Pay off house?

[Leifowitz]

I am at a crossroad on whether to pay off our primary house. DW and I have a rental property that we own free and clear that generates $1000 per month after tax cash flow. Our current P&I payment on our primary house is $2000. If we sell the rental, we would have enough cash after the capital gains and depreciation recapture to pay off our primary house. Looking for thoughts from others who have been in a similar situation.

 

[davebarnes]

Do you want the financial answer or the psychological one?

I, being financially foolish, took $50K out my Roth IRA in 2011 so we would own our house with no mortgage.
It felt good then. And, now.

 

[workmyfingerstothebone]

Well, having a rental paying $1000 a month is beneficial. Did you plan on owning the rental initially? If this was part of your investment plan then stick with it if not and being a landlord is not for you then sell.


We planed on having a rental for investment purposes. We paid off the home first and then the rental.

 

[pb4uski]

What is your mortgage interest rate? How much of the P&I is principal?

It seems to me as if you are confusing two decisions into one. One decision is whether or not to pay off the mortgage? Another is whether or not to sell or keep the rental?

And if the pay off the mortgage question is yes, then the follow on question is where are the funds to pay off the mortgage going to come from? Or if the decision is to sell the rental then the question is what to do with the proceeds?

 

[RunningBum]

Completely agree you are looking at 2 separate decisions.

The "pay off the house" decision is generally considered to be a toss up. There's a certainty in the savings of not paying x% interest, and what you'd invest the money in if you kept the mortgage, and whether you'd take on more or less investment risk a mortgage. And there's a comfort in having the debt gone that some people appreciate. Others might enjoy the leverage, and not depleting their savings.

Given that it's more or less a toss up, I wouldn't sell the rental just so you can pay off the mortgage. If you want to sell the rental anyway for other reasons, then you can consider whether you'd rather invest the money, or pay off the house.

 

[l8_apex]

Welcome to the forum. A couple of things: 1- there isn't enough info here to give you a quality answer, and 2- I understand why you're linking these two actions, but I'd suggest that you separate them as you move through your decision process.

 

[Aerides]

welcome.

as a new member, you might not be aware, but this is one of the more divisive topics here. You will find a great many folks favor paying off sooner, while still another great many will demonstrate that your dollars can probably work more effectively being invested, vs. paying down a low-interest-rate mortgage. Mortgage tax deduct-ability is another factor.

So, totally not enough info for your case, but here are some recent threads on this topic to mull over:

http://www.early-retirement.org/forums/f28/change-in-mortgage-thinking-in-retirement-92279.html

http://www.early-retirement.org/forums/f28/should-we-pay-the-mortgage-off-90541.html

http://www.early-retirement.org/forums/f28/mortgage-and-my-mind-92516.html

 

[SmallCityDave]

My knee-jerk answer is Yes, however it would be helpful to get more information.

 

[Leifowitz]

You are right, it is two separate decisions. I should have thought this through a little better before posting. That’s what I love about this forum.

We are leaning towards selling the rental. We expect to yield $350,000 after paying taxes, which is close to what we owe on our primary house. Our current interest rate is 4.25%. The breakdown of principal/interest is $600/$1400 per month. Our primary house is the only debt that we have. We have 7 years left until we retire at age 59.

 

[pb4uski]

If you don't pay off the mortgage then what would happen to that money... presumably you would invest it rather than fritter it away... what would it be invested in? Will those investments be expected to yield more than 4.25% over the remaining term of your mortgage? What is the range of likely yields?

That can help you quantify the decision financially. The you have to use your gut to decide what is most comfortable for you... some people are really bothered having a mortgage.... others it doesn't bother a stitch.

 

[Leifowitz]

We would invest it in individual stocks from the list of Dividend Kings

 

[pb4uski]

In that case it is very likely that over the remaining term of the mortgage that the investments will yield more than 4.25%.. so the smart financial move would be to keep the mortgage. Now the gut comes into play.

 

[Bamaman]

You are right, it is two separate decisions. I should have thought this through a little better before posting. That’s what I love about this forum.

We are leaning towards selling the rental. We expect to yield $350,000 after paying taxes, which is close to what we owe on our primary house. Our current interest rate is 4.25%. The breakdown of principal/interest is $600/$1400 per month. Our primary house is the only debt that we have. We have 7 years left until we retire at age 59.

There are a number of angles here. If you were retired or about to retire, I'd tell you to sell the rental. But what's the chance that it'll continue to appreciate in value in the future? If the rental home is in a hot retail home market and you have a good tenant, you might be better to hold on to it another 5 years.

One of our ace in the holes for ER was to have home(s) that were paid for. I honestly just don't like making payments, etc. And if I had a rental house, I'd just not like to deal with maintenance and bookkeeping if I was retired. But if there's more money with keeping it a little longer, don't yet sell.

 

[Offgrid Organic Farmer]

I would keep the rental and use it's $1,000/month income to make extra principal-only payments on your home mortgage.

 

[mickeyd]

Paying off my mortgage 8 years early (15 yr mtg) was one of the smartest long-term financial matters that I have ever done. Almost a no-brainer.

 

[pb4uski]

I would say that it is the opposite for us. When I retired in 2012 I chose not to pay off the mortgage... I refinanced in Jan 2012 just before I retired... mainly to reduce our interest rate from 4.375% to 3.375%. Just the other day I ran a Portfolio Visualizer analysis that started with a portfolio equal to our mortgage in January 2012 with monthly fixed withdrawals equal to our monthly payments. That portion of our portfolio, after paying ~7 years of payments is $100k more than our mortgage balance... so I am way ahead...IOW, that's $100k that I wouldn't have if I had used that money to pay off my mortgage 7 years ago instead of refinancing.

 

[Scuba]

I would say that it is the opposite for us. When I retired in 2012 I chose not to pay off the mortgage... I refinanced in Jan 2012 just before I retired... mainly to reduce our interest rate from 4.375% to 3.375%. Just the other day I ran a Portfolio Visualizer analysis that started with a portfolio equal to our mortgage in January 2012 with monthly fixed withdrawals equal to our monthly payments. That portion of our portfolio, after paying ~7 years of payments is $100k more than our mortgage balance... so I am way ahead...IOW, that's $100k that I wouldn't have if I had used that money to pay off my mortgage 7 years ago instead of refinancing.

We similarly refinanced our mortgage to 3.375% about 5 years ago. We have no intention of paying it off early. We like earning higher returns on our money and also like the liquidity.

 

[ERD50]

I would say that it is the opposite for us. When I retired in 2012 I chose not to pay off the mortgage... I refinanced in Jan 2012 just before I retired... mainly to reduce our interest rate from 4.375% to 3.375%. Just the other day I ran a Portfolio Visualizer analysis that started with a portfolio equal to our mortgage in January 2012 with monthly fixed withdrawals equal to our monthly payments. That portion of our portfolio, after paying ~7 years of payments is $100k more than our mortgage balance... so I am way ahead...IOW, that's $100k that I wouldn't have if I had used that money to pay off my mortgage 7 years ago instead of refinancing.

Thanks - I had not thought of using Portfolio Analyzer for this! Now that's using your brain!

I entered my numbers, and I'm $53,680 ahead on my 2003 $124,000 re-fi, using a 70/30 AA on index funds. Probably better in real life, as I actually did re-balance at what was close to the 2008 lows (didn't know/predict that at the time, just decided to re-balance at that point). That feels pretty good!

OK, so how can anyone in this thread claim it is "almost a no-brainer" to do an early pay-off? Sure, a gain is not guaranteed, but if you can secure a low interest rate, it is a pretty safe bet over a 15-30 year time period.

We would invest it in individual stocks from the list of Dividend Kings

- Why?

-ERD50

 

[kgtest]

For me it's two questions. 1. Can I afford the expense of the mortgage while FIREd ? and 2. Would I rather have the money compounding in the market at a variable rate usually > 4% or would I rather pay myself a straight 4% and put it towards the note?


So far I've tried to take split 50/50 annually with 50% of our expendable "investable" income towards the mortgage and the other half into the market.


So far that plan should work for us. YMMV.

 

[Helena]

.

Don't do like a guy I know.

He sold his debt-free rental house then quickly squandered the money.

Now he has no rental income and is having problems paying his mortgage.

.

 

[Bestwifeever]

We paid off our house as we started retirement in 2008. Our pension/SS/dividend income easily covers our expenses but would not have covered our mortgage payments, so we would have had to pull a little $$ from the nest egg for it, and that would have meant selling low when there was a little downward excitement (I think this is the basis of the old conventional wisdom of not having a mortgage in retirement). Perhaps you can invest the proceeds of the sale of the rental and then pay off the mortgage when you do retire? You will have made seven more years of payments against the mortgage as well by that time.

I'm sure it's six of one, half dozen etc in the end from a financial standpoint, but I do love the feeling of having zero debt the past ten years.

 

[joeea]

OK, so how can anyone in this thread claim it is "almost a no-brainer" to do an early pay-off?

For some folks, no-brainer-ness involves feelings rather than numbers.

 

[ShokWaveRider]

Answer to OP.... a resounding YES!

 

[IMATERP]

You haven’t paid off your property yet? What are you waiting for?

Today makes one year and one day since I FIRED and paying off our house was something that we did 3 years prior to ER.

Just do it!

I

 

[corn18]

The ROIC on the rental looks to be about 3.43% (12,000/350,000). Is it one of those unicorn rentals that require no work, ever? If not, that has a cost that isn't captured in the ROIC.

The interest rate on your mortgage is 4.25%. So paying off the rental to pay off the primary is a smart financial move.

The payoff mortgage vs. invest is a question that will never really be answered.

Do what makes you happy.