Talked to 2 Retired Neighbors .. They didn't pay off mortgage, but both have pensions

[pb4uski]

^^^ Not sure where you are getting that "financial advisors insist mortgages should be compared to, or paid off by, fixed income investments rather than one’s equities"... I've never run across that but it is a sensible comparison because both are fixed income/fixed expense and similar financial risk.

I think the more sensible approach is to compare the mortgage interest rate to the yield of the investments that would be liquidated to pay off the mortgage. If the subject pays of the mortgage and doesn't adjust their AA, then in effect they avoid mortgage interest at the opportunity cost of the expected yield of a portfolio with that AA... and historically in most cases that has been a financially poor decision.

On the other hand, if the mortgage will be paid off with cash or fixed income investments that are earning less than the mortgage interest rate and the subject adjusts their AA to reflect it, then it likely a financially wise decision.

 

[mystang52]

Why does it matter what your neighbors do, you aren't them and no two people have the same sets of numbers.


Are you second guessing trying to pay off your house?

This is spot on. It's an individual decision. I paid off my mortgage a long time ago, because it was the right thing to do.....FOR ME. I see many people on this site that are in the keep-the-mortgage camp. That's OK by me, 'coz it's the right decision......FOR THEM.

 

[Montecfo]

That is really good and payment isn't high at all.

You read and hear all the time and strongly recommend when you retire, you should be debt free. There again ones protocol doesn't fit everyone. There are many paths, no right or wrong way to ER and beyond. It all comes down to how each manage their money.
Thanks

It's truism that made more sense when rates were much higher.

 

[Luvtoride]

This is spot on. It's an individual decision. I paid off my mortgage a long time ago, because it was the right thing to do.....FOR ME. I see many people on this site that are in the keep-the-mortgage camp. That's OK by me, 'coz it's the right decision......FOR THEM.

Mystang52, well said neighbor (I live in Fair Lawn too). I'm glad to see some homes in town are paid off! I find this topic interesting due to the strong sentiments of the PAY-IT-OFF camp. Your statement about what is right for each of us makes the most sense to me. Thanks.

 

[Montecfo]

Seems no one can really explain why some financial advisors insist mortgages should be compared to, or paid off by, fixed income investments rather than one’s equities. It makes no logical sense, so I’m happy to move on.

Well, a bit of nuance: paying down your mortgage is comparable to making a bond investment, with a coupon equal to the interest rate. If you itemize deductions, it is comparable to a taxable bond. If you don't, it's comparable to a tax-free bond.

But whether you should do it depends on the rate, taxes and the source of funds and what they are earning.

 

[CardsFan]

We paid off the house over time years ago, then downsized, paid cash, and banked the rest.

What is missing from the original post: Do the neighbors actually have the funds to pay off the loan? We here tend to have the funds, so it becomes a decision. Others, like those in OP's post, have pensions and SS. They may not have the liquid funds to pay off a loan, even if they wanted to. Or it would be such a big percentage of the liquid funds, that it doesn't make sense.

Just a thought.

 

[JDARNELL]

I have always loved a good pay-off the mortgage keep the mortgage debate over the last decade. No matter how many times this ground it plowed it seems like there is a new way to plow it. And this thread is particularly thought provoking this time. I have been in the paid off mortgage camp for many years as I always made the case that by not having a mortgage there was an "implied" benefit that I had by not having to earn an income to pay the mortgage thus more freedom early on in being an early retiree. I am now thinking my views are shifting due to

1. Being a little more senior in age
2. Having retirement income that is indexed to inflation from Uncle Sam
3. Having a 2.5% mortgage

I have the cash to pay it off and plenty of disposable income each month. The decisions I am making appears to only be impacting the size of an estate we are going to be leaving to charity. I just can't figure out which I would rather have for casual conversation a paid off house or a low mortgage rate when things begin to rise.

 

[Markola]

^^^ Not sure where you are getting that "financial advisors insist mortgages should be compared to, or paid off by, fixed income investments rather than one’s equities"... I've never run across that but it is a sensible comparison because both are fixed income/fixed expense and similar financial risk.

I think the more sensible approach is to compare the mortgage interest rate to the yield of the investments that would be liquidated to pay off the mortgage. If the subject pays of the mortgage and doesn't adjust their AA, then in effect they avoid mortgage interest at the opportunity cost of the expected yield of a portfolio with that AA... and historically in most cases that has been a financially poor decision.

On the other hand, if the mortgage will be paid off with cash or fixed income investments that are earning less than the mortgage interest rate and the subject adjusts their AA to reflect it, then it likely a financially wise decision.

That makes some theoretical sense now, so thanks. Personally, I’d want to compare not just yields but the total return of both the house appreciation and mortgage rate vs. the securities’ portfolio yield and price growth. The likely total return of both opportunities for my investment dollar over the next 30 years.

I’d be curious how many people here paid off their mortgages from bonds and then stuck with the resulting, more aggressive portfolio? I’m going to guess, not many. So if they rebalance to their original asset allocation, or never bought paper assets in the first place while they paid off their house, their paper assets don’t compound as much and lose ground but they sleep better at night, because no mortgage. I think I would feel the opposite, meaning great FOMO. Different strokes for different folks, I guess.

 

[RetiredHappy]

We took a mortgage this year on our new home after having been retired for 5 years. Mortgage payment only makes up 6.5% of our expense. It is just another expense line item where our retirement income has to cover. We don't think in terms of whether it comes from SS, annuity income, RMD withdrawal or dividends.

 

[Montecfo]

That makes some theoretical sense now, so thanks. Personally, I’d want to compare not just yields but the total return of both the house appreciation and mortgage rate vs. the securities’ portfolio yield and price growth. The likely total return of both opportunities for my investment dollar over the next 30 years.

I’d be curious how many people here paid off their mortgages from bonds and then stuck with the resulting, more aggressive portfolio? I’m going to guess, not many. So if they rebalance to their original asset allocation, or never bought paper assets in the first place while they paid off their house, their paper assets don’t compound as much and lose ground but they sleep better at night, because no mortgage. I think I would feel the opposite, meaning great FOMO. Different strokes for different folks, I guess.

Markola,

I think you raise a good question about portfolio composition.

Just to be clear, the home appreciation is not part of the calculus on keeping a mortgage or not. Home appreciation is a constant.

As you point out, the source of funds and expected return of those funds is key. But a balanced retirement portfolio could be reasonably expected to return mid single digits over time easily beating the cost of a mortgage in this environment.

Having said that, returns could be lower than historical averages the next 5-10 years given the bull run and rising interest rates.

An alternative way to think about it is to ask yourself this: Would I borrow to buy stocks in this current financial market?

If the answer is "no" then mortgage paydown/payoff may be more attractive to you.

As always, actual results may vary

 

[Koolau]

<SNIP>

An alternative way to think about it is to ask yourself this: Would I borrow to buy stocks in this current financial market?

If the answer is "no" then mortgage paydown/payoff may be more attractive to you.

As always, actual results may vary

Ah, yes. I think this is a bit what I was getting at in an earlier post. NOT paying off the mortgage so that you do not need to sell investments (aka stocks) is like borrowing to buy stocks. In effect, that's also called buying on margin or using leverage. Not "good" or "bad" but just a recognition of what we are doing with the borrowed money. YMMV

 

[Koolau]

Oh, and why would it matter where/how one borrowed the money (margin act. at the brokerage, "borrowing" your emergency fund but have a HELOC in the wings, not paying off the mortgage or even pawning the family jewels) as long as you could make more money in the market than the interest would cost you. I think the big reason for keeping the mortgage is because the rates are currently so low that it's worth the risks that stocks just might go down instead of up. If you were doing pay-day loans to purchase stock, not so much. YMMV

 

[pb4uski]

That makes some theoretical sense now, so thanks. Personally, I’d want to compare not just yields but the total return of both the house appreciation and mortgage rate vs. the securities’ portfolio yield and price growth. The likely total return of both opportunities for my investment dollar over the next 30 years.

I’d be curious how many people here paid off their mortgages from bonds and then stuck with the resulting, more aggressive portfolio? I’m going to guess, not many. So if they rebalance to their original asset allocation, or never bought paper assets in the first place while they paid off their house, their paper assets don’t compound as much and lose ground but they sleep better at night, because no mortgage. I think I would feel the opposite, meaning great FOMO. Different strokes for different folks, I guess.

House appreciation is common to both alternatives so should not be considered.. you'll get appreciation whether you have a mortgage or not. And where I said yield I meant total return, not just dividend yield.. I wasn't precise with my wording.

On the last part, I fully intended to change my AA and keep it as a result of paying off my mortgage, but then covid came along and I decided to go in capital preservation mode and totally changed things.

 

[ncbill]

Sub-3% mortgages don't impress me anymore considering one can now borrow on margin at rates not much above 1%.

 

[Koolau]

Sub-3% mortgages don't impress me anymore considering one can now borrow on margin at rates not much above 1%.

I wasn't aware of that though I'm not interested as such. I'm just surprised that more people (especially "Keep the Mortgage" folks) aren't jumping all over it. I've never done margin investing so I'm not familiar with the various potentials for "issues" (other than margin calls, of course.) YMMV

 

[gauss]

^ The potential problem with margin borrowing vs mortgage borrowing is that if the price of your home plummets, the mortgage company has no right to ask you to put up more money for collateral to avoid a forced sale of the home by the lender -- assuming you are current with your mortgage payments and have not otherwise defaulted . The mortgage company assumes the risk here and we saw the results in the mortgage crisis a decade ago. (ie many banks left holding the bag on loans that went bad).

With brokerage margin borrowing,on the other hand, if the market value of your investments that you are using in your margin account decrease significantly, you may get a "margin call" to put more money in the account or have the broker unilaterally sell your investments at a low price. This is of course more of a risk if you have maximized your margin loan relative to the value of your securities.

-gauss

 

[ERD50]

Sub-3% mortgages don't impress me anymore considering one can now borrow on margin at rates not much above 1%.

Don't you mean 1% above prime?

Either way, margin rates aren't fixed for 15, 20, or 30 years.

-ERD50

 

[Koolau]

^ The potential problem with margin borrowing vs mortgage borrowing is that if the price of your home plummets, the mortgage company has no right to ask you to put up more money for collateral to avoid a forced sale of the home by the lender -- assuming you are current with your mortgage payments and have not otherwise defaulted . The mortgage company assumes the risk here and we saw the results in the mortgage crisis a decade ago. (ie many banks left holding the bag on loans that went bad).

With brokerage margin borrowing,on the other hand, if the market value of your investments that you are using in your margin account decrease significantly, you may get a "margin call" to put more money in the account or have the broker unilaterally sell your investments at a low price. This is of course more of a risk if you have maximized your margin loan relative to the value of your securities.

-gauss

Don't you mean 1% above prime?

Either way, margin rates aren't fixed for 15, 20, or 30 years.

-ERD50

Ahhh! This puts it back in perspective for me. Thanks.

 

[daylatedollarshort]

Part of the reason we have a fixed mortgage is that most of our pension income is not indexed to inflation. The mortgage offsets that somewhat. The pensions won't go up with high inflation but then neither will the mortgage.


If there is high inflation, our TIPS, home value and Social Security should all go up. In my spreadsheet models we come out ahead with high inflation.

 

[Koolau]

Part of the reason we have a fixed mortgage is that most of our pension income is not indexed to inflation. The mortgage offsets that somewhat. The pensions won't go up with high inflation but then neither will the mortgage.


If there is high inflation, our TIPS, home value and Social Security should all go up. In my spreadsheet models we come out ahead with high inflation.

Yeah, even though money is fungible, having un-COLA'd money to pay a fixed mortgage makes sense to me. It's a kind of "hedging" I guess you could say.

 

[Markola]

Oh, and why would it matter where/how one borrowed the money (margin act. at the brokerage, "borrowing" your emergency fund but have a HELOC in the wings, not paying off the mortgage or even pawning the family jewels) as long as you could make more money in the market than the interest would cost you. I think the big reason for keeping the mortgage is because the rates are currently so low that it's worth the risks that stocks just might go down instead of up. If you were doing pay-day loans to purchase stock, not so much. YMMV

I am not the type to use debt to buy stocks, but you make a good point that I am doing exactly that by owning a mortgage. It leads to another interesting thought, too, because the mortgage makes the investment time horizon so long that one could have time over the course of 15 or 30 years of economic cycles to optimize. Maybe the way to have one’s cake and eat it, too, would be down the middle: One could pay extra on the low interest mortgage when paper asset prices seem overvalued; then, when things inevitably correct, shift that extra money to gorge on cheap paper assets for a while.

 

[ncbill]

Don't you mean 1% above prime?

Either way, margin rates aren't fixed for 15, 20, or 30 years.

-ERD50

Nope...e.g. the rates at Interactive Brokers: Margin Rates

From posts over on Bogleheads others have managed to negotiate rates close to those at IB with other brokerages...much cheaper than the posted rates.

 

[ERD50]

Nope...e.g. the rates at Interactive Brokers: Margin Rates

From posts over on Bogleheads others have managed to negotiate rates close to those at IB with other brokerages...much cheaper than the posted rates.

Wow, they show the benchmarks @ ~ 0.07%, plus their ~ 1% rate. I looked at Fidelity earlier this year, they were up around 7~8% for a margin loan. I ended up with a Line of Credit at Etrade for ~ 2.8%.

But neither is fixed, so I will be looking for a 30 year mortgage at current low rates.

-ERD50

 

[Winemaker]

We paid our 30 year mortgage off years ago; when we refinanced to a 15 year mortgage at a much lower rate, which in turn was paid off. We did have 3 mortgages on 3 rental properties, which we rolled into a new 15 year mortgage on the house. Presently, 2 rentals are left as we sold the SFH, and were mortgage free, but we can deem the interest from the remaining mortgage as a rental expense. Rental properties are charged higher interest rates because of risk to bank/lender, than mortgage on the roof over your head. Our 7.875% apartment mortgage is now 3.25% as is a duplex that was 7% and then became a floater, 1yr Treasury+2.185%. Rental cashflow covers mortgage easily, as it covered it when the rates were at 7.875 and 7%. Only 15% of the real estate portfolio is mortgaged at conservative values. Like it has been mentioned, YMMV.

 

[MC Rider]

What will you do if you have a "HELOC waiting in the wings" and the bank shuts it down? Because they can do that if they want to.