ba-bye house payment

[cute fuzzy bunny]

Easy.

Few retirements succeed because someone arbed a point of gain from a few hundred thousand bucks.

But a lot of them fail because people had to dump their investments in a down market to make the mortgage payment.

A zero debt investor can invest more aggressively as volatility is fairly irrelevant. A zero debt investor can almost forget about large, low returning bond holdings because they dont need the steady income or volatility reduction. A zero debt investor can reduce their budget to ridiculously low levels vs a debt loaded one.

And you can live in the investment as long as you like. That 'liquidity' has no intrinsic value.

In short, someone arbing their mortgage is taking on a certain level of risk. By eliminating that risk, a investor can take on other, more controllable risks that net as much or more financially.

Although its also possible for a zero debt investor to take on LESS risk if they choose, as they dont have to keep producing the mortgage check every month, they can get by with a lower return, lower volatility, lower risk strategy.

The emotional component of not having your primary residence 'at risk' to investment variances is just a bonus baby.

For working accumulators, you oughta have a mortgage. For people able to get sub 5% loans, you oughta consider keeping it. If you're already a 100% equity investor and feel comfortable with a high level of risk, maybe you've got a pension or other income source that can comfortably pay the mortgage...keep it.

Otherwise holding a mortgage for an ER seems to be a series of creating problems and then trying to solve them.

 

[Sam]

I know there is an emotional side to this debate for many, but I just don't get it.

How does moving money from one investment to another get you any closer to FI?

I agree. Especially when considering moving money from one HIGH yield investment to a LOWER yield investment.

But the intangile emotional factor is so powerful that the negative turns positive, at least in one's mind.

 

[Calgary_Girl]

Congratulations! We paid ours off in 2001 but for us it was a "no-brainer" since the mortgage interest is not tax deductible in Canada.

 

[dm]

Paid mine off in 2005 and don't regret it. I've got 9 more weeks of being a wage slave and then I'm free. Being free of the mortgage payment means I dont have to withdraw as much to make ends meet. The value of my home is only around 10% to 15% of my net worth anyway. I may still downsize in the future, but no more mortgages for me.

 

[honobob]

Few retirements succeed because someone arbed a point of gain from a few hundred thousand bucks.

But a lot of them fail because people had to dump their investments in a down market to make the mortgage payment.


Otherwise holding a mortgage for an ER seems to be a series of creating problems and then trying to solve them.

This would also be the strong argument against renting in retirement.

 

[cute fuzzy bunny]

Pretty much, but it'd depend on where you owned/rented. I guess comparing owning one of those $190k homes that hasnt appreciated in 20 years would be a bad decision, but renting an apartment for $200 a month in thailand wouldnt be so bad.

Its pretty tough to pull a reverse mortgage out of your apartment as an emergency 'save' if your retirement gets screwed up later in life.

 

[bow-tie]

I know there is an emotional side to this debate for many, but I just don't get it.

How does moving money from one investment to another get you any closer to FI?

If you hit a bad stretch, you can pay the mortgage and your grocery bill from the money in your account. If you pay off the mortgage, no mortgage payment, but you can't eat your house.

Personally, I feel better with the money in a liquid account. Hey, if it makes you feel better, fine. I'm just not so certain you should be counting this as moving you closer to FI.

-ERD50 ( with a mort fixed at 5% for 5 years - then we will see)

I think we're doing well in maxing out our savings to hit FI. Even with our mortgage, we managed to save some decent coin. Granted, keeping the mortgage and increasing the savings makes sense, but we struck a balance with the longer-term savings and working to axe the house pmt. It may work only in my mind, but that's the one that counts. We were also getting to the point where we were not going to be able to itemize anymore. So the mortgage interest wasn't tax deductible.

I'm trying to balance the emotional lift of being complete debt free and the true rational-numbers-driven arbitrage of keeping the mortgage and maximizing the savings. I like the results.

 

[Rambler]

Good on ya mate...paid off the mortgage 12 years ago. Still have that house, built another without a mortgage. Don't owe anything to anyone, except this months credit card charges. I know that in many cases it does not make the most financia sense, but makes a lot of emotional sense, and sure does help to keep insomnia at bay...
R

 

[Rich_by_the_Bay]

Way to go. Paid mine off last year and never looked back. You sound like the type to take the former monthly payments and invest them, so you are good to go.

The numbers are what they are and favor payoff for some and not for others. But the nonfinancial incentives are strong, as noted above. Not to mention that when you sell, the proceeds are all yours. Feels good.

I'd stress CFB's point - if things take a bad turn in your financial life unexpectedly, even a HELOC can turn into a serious burden. Dipping in to your newly enhanced personal savings (plumped up by redirecting your old mortgage payments) is hard enough but at least you won't have the bank's piece to fret about.

 

[deserat]

Yes - weighing the emotional versus other aspects of the decision are personal issues for most - I side on the the 'no mortgage' side, primarily because for the most part, paying for the roof over your head is the largest expense in your lifestyle - if you can minimize that, your overall capital needs for an ER lifestyle go down. With that in mind, I re-fi'd two years to a 10 year fixed and pre-pay more principal every month. I want to be in the position to where I could sell my house and go buy somewhere else less expensive for cash (I live in northern Calif).

Bow-tie, congratulations - that is indeed a great achievement to me. The savings will now really pile-up and ER will come that much sooner....

 

[clifp]

While I currently have a mortgage, (4.875% was to good to pass up.) One of my happiest financial moments was paying off my mortgage in my mid 30s. At this point I knew that I was well on the way of become FIRE.

Congratulations!!

 

[ERD50]

I side on the the 'no mortgage' side, primarily because for the most part, paying for the roof over your head is the largest expense in your lifestyle - if you can minimize that, your overall capital needs for an ER lifestyle go down.

The problem I have with that statement is that it ignores the other side of the equation. Yes, your capital 'needs' went down, but your capital went down too - to pay off the mortgage.

Robbing Peter to pay Paul?

-ERD50

 

[JustCurious]

Congratulations! We paid ours off in 2001 but for us it was a "no-brainer" since the mortgage interest is not tax deductible in Canada.

I live in the U.S., and my mortgage interest is not tax deductible either. And I'm not alone.

 

[Calgary_Girl]

I live in the U.S., and my mortgage interest is not tax deductible either. And I'm not alone.

Really? Are there some cases where it's not deductible?

 

[Sarah in SC]

Mine isn't deductible either, only because I can't use itemized deductions--no kids, tiny mortgage, low taxes, etc. Been on the standard deduction for a couple of years. Congrats--I hope to be joining you in just a few short weeks, Bow-Tie!

Sarah

 

[SecondCor521]

Really? Are there some cases where it's not deductible?

There are, but for the typical American, the most likely explanation is that the total of their itemized deductions -- including their mortgage interest -- falls below the standard deduction.

2Cor521

 

[Sam]

There are, but for the typical American, the most likely explanation is that the total of their itemized deductions -- including their mortgage interest -- falls below the standard deduction.
2Cor521

That would be me, the typical American. In the 20 years of home ownership, I was eligible to itemize for 2 years, but chose not too, because the saving was less $20.

 

[videogawd]

Those of you who just paid off their houses, can you mention the figures as well?
Im in the market for a house right now and Im 30 years old, but i am very unlikely to be able to pay off a $800k house(which is a median price for a 3-bd single family in my hood, the Bay Area(peninsula part) in 10 or so years.

 

[cute fuzzy bunny]

A bay area ER is going to be a tough one. Pretty spendy.

I moved to Excramento from santa clara. You can get the same house up here for half price.

But you'll have to spend a little of your savings on some air conditioning...

 

[W2R]

Those of you who just paid off their houses, can you mention the figures as well?
Im in the market for a house right now and Im 30 years old, but i am very unlikely to be able to pay off a $800k house(which is a median price for a 3-bd single family in my hood, the Bay Area(peninsula part) in 10 or so years.

That would be pretty tough to pay off.

I bought a $160K house ($32K down) in 2002 and paid it off in 4 years. It is now worth $200K. I could sell it, and since I am earning more now, I could put $200K down and buy a $435K house and pay that off in another 4 years and so on. I don't want anything more than what I have, though, since I live alone and this house is very nice for me. When I bought it, I could afford more but really didn't need to spend more to get what I wanted.

Moving up to a more expensive home more than once doesn't sound like much fun. Who wants to move every 4 years. Besides, you probably couldn't get much at all for $200K where you live. Guess that is a big problem that you take on when you decide to live there.

 

[Sarah in SC]

Mine started with a mortgage of only $60k, but we also used the proceeds from the sale of the beach house to buy the 4 acres of property and for about 1/2 of the building costs. I was the GC on the project, so we had some major savings there. Total investment in the house is $244, it is worth $475k-$500k now, according to our realtor (waterfront).

 

[cho oyu]

Moving up to a more expensive home more than once doesn't sound like much fun. Who wants to move every 4 years. Besides, you probably couldn't get much at all for $200K where you live. Guess that is a big problem that you take on when you decide to live there.

In most of the bay area, $400k might get you into a two bedroom condo/townhouse. Add in another $300+ for HOA, and you have the equivalent of at least another $50k in housing cost.

Fortunately, rental costs are often less than 50% of purchase costs for the same property.

Even with two professional salaries, the cost of housing can make a severe impact on the ability to save or ER. Although there are some people who are still purchasing at these extraordinarily high prices (and with higher interest rates!), I think many are finally realizing that dumping a majority of post-tax income has deleterious effects on peace of mind and lifestyle.

 

[bow-tie]

Mine started with a mortgage of only $60k, but we also used the proceeds from the sale of the beach house to buy the 4 acres of property and for about 1/2 of the building costs. I was the GC on the project, so we had some major savings there. Total investment in the house is $244, it is worth $475k-$500k now, according to our realtor (waterfront).

Now THAT sounds ideal.

 

[JustCurious]

Really? Are there some cases where it's not deductible?

Yes. In fact, it is quite common. Mortgage interest is only deductible if you itemize your deductions. If you take the standard deduction, then your mortgage interest is below your standard deduction and is therefore not deductible. And since most Americans take the standard deduction...

Tax Tip: Choose best deduction method for your tax situation

then it is quite common indeed. Also, even for those people who itemize, the mortgage interest is only beneficial to the extent that the total itemized deductions exceed the standard deduction.

Of course, you will not hear these facts from the lending industry. The media simply repeat over and over again that "mortgage interest is tax deductible" to the point where most people just assume it to be true without understanding the true facts.

P.S. The total of my itemized deductions (including mortgage interest) is less than my standard deduction, so I get no tax benefit or deduction for my mortgage interest.

 

[cute fuzzy bunny]

One of the hiccups in the great mortgage debate.

Most forget that an early retiree has to create income by withdrawing from their portfolio in order to make the payment - and paying taxes on those withdrawals - that gains them NOT a full deduction of the interest, but really only that portion of the interest that exceeds the standard deduction.

So you're losing money on every payment, but I imagine some feel they're making it up on the volume...?