Should we pay the mortgage off

[Cpadave]

We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.

 

[W2R]

We currently have a 650K mortgage on our house at 6.325 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.

Pay off the mortage or not? This is one of the most contraversial questions on the forum, and always has been. My guess is that about 50% of members will say yes, and 50% no. I am on the "no mortgage" side of the contraversy, but there are good arguments on either side, tax bill or not.

My opinion of it is that it is smart to plan to pay off the mortgage before retirement, as part of risk management. I wanted less risk in my retirement financial plan than I endured when working. The risk that Chase Mortgage is going to claim I still have a mortgage to pay (paid off in 2006), is about zero and certainly lower than the risk that my bond funds might tank or crater (leaving me short when it comes to making those mortgage payments). When working, the risk is pretty negligible either way and can be dealt with using income from work, but when retired one usually has lesser income and would like to not have to worry about it.

When I paid off my mortgage, I used money that I otherwise would have invested in taxable accounts for retirement plus savings that I already had in the bank. I finished paying it off three years before retirement. It gave me a lot of joy to be able to get rid of my mortgage. YMMV

 

[Finance Dave]

We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

One option is to use part of our current fixed income allocation which has a duration of 4.3 yrs to pay off the mortgage. Then using the cash flow saved each year to allocate back in to maintaining a 60/40 portfolio allocation.

Second option is to wait for a possible distributions from my DW old private equity to come in ( within a year or two), and use that amount to pay of the mortgage.

Or do nothing. Thanks for your input.

Not sure if this is the same in all counties, but in our county you lose the mortgage exemption if you pay off your mortgage, which will cause a significant increase in your property tax bill.

At a minimum, I suggest researching this with your local tax authority before going forward.

What we did was take out a HELOC, then paid off the mortgage. The HELOC maintains the mortgate exemption regardless of the outstanding loan balance. We use the HELOC for various things but keep the outstanding balance very low to avoid significant interest costs.

As a side note, there was a certain "comfort" that came for us with paying off the mortgage...I recommend it.

 

[UnrealizedPotential]

I don't know what's best to do but I ended up mostly just investing in the stock market. I sold my condo and did pretty good because I benefited from price appreciation over the years when I sold my condo. I did well in the market too. It's a tough question with maybe no clear cut answer.

 

[l8_apex]

...I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage...

The money that you would use to pay it off: I assume that you have it invested in something. What's been the return on investment of that money? (Is it more or less than your mortgage rate?) More importantly, what do you think the ROI is going to be going forward, and thus what would you lose if you take that investment money to pay off the mortgage?

 

[rodi]

I fall in the "no mortgage is better" camp... in general.

That said - I'd be nervous dumping $650k into the mortgage in one fell swoop. For me (but perhaps not you) that's a pretty big percentage of my portfolio.

IMO - equity in your home (as in a paid off mortgage) is quite different than a fixed income investment. You can sell bonds and not alter your lifestyle... but to sell a house you have to move... And if you need to pull cash from your "fixed income" portion of your portfolio it's harder to do from home equity.

All of this is less about ROI and interest rates... it's about a primary home being just that - a home.

FWIW - we have a paid off house we live in. We did it by making extra principal payments month by month... although we did lump sum the final $40k. Our home is a significant part of our net worth because we live in a nice neighborhood in a very pricy area. But I never include it in my retirement portfolio/investable assets analysis... The only parts of my retirement plan that it fits in are: 1) a lower cost place to live (no mortgage or rent) and 2) plan B for long term care if one or both of us needs longer term nursing home care.

 

[pb4uski]

The money that you would use to pay it off: I assume that you have it invested in something. What's been the return on investment of that money? (Is it more or less than your mortgage rate?) More importantly, what do you think the ROI is going to be going forward, and thus what would you lose if you take that investment money to pay off the mortgage?

+1 What is the after-tax return on what you will use to pay it off vs the after-tax cost of keeping it? If you will be using fixed income to pay it off, do you plan to change your AA?

 

[Luck_Club]

We currently have a 650K mortgage on our house at 3.625 % with 8 yrs left on the 15yrs term. I was always thinking with fixed income returns being so low these days it might make sense to payoff the mortgage. Now with the new tax act, it looks like it might make more sense. We will be entitled to 11K of additional deduction if we itemized vs standard. That means we are losing the benefit on 13K of mortgage deduction.

Or do nothing. Thanks for your input.

Assuming the following:
Standard deduction for married couple is now $24,000.
Maximum real estate tax deduction is $10,000
Mortgage interest deduction is $23,562

You are still better off itemizing your return. Once your principle balance falls below below $386,000 you are at a point where the standard deduction is higher than itemizing based on those two deductions.

 

[Senator]

Yes, sell the house, pay off the mortgage, and buy a different lower-cost place with cash.

 

[joeea]

You haven't provided enough information for making the decision. Income, age, goals, risk aversion, size and type of portfolio, planned retirement date, how long you intend to remain in the house, etc - all these and more could go into your decision.

Or you could be the type that can't sleep at night when you have a mortgage, and you could choose to pay it off now.

My primary home was paid off long ago, before we were smart enough to analyze the financial implications. Our second home (and likely retirement home) has 24 years remaining on a 30 year mortgage.

For us, the mortgage rate is very favorably low so we are in no hurry to pay it off, even though we have plenty of money to do so. Once we fully retire we'll sell our current primary home and likely move into our other home. At that point we can decide to pay it off using proceeds from the sale of our primary, or continue to hold the mortgage. We are leaning toward the latter.

The good thing about not paying if off now is that we can decide to do so at any point in the future, should market conditions dictate. We'll always have enough to pay it off. But once we pay off the mortgage, it's hard to un-pay it off.

This question, along with "when to start collecting Social Security" seem to be the Big Two for endless debate. I think it's funny that some who want to collect SS at 62 so they can start investing it early seem to be the same who want to take money out of their portfolio to pay off the mortgage. I tend toward exactly the opposite decisions. In general, for folks who have the means to decide, I think they tend to both be choices between "good" and "better" decisions. Unless you are living closer to the edge, I doubt you will go wrong either way. And I'm convinced that pretty much everyone is happy with their decisions, no matter which way they decide.

 

[Scuba]

DH & I have not paid off our mortgage and don’t intend to pay it off early. We have a 30 year fixed loan at 3.375%. The opportunity cost to pay it off is too high as we’ve been earning much more than that on our investments. And the monthly payment is a small part of our monthly outflow.

 

[ERD50]

Also consider lumping any deductible payments if possible - this could get you a higher deduction in alternate years.

-ERD50

 

[Cpadave]

+1 What is the after-tax return on what you will use to pay it off vs the after-tax cost of keeping it? If you will be using fixed income to pay it off, do you plan to change your AA?

The after tax return would be my current rate based on the fixed income portfolio which is about 2.5-3%. Plan to use the cash flow savings to allocate back to fixed income portfolio over time.

 

[Cpadave]

Yes, sell the house, pay off the mortgage, and buy a different lower-cost place with cash.

That is our plan after the kids finish school, in about 10 years.

 

[Cpadave]

You haven't provided enough information for making the decision. Income, age, goals, risk aversion, size and type of portfolio, planned retirement date, how long you intend to remain in the house, etc - all these and more could go into your decision.

Or you could be the type that can't sleep at night when you have a mortgage, and you could choose to pay it off now.

My primary home was paid off long ago, before we were smart enough to analyze the financial implications. Our second home (and likely retirement home) has 24 years remaining on a 30 year mortgage.

For us, the mortgage rate is very favorably low so we are in no hurry to pay it off, even though we have plenty of money to do so. Once we fully retire we'll sell our current primary home and likely move into our other home. At that point we can decide to pay it off using proceeds from the sale of our primary, or continue to hold the mortgage. We are leaning toward the latter.

The good thing about not paying if off now is that we can decide to do so at any point in the future, should market conditions dictate. We'll always have enough to pay it off. But once we pay off the mortgage, it's hard to un-pay it off.

This question, along with "when to start collecting Social Security" seem to be the Big Two for endless debate. I think it's funny that some who want to collect SS at 62 so they can start investing it early seem to be the same who want to take money out of their portfolio to pay off the mortgage. I tend toward exactly the opposite decisions. In general, for folks who have the means to decide, I think they tend to both be choices between "good" and "better" decisions. Unless you are living closer to the edge, I doubt you will go wrong either way. And I'm convinced that pretty much everyone is happy with their decisions, no matter which way they decide.

We both retired at 40. I am currently 51. I think the idea in our situation is that since our mortgage will be paid off in 8 years anyway, why not take some of the fixed income portfolio that is not earning more than 2.5-3% after tax and pay off the mortgage.

I understand if there were many years left on the mortgage. In that situation, it is more likely the bond rates might exceed the cost of mortgage. Or if we were 100% in stock market and expected to have higher return with that money. Which is not the case with out 60/40 allocation.

 

[pb4uski]

If you pay off the mortgage with the proceeds of fixed income and then don't rebalance and just replenish fixed income with cash flow, I'm not sure there is a big advantage one way or the other, so either choice seems fine.

 

[Luck_Club]

We both retired at 40. I am currently 51. I think the idea in our situation is that since our mortgage will be paid off in 8 years anyway, why not take some of the fixed income portfolio that is not earning more than 2.5-3% after tax and pay off the mortgage.

I understand if there were many years left on the mortgage. In that situation, it is more likely the bond rates might exceed the cost of mortgage. Or if we were 100% in stock market and expected to have higher return with that money. Which is not the case with out 60/40 allocation.

What is the remaining balance on the mortgage? Did you borrow $650K or did you borrow more and you have $650K remaining?

The answer will definitely impact the tax decision. As mentioned above, I think you loose all tax benefit when you reach about $369K, and you will be taking the standard deduction anyways. Interest rates are going up, so your "fixed income" investments (bond funds) that are earning 2.5-3% will be losing value, unless held to maturity.

 

[Cpadave]

What is the remaining balance on the mortgage? Did you borrow $650K or did you borrow more and you have $650K remaining?

The answer will definitely impact the tax decision. As mentioned above, I think you loose all tax benefit when you reach about $369K, and you will be taking the standard deduction anyways. Interest rates are going up, so your "fixed income" investments (bond funds) that are earning 2.5-3% will be losing value, unless held to maturity.

$650k is the remaining balance of what was originally a bigger mortgage. The monthly payment is ~$7k, most of which being principal pay down at this point (which we do not consider an expense, but still a cash flow we have to fund). However, the interest expense of almost $25k/yr is still quite high. The mortgage payment is a significant portion of our annual cash flow needs.

I find it hard to stomach the fact that our fixed income portfolio is generating less than the mortgage rate on the after-tax basis. only half of our interest expense gets the tax deduction, while the yield from the bond portfolio that we use to fund the mortgage payments is fully taxed as ordinary income. I am leaning towards paying it off, while DW is more hesitant because she is more conservative and is always big on dry powder and financial flexibility.

 

[Cpadave]

If you pay off the mortgage with the proceeds of fixed income and then don't rebalance and just replenish fixed income with cash flow, I'm not sure there is a big advantage one way or the other, so either choice seems fine.

Yes, if we do liquidiate some of the bonds to pay off the mortgage, we will just replenish the bond portfolio over time with excess cash flow.

 

[RobbieB]

How about you pay off say half of the balance with the bonds? Enough so that you can deduct all the interest you pay?

 

[joeea]

I am leaning towards paying it off, while DW is more hesitant because she is more conservative and is always big on dry powder and financial flexibility.

Happy wife, happy life.

 

[Sunset]

....However, the interest expense of almost $25k/yr is still quite high. The mortgage payment is a significant portion of our annual cash flow needs.

I find it hard to stomach the fact that our fixed income portfolio is generating less than the mortgage rate on the after-tax basis. only half of our interest expense gets the tax deduction, while the yield from the bond portfolio that we use to fund the mortgage payments is fully taxed as ordinary income. I am leaning towards paying it off, while DW is more hesitant because she is more conservative and is always big on dry powder and financial flexibility.

Certainly pay some of it off, since you can't deduct more than the limit allowed now.
Especially since your bonds after paying tax, are earning less than the non-deductible interest of part of the mortgage.

 

[street]

I personally don't like loans and pay them off as soon as I can. I had a loan for my house which I built myself one about 2 years. I then just paid it off and then I could put more in stocks and savings. That was 34 years ago I paid off my house and for me it made more sense.

The deciding factor would be interest of loan and nothing says you can't make double or triple payments if you would like.

 

[Cpadave]

Thank you all for your thoughts and suggestions. Very helpful indeed. I talked it over with DW. We agreed to stop plowing money into the market for a while and instead apply all excess cash flows to extinguish our mortgage.

 

[supernova72]

I looked at the Finance elements when was deciding to payoff or not. I was getting to a point of not being to itemize within a few yrs which was also a factor. I owed 115k with six years to go. Took it out of a lower yield bond fund to pay it off (4% 15 yr loan).

The deciding factor for me was the "piece on mind" of owning the place outright. You don't see that factored into many formulas of course but for me was liberating as they say to be debt free. YMWV!!