Why Pay off the mortgage?

[RetireeRobert]

Quote:

Originally Posted by ziggy29 Paying down the principal on a 6% mortgage is financially no different than putting that money into a sure-thing 6% investment for the remaining duration of the loan. If you don't itemize, that's like a sure-thing tax free 6% return. If someone could point me to a tax-free, ultra-safe 6% investment, I'd love to hear about it.

OK. Give me a little time.

[cute fuzzy bunny]

Paying off my mortgage actually reduced my taxes. By itemizing deductions (and there were plenty) I managed to eke out a decent gain against the standard deduction and if I had a large non-discretionary income source (like a j-o-b) that'd be good. By eliminating the mortgage, the associated withdrawals taxed at 15%+, and reducing my tax profile I paid zero taxes for 3 years and almost nothing the past two. My capital gains rate also fell from 15% to 5%.

[ERD50]

Quote:

Originally Posted by youbet This sounds like emotional driven decision making to me. You "hate" to see your investment account balance go down by the amount of your mortgage principal?? What do the numbers say? Why are you letting feelings like this influence your decision?

Yes, I intentionally put that in there as a counter to show that there are two sides to the 'emotional' component also - just a different POV.

In the end, I WON'T let that drive my decision, just the numbers. One thing I do need to check, it might not be significant, but if I withdraw to pay off the mortgage, it might take the account below a level to get the better commissions and service from my broker. That's probably extremely small potatoes, though.

Since my mortgage is a direct withdraw from my account, I wouldn't even get the satisfaction of simplifying my life with one less payment to make!

-ERD50

[youbet]

ERD50.......

When you have a moment, open a delicious cold one, sit back and contemplate all the areas in financial matters where emotions frequently come into play..........

There are folks who:

can't live with high levels of volatility in their portfolios

can't keep from tinkering with their portfolios

stay with jobs they hate because they can't tolerate the risk of leaving

keep wanting to "double down" when they experience a loss

feel comforted by insurance/annuity salespersons and their pitches

need a large gambling component (penny stocks, etc) in their portfolios

can't stop spending

can't stop saving

and on and on and on.......

And, yep, some folks get off emotionally on eliminating indebtedness, even if the financial impact of doing so is inconsequential. It just feels good.

Don't worry about it. Compared to areas in one's financial life where emotions can really, really screw things up, feeling good about paying off the mortgage isn't a big hitter!

[ERD50]

Quote:

Originally Posted by youbet ERD50....... When you have a moment, open a delicious cold one, sit back and contemplate all the areas in financial matters where emotions frequently come into play..........

Well, if you insist.... pop-fizzz-glug,glug,glug-fizzzz.....sip-sip-sip....mmmm, burp - mmmm - good idea!

Quote:

Don't worry about it. Compared to areas in one's financial life where emotions can really, really screw things up, feeling good about paying off the mortgage isn't a big hitter!

Of course you are correct.

In all those cases, I still think it is best to recognize it for what it is. Someone may still want to follow the emotional draw over the numbers, fine.

I guess another reason, in the back of mind, for going on about this is - there are probably quite a few 'lurkers' out there. I have been reading forums long before I ever posted. When I see all these posts congratulating people on moving money to pay off their mortgage, it makes it sound like it was some great financial move.

So, are lurkers going to think - 'wow, this is the key to FIRE, pay off that mortgage! Look how excited these FIREd people get about this!'? When, in reality it probably has little to do with whether you get to FIRE-land or not. So those pre-FIRE'd people should probably be putting their energy elsewhere (as should I!).

I guess there is just something in my nature that drives me to want to try to expose things for what they are. At that point, people will do what they will do. I just feel better if they at least got the whole story.

-ERD50

[ERD50]

Quote:

Originally Posted by cute fuzzy bunny Paying off my mortgage actually reduced my taxes. By itemizing deductions (and there were plenty) I managed to eke out a decent gain against the standard deduction and if I had a large non-discretionary income source (like a j-o-b) that'd be good. By eliminating the mortgage, the associated withdrawals taxed at 15%+, and reducing my tax profile I paid zero taxes for 3 years and almost nothing the past two. My capital gains rate also fell from 15% to 5%.

Interesting point. It really goes to show that the financial part of the decision is very specific to the individual situation.

My crystal ball is telling me that when I actually get my rate increase, the difference between pay off or no pay off isn't going to be worth the paper/ink it takes to print the spreadsheet. Doing nothing is probably going to be my fall back - it's easiest.

But, we will see.

-ERD50

[aenlighten]

'No free lunch and no increased safe withdrawal rate.'

Yes, it is increased over the rate to support constant real withdrawals which is what 4% provides, and it is increased due to the limited term of the mortgage assuming it is fixed and limited, ie, not variable or interest only. Mortgage payments do not increase in real terms in this case, while withdrawals to support spending do.

Differences in survival rate can change the acceptable rate significantly.

In my case, rates were high, and taxes would also have been higher if I did not pay it off.

[ziggy29]

Quote:

Originally Posted by aenlighten Yes, it is increased over the rate to support constant real withdrawals which is what 4% provides, and it is increased due to the limited term of the mortgage assuming it is fixed and limited, ie, not variable or interest only. Mortgage payments do not increase in real terms in this case, while withdrawals to support spending do.

Offset by the fact that having a mortgage reduces your ability to fund your retirement in the future, AND if you retire while you still have a mortgage, it requires you to withdraw a larger percentage of your portfolio to live from.

The only real financial difference comes if you can invest the money that would otherwise go to paying down the mortgage, on an after-tax basis, at a better rate of return than the mortgage itself. For many people investing semi-aggressively on a long-term basis that's likely, but again, we all value the peace of mind of being debt-free a little differently.

[Nords]

Quote:

Originally Posted by ERD50 When I see all these posts congratulating people on moving money to pay off their mortgage, it makes it sound like it was some great financial move. So, are lurkers going to think - 'wow, this is the key to FIRE, pay off that mortgage! Look how excited these FIREd people get about this!'? When, in reality it probably has little to do with whether you get to FIRE-land or not. So those pre-FIRE'd people should probably be putting their energy elsewhere (as should I!). I guess there is just something in my nature that drives me to want to try to expose things for what they are. At that point, people will do what they will do. I just feel better if they at least got the whole story.

That's one of the reasons for the FAQ archive. (Well, that and getting tired of having to keep looking up the same threads every month or two.) If the new lurkers aren't reading the "Best of" and the FAQs then there's not much else we can do to help.

"Interesting" thought... we wouldn't be having this conversation if interest rates hadn't dipped to a 40-year low a few years back. Maybe this really was a twice-in-a-lifetime opportunity.

[cute fuzzy bunny]

Quote:

Originally Posted by aenlighten 'No free lunch and no increased safe withdrawal rate.' Yes, it is increased over the rate to support constant real withdrawals which is what 4% provides, and it is increased due to the limited term of the mortgage assuming it is fixed and limited, ie, not variable or interest only. Mortgage payments do not increase in real terms in this case, while withdrawals to support spending do. Differences in survival rate can change the acceptable rate significantly.

Sigh. This is simple math. If inflation is 5% per year, your mortgage payment becomes 5% cheaper due to the devaluation of the cash the bank has used to fund your loan. And your portfolio loses 5% of its real value at the very same time, making the inflation argument a neutral option. This is not "free money" that is appearing. The 4% SWR assumes an adjustment with inflation to maintain the 4% over time, but that calculation is factored in and requires that a higher rate of return and its associated investment risk are incorporated. You dont get to benefit from both, but rather benefit from one while suffering equally by the other.

As far as the rest, i'm gonna call bullshit. Anyone who claims to operate "solely by the numbers" can check back in again in the 7th year of a bear market and tell me how cool your cucumber is.

[aenlighten]

You are initially withdrawing at a higher rate (bad for portfolio survival), but a slightly higher rate can be justified (good for portfolio survival), simply on the basis of historical record. The very same calculations that establish 4%. Since your real mortgage payment decreases with inflation, the effective term of your mortgage is shortening. Do you doubt you can withdraw at a slightly higher rate over a shorter term? Do you doubt you should lower your rate to survive over a longer term? The point is not to pay a higher rate than can be justified. For 100% survival over 30 years, that rate is only 4.68%. for 20 years 5.44%, and for 10 years 8.92%. This means 10 years left on a mortgage is probably reasonable, but 30 years left means are accepting less than 100% portfolio survival. I don't call that gaining from both sides. I call that seeing the risk and making a decision about it.

[cute fuzzy bunny]

Okay then, good luck with that.

[aenlighten]

Then 4% would reasonably apply since you would not want to have to pay more than you could safely earn. Inflation would not help since your term is unlimited. Since such loans are not available, mortgages would be an acceptance of higher risk for potentially higher return. The weakness is the data since inflation is really a late 20th century phenomena. One would not have wanted a mortgage going into the depression, but one would very much wanted one in a time of rising inflation. In many ways, this is as much an asset allocation and timing issue as a debt issue.

[rayvt]

I'm in agreement with the people who say that no "Congratulations onthe successful transfer of some of your assets from your brokerage account to a single-property REIT investment" are in order.

The comfort factor for me (and more importantly--my wife) is the knowledge that I can pay off the mortgage any time I want to, with just one phone call to my stockbroker. That's a better warm&fuzzy feeling than merely paying off the mortgage.

As far as "Now the house can never be taken away from me"---that is simply not true. See what happens if you forget to pay your real-estate tax bill."

[maddythebeagle]

hey....at least we are keeping it all neatly in one thread...

[RetireeRobert]

Quote:

Originally Posted by ziggy29 Paying down the principal on a 6% mortgage is financially no different than putting that money into a sure-thing 6% investment for the remaining duration of the loan. If you don't itemize, that's like a sure-thing tax free 6% return. If someone could point me to a tax-free, ultra-safe 6% investment, I'd love to hear about it.

NQI - Nuveen Insured Quality Municipal Fund gets you 5.3% in AAA rated portfolio of muni bonds which is also separately insured by a third party as to payments of principal and interest.

[haha]

For me it all depends on rates. I have a free and clear house. I will sell it and live in an apartment for at least the time being. But if I were to buy a dwelling, I would likely get a big loan as long as the rates weren't bad, even if I had to accept a negative delta re: the after tax return on a risk free investment. I would do this because it would still be cheap money that I could always pay if I wanted to but also could use if I wanted to, to invest in perceived high probability high potential return assets.

An American 30 year fixed mortgage is practically a gift from God.

I think a young person with a secure job should almost always take a nice big loan. Inflation is the debtor's friend. Whatever else government officials say is just head-fake.

Ha

[ERD50]

Quote:

Originally Posted by RetireeRobert NQI - Nuveen Insured Quality Municipal Fund gets you 5.3% in AAA rated portfolio of muni bonds which is also separately insured by a third party as to payments of principal and interest.

Seems to me the discussion usually goes that paying off the mortgage is risk-free, so any alternate investment made with that money (if not paying off the mortgage) needs to be risk-free also.

OK, that makes a good apples-apples comparison, and if one feels that way, it is fine, but is it necessary? How 'safe' does an alternate investment need to be? It seems to me that if the investor is comfortable with some risk, and understands it - fine, then they should consider that in their decision.

I guess if one really believes that one should not consider an investment with some risk in exchange for a mortgage, than they would need to say that no one should have a single penny invested in anything (other than emergency fund cash) until their mortgage is paid off. But I don't think too many feel that way. Or do they?

But it is not apples-apples, not trying to say it is, it does change your risk profile, but maybe it is a reasonable viewpoint?

-ERD50

[aenlighten]

not only the investment you might make with the borrowing, but the income to pay it off. If you have a fixed pension that is declining in value each day, then a holding mortgage to offset it, would actually represent a lower risk option. The greater the annuity and pension income one has, the more attractive a mortgage would be, while without anything other than equities to pay for it, the less attractive even though they potentially offer a higher return. Return and volatility of the income source as well as rates and term of the loan and the size of it relative to other assets are important.

[ShokWaveRider]

OK., PLEASE Help me out here. In this for instance does it pay to have a Mortgage?

Hypothetical Scenario:

DW & DH have income from various sources in "Semi-Retirement" (He is she isn't), for the sake of this example all income sources are considered full income, not dividends etc.

Total Taxable Income: $14,000 per Month ($168k)


Write offs (Per Month) from business/hobbies that they like doing (not working for the man)

Car: $700
176: $800
RE Tax: $850
% of Home Expenses: $500
Insurance: $250

Mortgage: $1055 (Interest only)

Total W/O mortgage is $36,600 With mortgage is $49,250.

Is this not better to get one into a lower tax bracket thus making it more worth while as without the mortgage it may just be $26k or so itemized?

Add to this that money is cheap now 6%, when interest soars to combat inflation and other stupid government financial blunders, in future when interest rates are 12% as opposed to 6%, does this now sound like a good deal?

SWR