Pay off the mortgage or set it and forget it, what would you do?

[RunningBum]

A diversified portfolio of an equivalent amount to the mortgage balance will earn more than the interest cost of the mortgage, correct? Then we agree on taking the analytical approach. Cheers

Jumping to the other side of this, what's the best analytical approach? Maximize your money in the most common case, or giving yourself the best chance to survive a serious extended downturn? You don't know that your diversified portfolio will earn more. If your investments not only don't beat your mortgage rate but also go negative, having paid off the mortgage looks like a better move, doesn't it?

 

[CardsFan]

Every time this topic comes up (and it comes up a lot) I ask the question:

If your home is already paid off, today, with the current market, would you take out a mortgage to invest in the market?

This is a matter of risk tolerance. The odds are that taking the mortgage, in the long run, would be the right decision. But how many would actually do it? AND, would they sit tight if/when the market corrected, or would they sell low?

The irony is, when buying a new home, I think more people see the benefits of the mortgage.

And then there is the question what percent of net worth is the home value?

There is no RIGHT answer here, though some will insist there is.

 

[l8_apex]

Jumping to the other side of this, what's the best analytical approach? Maximize your money in the most common case, or giving yourself the best chance to survive a serious extended downturn? You don't know that your diversified portfolio will earn more. If your investments not only don't beat your mortgage rate but also go negative, having paid off the mortgage looks like a better move, doesn't it?

What's happened after every extended downturn?

One can look at historical data and determine how often stocks would have beat a particular mortgage rate over a particular number of years, and how often one would come out behind. I think that we all do this with our investments and projecting retirement income with tools like Firecalc already.

The idea/discussion of "how to handle a serious extended downturn" is also fraught with assumptions. One can argue that no mortgage is better, but one can also argue that having a mortgage and having an equivalent amount of cash and/or liquid investments will be better.

 

[Unpaintedhuffhines]

ha. I just made this decision. I'm theoretically 90 days from retirement, and I refinanced my mortgage $420K, 30 years at 2.5%. My thinking was over the next 30 years, that $420K will do much better than 2.5%, so I chose for my $ to be working for me instead of in my house, which will be left to my heirs.

On the other hand, I totally get the emotional decision to not have a mortgage. So, as others have said, depends on whether you want to take an analytic or emotional approach. Whatever way you want to go is the right way.

 

[ERD50]

... I will end this by saying we all make choices in life and the market has been very very good to me and my family!

I have absolutely no problem with your choice. I do have a problem with your logic.

... There is no RIGHT answer here, though some will insist there is.

I guess I'd have to scan the posts, but I don't think anyone is saying that holding a mortgage is the RIGHT answer. But there do seem to be some wrong analysis.

Jumping to the other side of this, what's the best analytical approach? Maximize your money in the most common case, or giving yourself the best chance to survive a serious extended downturn? You don't know that your diversified portfolio will earn more. If your investments not only don't beat your mortgage rate but also go negative, having paid off the mortgage looks like a better move, doesn't it?

Yes, holding the mortgage and investing is adding some risk. It seems very low given these current mortgage rates, and the historical long term market performance (the worst of the 20 and 30 year periods beat these rates). But the risk is still there, and if someone is uncomfortable with that risk with a prudent mortgage amount, then paying off the mortgage is the decision they come to.

But that should be it, not some apparently convoluted explanation that it let's them put more in the market, because they don't have a mortgage payment?

-ERD50

 

[Nick12]

I have absolutely no problem with your choice. I do have a problem with your logic.




I guess I'd have to scan the posts, but I don't think anyone is saying that holding a mortgage is the RIGHT answer. But there do seem to be some wrong analysis.




Yes, holding the mortgage and investing is adding some risk. It seems very low given these current mortgage rates, and the historical long term market performance (the worst of the 20 and 30 year periods beat these rates). But the risk is still there, and if someone is uncomfortable with that risk with a prudent mortgage amount, then paying off the mortgage is the decision they come to.

But that should be it, not some apparently convoluted explanation that it let's them put more in the market, because they don't have a mortgage payment?

-ERD50

Convoluted might be your opinion. There are more problems in this world to be concerned about. I've been a player in the market for many years. Freeing up more cash ( mortgage free ) allows me to accumulate more shares and of course more risk and that's my choice. Others who ER with 5 mortgages is another choice. We all make choices. It is members having differences of opinions and risk investing .

 

[daylatedollarshort]

Convoluted might be your opinion. There are more problems in this world to be concerned about. I've been a player in the market for many years. Freeing up more cash ( mortgage free ) allows me to accumulate more shares and of course more risk and that's my choice. Others who ER with 5 mortgages is another choice. We all make choices. It is members having differences of opinions and risk investing.

Whether it is best to have a mortgage going forward is a matter of personal opinion with pros and cons, because we don't know what investment returns will be in the future. But in the recent past, it is a fact based on math that in most cases those with mortgages who invested the money in the stock market came out ahead financially, because we do know what mortgage rates and stock market returns have been, and the stock market returns have been much higher than prevailing mortgage rates.

 

[CardsFan]

I guess I'd have to scan the posts, but I don't think anyone is saying that holding a mortgage is the RIGHT answer. But there do seem to be some wrong analysis.

-ERD50

My comment was more directed at past threads where folks on both sides decided they had the one and only right answer.

But your comment on analysis is correct. It may ultimately be an emotional decision, but, the numbers are the numbers.

 

[ERD50]

Convoluted might be your opinion. There are more problems in this world to be concerned about. I've been a player in the market for many years. Freeing up more cash ( mortgage free ) allows me to accumulate more shares and of course more risk and that's my choice. Others who ER with 5 mortgages is another choice. We all make choices. It is members having differences of opinions and risk investing .

OK, you are just repeating yourself and you are not responding to the questions.

This is not a conversation, it's just you telling us how proud you are of yourself.

Over and out.

-ERD50

 

[harley]

In my case I'm not putting the money freed up by taking the mortgage into the equity market. I'm more than willing to bet that I'll beat the 2.875% mortgage rate I have now with just CD rates over the 30 years of the mortgage. I know CD rates are low now, but they won't stay that way forever. And 2.875% is practically free money. I wouldn't put it into the equity market even though the odds are good that over time I'd win by even more, because an extended market downturn could lower my principal enough that I might never recover, as I'd also be pulling money out to pay the mortgage each year. But by investing in CDs, unless we go well below 1%, which is where we are now, the worst I can do is lose by a little. I'm definitely willing to make that bet.

 

[harley]

OK, you are just repeating yourself and you are not responding to the questions.

This is not a conversation, it's just you telling us how proud you are of yourself.

Over and out.

-ERD50

I'd like to congratulate you. It used to take you a lot more than 5 iterations of an argument before you would give up and let it go. You're making progress. Some people just can't see beyond their own point and it becomes the proverbial wrestling a pig in mud situation.

 

[ERD50]

I'd like to congratulate you. It used to take you a lot more than 5 iterations of an argument before you would give up and let it go. You're making progress. Some people just can't see beyond their own point and it becomes the proverbial wrestling a pig in mud situation.

But maybe you are counting the chickens too soon? I sometimes get weak, and come back after I say I'm done.

But no, I'm not getting better, just so much more to do to get our new home set up as I want it, less time for computer gazing.

-ERD50

 

[Bullwinkle]

I used to be in the camp of take the mortgage, put the rest in the market. But I'm moving back towards pay it off early, for a reason I haven't seen anyone say yet: the rationale is that my AA is high (90/10). And the 10 is mostly in 401k where it seems backwards (since I can't get it out for a long time, I should tolerate more volatility in there). Since I can't really move the AA without tons of taxes, I've been accumulating in cash and bonds instead. But bonds are returning around zero (or slightly below zero) and a lot of people think they'll stay that way for a while. So in that case, it seems best to put the emergency fund in cash, and once that's seems good enough, put the rest into the mortgage. It seems like the cost is that I have less available if there's a downturn, but since I'm still working I figure I can weather that. So the real cost is that it encourages OMY.

Not sure if it makes sense to anyone else, but that's what I used to convince myself. That and the wife would be happier with both less debt and OMY!

 

[iloveyoga]

+1

What I chose to do was pay off the mortgage, because I felt that was simpler and also because I am a worrywart, and this helps me to not stay awake at night worrying about "what if"s.

But you should do what appeals to you the most!

My mortgage was not as large as yours, but we paid it off many years ago. It really did change my life, not having that large payment every month.

 

[Nick12]

My mortgage was not as large as yours, but we paid it off many years ago. It really did change my life, not having that large payment every month.

+1, it is a great feeling to be mortgage free! Many years ago when I wrote out the check to pay it off, my mailbox in the next few months became full of banks wanting me to take out loans. No thanks! Slaves to debt is what fuels our economy and many cannot retire because of it.

 

[karen1972]

I personally went with the mortgage, locked in 2.875%, I am much younger and the mortgage to me was a way to hedge inflation and avoid a tax impact as it wasn't liquid.

I had also ran it through FireCalc and paying off the mortgage resulted in 4 additional failure scenarios (even without accounting for tax impact) which was a bit surprising but convinced me not to go that path. You may want to try that exercise, if they both result in 100% success then I would probably just pay it off so that it was one less thing to worry about.

 

[RunningBum]

What's happened after every extended downturn?

30 years later, the NIKKEI is still 25% off it's high. Given the limited number of data points, one might not want to limit history to the US market.

One can look at historical data and determine how often stocks would have beat a particular mortgage rate over a particular number of years, and how often one would come out behind. I think that we all do this with our investments and projecting retirement income with tools like Firecalc already.

I'll ask again, in bold to help you see it, since you seem to be focusing on the more common case:

Jumping to the other side of this, what's the best analytical approach? Maximize your money in the most common case, or giving yourself the best chance to survive a serious extended downturn?

The idea/discussion of "how to handle a serious extended downturn" is also fraught with assumptions. One can argue that no mortgage is better, but one can also argue that having a mortgage and having an equivalent amount of cash and/or liquid investments will be better.

Maybe. Maybe not. Your statement I was replying to was

A diversified portfolio of an equivalent amount to the mortgage balance will earn more than the interest cost of the mortgage, correct? Then we agree on taking the analytical approach.

Conveniently changing a diversified portfolio to holding cash isn't grounds for smugly declaring agreement with your view.

A better argument for holding a mortgage in bad times is that runaway inflation might be a more realistic threat to retiree finances. Holding a low interest rate mortgage should be better for that case.

This is another argument I don't have much of a stake in because I've made my decision, and it's not going to change. I paid cash for the house I had built 20 years ago because I didn't want to deal with a construction loan and then a mortgage. I financed it by exercising employee stock options at just a couple points off what is still the all time high for the stock, and it still isn't anywhere close to that. In fact, had I held on to the stock options I would have seen their value plunge with the dotcom bubble burst and been forced to exercise at probably 75% lower since the options would have expired well before any recovery. A pretty unique case, and I should have diversified no matter what, but it's almost certainly what would have happened to me.

Feel free to have the last word.

 

[jazz4cash]

At 3.5%, I’d pay cash. At a more realistic 2.5x-2.7x, I’d pick the payment I wanted and use a term and principal amount to fit the payment. At these rates I don’t care if I never pay the mortgage off. If my mortgage payment is 1/3 of my SS benefit I’d be very comfortable with that. I’d set up a CD or MYGA ladder of at least 5 yrs worth of payments and put the rest in equities.

 

[bobandsherry]

With nearly 70 messages, to summarize the responses:
1. Go ahead and pay off your mortgage
2. Go ahead and keep your mortgage, invest the funds and pocket a hopeful spread (arbitrage)

Do what makes you happy - no right or wrong answer, actual results won't be known until 10-30 years down the road.

 

[CSdot]

The stock market has been on a tear for 12 years so anyone with the benefit of hindsight will say that your money was better off invested in the market for the past 12 years. However, I don't have a crystal ball, so the answer for ME at age 50 when I was faced with an extra pile in cash late last year from a better than normal year at work was to pay the mortgage off early.

For those who say it is better to invest that money, you might be right (you absolutely would have been correct for the time period of 2009 - 2021), but I sleep fine with the decision I made for my family.

While I might not have a 65 foot yacht or a Lambo (or whatever the cool kids are driving these days), my boring safe approach, while robbing me of the bragging rights that my high flying friends who invest using OPM have, has put me on a sound financial footing. I have a solid 7-figures invested in equities, a paid for house, a paid for beach house, additional amounts invested in safer non-stock investments, plus a couple years worth of cash stashed in an emergency fund.

Your Mileage May Vary, so the answer is to decide what works best for your personality and risk tolerance.

 

[WhenIsItTime]

Like most things, this ? requires full context and regardless ends up a personal choice.

Many folks say keep the mortgage and invest the funds. Putting the funds in a CD is a terrible idea as the rate is lower than the mortgage rate and will be for years. By definition, you shouldn’t lose at arbitrage.

The other missing piece is total asset balance and portion of AA in cash or these days even bonds. If you lower the mortgage and invest the funds in stocks, but carry a large cash position or bonds are you really leveraging the rates? If you pay mortgage off, arguably you can lower your cash (bond?) positions of AA since lower cash outflow requirements.

I made the personal decision to pay of my mortgages. Love being debt free. Totally agree that is a personal choice I’m fortunate to make. I am comfortable keeping AA 85%+ stocks.

 

[ncbill]

From what I've seen it matters if housing costs is a large part of expenses going into retirement.

Buried a relative a couple of years ago who was retired but not by choice.

By the time I got ahold of their finances shortly before their terminal diagnosis they had a mortgage & HELOC payment (including taxes & insurance) of $1,200/month.

Versus SS income only of $1,800/month and only 5 figures (what was left from an inheritance from a parent) in a taxable brokerage account...they had already liquidated any retirement accounts prior to receiving the inheritance.

They didn't live but a few months more given their aggressive cancer...thank G_d for Hospice!

Even with the mortgage & HELOC balances I was able to get around half of what their home sold for to their beneficiaries.

 

[RunningBum]

From what I've seen it matters if housing costs is a large part of expenses going into retirement.

Buried a relative a couple of years ago who was retired but not by choice.

By the time I got ahold of their finances shortly before their terminal diagnosis they had a mortgage & HELOC payment (including taxes & insurance) of $1,200/month.

Versus SS income only of $1,800/month and only 5 figures (what was left from an inheritance from a parent) in a taxable brokerage account...they had already liquidated any retirement accounts prior to receiving the inheritance.

They didn't live but a few months more given their aggressive cancer...thank G_d for Hospice!

Even with the mortgage & HELOC balances I was able to get around half of what their home sold for to their beneficiaries.

Seems like they didn't have enough money to have the option to pay off the mortgage. In fact the mortgage and HELOC provided the leverage for them to pay other living expenses, right? When you are cash strapped then keeping a mortgage is really the only option. Maybe that's what you meant.

Some people run into this if they ER in their 50s and have limited funds in taxable. They need to get to 59.5 so they can tap retirement accounts. While some may think it's best to pay off their mortgage to reduce their monthly expenses, it's really better to keep the mortgage to keep more of their taxable money available for other expenses.

 

[Camas Lilly]

I just prefer to keep my life simple in retirement, and that includes not having to worry about cash flow day to day.

My biggest expenses are insurance on cars and homeowners and a Amazon charge card that my wife loves using. I also pay my daughter's healthcare insurance.

We would have to dip into our IRA Rollover to make any house payment, and I'm trying to put that off until RMD's at age 72.

But we're fortunate to have our main house and a fish camp on the river that are paid for.

I am really leaning this way too. I am finding the financing costs, interest, insurance, etc. for a 12 month build time in addition to losing a cash discount price is adding up to ~$28,000.

 

[Camas Lilly]

I wanted to give you all an update. Since this money is separate from money set aside for retirement living expenses and I am basically just transferring equity from 2 homes into one at the end of the day, I am leaning toward paying off the house and not having to bet on what the market might bring. We will have quite a comfortable budget with the funds left and I am fine with that, as long as I don't go into those funds for the house.

My first quote from the bank for financing this house that is 12 months out on build time includes appraisal fees (2) construction inspections, construction management fee, title insurance fee of $3,000 alone!, origination fee $4000, and yea, I can buy the loan down to 3.65% for $5745. Total cost from the bank $16,957 and this lender works with the manufacturer on a regular basis, so knows the routine.

Also found out there is a $7,500 cash discount from the manufacturer. Now we're up to $24,457 in costs.

My first basement quote is going to come in around $100,000 for a 2100 sq. ft home. Twice the amount of what I was thinking. That is just concrete hole plumbed for a bathroom and a small walkout. Of course the price of concrete is through the roof right now, just like lumber was.

Sitting this inning out until Spring would allow me to sell my house, move and go in with all cash, hoping falling concrete prices and lumber will start being reflected in the pricing. I am not sure I can see paying $24,457 in extra costs to buy into what is hopefully the top of the market, finance, move, sell and then come in and pay off the loan in another year. What I am finding is between the costs of financing the home and now the price of concrete, is going to push me into those retirement funds, and that is the part I am not willing to budge on.