on the hook for the loss if you were to sell, as you would lose that equity if you tried to hand the house back to the bank. So paying down the mortgage further is not locking in the loss.

 

[Dash man]

Thanks. Our asset allocation is conservative and I made around 3% for the last 12 months compared to the mortgage rate of 4.8%. I would have peace of mind of not having a mortgage if we decide to stay here permanently but...

Wouldn't I be locking in the loss to pay off the house now when it is worth about $100K less than I originally purchased it? That's my logic.

A loss is not realized until a property is sold. The home is worth what it is and may or may not change in value by the time you choose to sell the home. The emotional decision of not wanting to take a loss may cloud your ability to make smart financial decisions for your future. I suggest you drop that thought.
The mortgage has nothing on do with that. The decision on whether to pay off the mortgage should strictly be a financial decision while considering your expected returns on the money if invested versus the interest you pay on the mortgage and the associated tax benefits.

 

[Cheesehead]

Thanks everyone for your advice. Other factors I don't know if you have to concern yourselves with is we are in one of the country's highest real estate taxes county ($1100 a month) and home owners association fees of $370 a month, so that factors in.

We are too conservative investors to make much more than 5-6% a year I believe after having lost 50% during the crash.

We have looked into refinancing but were rejected due to "not having enough equity". Perhaps we'll try again as the value slowly creeps up.

 

[davismills]

You've been given great advice, Cheesehead. In hindsight I probably should not have paid off my home early, but every morning I touch a different wall in my house and say to myself....This baby is ALL mine.

 

[Dash man]

We have looked into refinancing but were rejected due to "not having enough equity". Perhaps we'll try again as the value slowly creeps up.

If you have the funds to pay down the mortgage, you'd shorten the years left to pay and pay less interest overall. The higher equity would also allow you to refinance should you still desire to do so.

 

[Senator]

Paying off a mortgage is like putting money in at a fixed rate of 4.8%, until you sell. Are you getting a higher investment return than that?

Here is the analysis that I went though when I paid off my mortgage on a rental property, at 5.5%.

 

[NgineER]

Cheesehead,
What would you prefer? A guaranteed return of 4.5% on your money, or maybe 5 to 6% return on your investments?

 

[pb4uski]

....We have looked into refinancing but were rejected due to "not having enough equity". Perhaps we'll try again as the value slowly creeps up.

But if you have funds to pay down the mortgage you can refinance by just paying the difference (aka a cash-in refinancing). Based on the numbers you provided it appears that your home's value is $390k and your mortgage is $310k, so you're just short of 20% equity which should be sufficient for most mortgages. But let's say for discussion purposes you need 25% down and the appraisal came in at $375k. Then your mortgage could be $280k and you would have to come up with the $30k difference when the lower rate loan is closed. This is called a cash-in refinancing because the borrower puts cash into the property when refinancing (rather than taking cash out, which is more common).

If you did this you would have more equity, a lower mortgage, a lower nestegg and a much lower mortgage interest rate.

 

[Cheesehead]

Thanks all! You are better number crunchers than I. Yes the mortgage is $313K. I will look into this but need to do it without using tax protected retirement funds.

 

[38Chevy454]

All I can say is $1100/mo prop taxes and then another $370/mo HOA fees is very high! That seems like a lot of monthly expense that has to come off the top before you have extra to pay down mortgage or other savings. Since youa re close tot he 20% equity req't for refi, putting alittle bit of cash in and getting a 15 year mortgage may save you some decent money, even if you sell in couple years. Any money you put in will come back when you sell, assuming the house value stays at aor above current level. 4.8% is higher than current rates, esp compared to 15 year rates.

BTW, while your 401k "value" may have dropped in 2008-2009 crash, if you would have stayed the course it would have recovered and you would be at more than 100%. By selling and going to conservative investments you did lock-in the loss to some extent. Not trying to beat you up, just pointing out that you have missed out on some of the recovery.

 

[bad_LNIP]

I'll be the oddball out here and say you should probably sell and rent if nothing else. You shouldn't pay off your mortgage, especially if it is going to take nearly a quarter of your nest egg AND it is going to result in a guaranteed 15-20k loss every year AND you aren't even going to live in the house for a good portion of the year.

You can't just look at the interest savings and decide it is a good deal and it isn't as simple as "making" 4.8% or whatever your interest rate is. Over 5 years, you save 4.8% annually, but lose 30% of the 300k in taxes, maint, HOA, insurance, utilities, etc. Those are real avoidable costs and maybe you make up the difference in capital appreciation, maybe you don't.

Leaving a house for months on end vacant is just inviting squatters, vandals, animals, black mold from a roof leak, pipes bursting and all sorts of other bad things that can happen, and for what? Is there some compelling reason keeping you in the area or in the house? If you must come back, why not rent a nice place or executive apartment for say 1k/month for 6-9 months?

Have you looked at renting or selling it?

OP you would be better off in 5 years randomly picking 4-5 closed end funds yielding 5-6% which is easy to find or buying a NNN lease property with a corp guarantee than flushing 300k. At least with a NNN property, you actually get PAID every month, as opposed to getting a tax bill every year. 300k would easily get a 1M property and have a NOI of 60-80k or so annually. To do that, though you need to learn a lot more about investing and managing money. Ever think of a community college course on corp finance? This is one easy discounted cash flow analysis with a majorly negative NPV.

 

[ivinsfan]

I'd probably sell that house just to get rid of the taxes and HOA fees. HOA's seldom go down and can be a big stumbling block when trying to sell.

I would either buy a smaller home or rent one. Keeping in mind a smaller home will also be at a distressed price level ie, selling for less then it would have in bubble times. I'd unload that house you are in before interest rates start to rise. 1500 dollars in out of pocket costs before mortgage will deter a lot of buyers if rates start to go up.Don't put spare cash into this if you really want to retire or downsize or move. Based on the numbers you gave you would not need to take a check to closing so that's about the best you can hope for.
House payment + 1500 a month+plus utility costs is a big annual expense going into retirement....and depleting your nest egg might not be in your best interest.

 

[sheehs1]

But if you have funds to pay down the mortgage you can refinance by just paying the difference (aka a cash-in refinancing). Based on the numbers you provided it appears that your home's value is $390k and your mortgage is $310k, so you're just short of 20% equity which should be sufficient for most mortgages. But let's say for discussion purposes you need 25% down and the appraisal came in at $375k. Then your mortgage could be $280k and you would have to come up with the $30k difference when the lower rate loan is closed. This is called a cash-in refinancing because the borrower puts cash into the property when refinancing (rather than taking cash out, which is more common).

If you did this you would have more equity, a lower mortgage, a lower nestegg and a much lower mortgage interest rate.

Until you decide if you are staying or going, at least try this method for a refinance. Until you decide, and if you refinance to a lower rate, I personally would not pay it off. You don't know how long it may stay on the market with your money tied up should you pay it off. At presumably the lower rate, you stand a better chance of making more on your investments. You always have the option of paying it off at a later date, should you decide to do so.

That said, consider looking at things projected out each year for perhaps the next 5 years. In 5 years you will have paid $88,200 for just the property taxes and HOA fee. In 6 years it will exceed $100,000. And you get little or nothing for that money! Total everything looking at both scenarios, staying versus selling now, factoring in the caring cost of "your new place". (will it be similar?).
And don't forget to include tax advantages, disadvantages in the analysis as well as real estate fees. Money is money.

Numbers usually tell me what the right decision is.

 

[catman2020]

I'd probably sell that house just to get rid of the taxes and HOA fees. HOA's seldom go down and can be a big stumbling block when trying to sell.

I would either buy a smaller home or rent one. Keeping in mind a smaller home will also be at a distressed price level ie, selling for less then it would have in bubble times. I'd unload that house you are in before interest rates start to rise. 1500 dollars in out of pocket costs before mortgage will deter a lot of buyers if rates start to go up.Don't put spare cash into this if you really want to retire or downsize or move. Based on the numbers you gave you would not need to take a check to closing so that's about the best you can hope for.
House payment + 1500 a month+plus utility costs is a big annual expense going into retirement....and depleting your nest egg might not be in your best interest.

I would second this point - You're obviously doing great, if you are within two years of retiring, but seems as though you have a lot tied up in housing costs - especially if you are planning to leave it empty for a large part of the year.

We downsized recently - we are actually more comfortable in a smaller place with less house to look after. We decided to go without a mortgage when we downsized, and feel great about that - don't consider home equity as part of our net worth - don't think about it all really.

BTW, We do a lot of renting through sites like VRBO.COM where you can rent fully furnished private homes - you might be amazed at what you can rent on a short term weekly/monthly basis and then just 'toss the owners the keys' when you are done and not have to deal the hassles of multiple home ownership.

 

[Flazo]

Just because your house is less doesn't mean you don't owe the balance of your mortgage. I too got caught up in this mess, bought house for 618,000 and now only worth 480,000. I paid off the mortgage for peace of mind and not paying the interest every month. I still have to pay 1200.00 a month for Taxes and Ins though. Get me out of NJ as quick as possible......Crazy to live here with taxes going up every year....

 

[Cheesehead]

OP here- Thanks again everyone.

38Chevy454: Although we lost 40% of the nest egg during The Crash I held on and did not sell and lock in a loss, however, it took about 5 years for it to come back to the value it was. It has taught us to be more conservative and not trust Wall Street. We are now 27% Total Market Index and 10% International Index and that's all we have the stomach for at 57 & 61 years old.

Reading this great advice I am leaning towards refinancing then moving when we finally retire to a place with less taxes. The taxes are high due to the school district's improvements.

As to the HOA fee, this is our 4th house and I feel that since the fee covers: Landscaping, Garbage & Recycling, Snow Removal, All Painting , Staining and Deck Repair, a New Roof (if necessary), Gutter Cleaning, Asphalt and Replace the Driveway, Below Ground Sprinklering, Cleaning the Gutters...the fee is probably just a little more than if I had a single family home and had to pay for these services separately. Plus I'd have to buy all the stuff I sold: lawn mower, snow blower, etc. plus we now have our weekends to ourselves starting at 5PM on Friday. It is an upscale neighborhood on a golf course.

But I do want to protect the nest egg.

 

[ivinsfan]

OP here- Thanks again everyone.

38Chevy454: Although we lost 40% of the nest egg during The Crash I held on and did not sell and lock in a loss, however, it took about 5 years for it to come back to the value it was. It has taught us to be more conservative and not trust Wall Street. We are now 27% Total Market Index and 10% International Index and that's all we have the stomach for at 57 & 61 years old.

Reading this great advice I am leaning towards refinancing then moving when we finally retire to a place with less taxes. The taxes are high due to the school district's improvements.

As to the HOA fee, this is our 4th house and I feel that since the fee covers: Landscaping, Garbage & Recycling, Snow Removal, All Painting , Staining and Deck Repair, a New Roof (if necessary), Gutter Cleaning, Asphalt and Replace the Driveway, Below Ground Sprinklering, Cleaning the Gutters...the fee is probably just a little more than if I had a single family home and had to pay for these services separately. Plus I'd have to buy all the stuff I sold: lawn mower, snow blower, etc. plus we now have our weekends to ourselves starting at 5PM on Friday. It is an upscale neighborhood on a golf course.

But I do want to protect the nest egg.

Again on the HOA, it's supposed to cover all those costs that's why the number is so high. In reality it can turn out very differently, assessments and rising HOA fees are a fact of life in today's world. Just pointing out that any buyer will see it as a monthly expense. Do you have kids still in school? You don't say anything about expense control in retirement, so maybe it's not an issue for you. This house will chew up a lot of cash for a long time.

 

[pb4uski]

...Reading this great advice I am leaning towards refinancing then moving when we finally retire to a place with less taxes. ....

Since you're only two years away, before you proceed you should crunch the numbers but I suspect you'll be saving about $4k a year or perhaps a bit more. Just be careful that you will be there long enough for the savings to exceed your refinancing costs.

+1 on moving to a place with less taxes - $1,100 a month is outrageous.

 

[Walt34]

I still have to pay 1200.00 a month for Taxes and Ins though. Get me out of NJ as quick as possible......Crazy to live here with taxes going up every year....

Yeow! That's only a little less than we pay in a year!