Should I keep or pay-off, part of or all of, new mortgage?

[Doc0]

Depends on inflation. If inflation stays high you pay your loan off in cheaper dollars while the property appreciates and depnding may offer a tax advantage. If inflation falls likely mortgage interest will fall and you can refinance. Personally I'd keep the loan. Debt is an asset class.

 

[daylatedollarshort]

I have lived in paid off houses for 17 years, retired at 47. My engineering coworkers thought I was crazy to do this because of the "math." Funny thing is they are still working to pay for their stuff.

We have many members here who retired early and have strategic mortgages. This past year under 3% mortgages have been money makers with fixed income paying more.

 

[EdL3]

Pay off the mortgage, peace of mind is priceless.

 

[eyenitnoy]

I recently bought a new primary residence for my DW and I and just sold the old one. I took out a 15 year $500K conventional mortgage at 6% on new home (with market value of $700K). I now have $940K in liquid cash after closing on old residence and cashing in some matured bonds and T-bills. Should I now keep or pay-off, part of or all of, new mortgage?

Background: My wife and I are both 56 and retired. No other debt besides the new mortgage. Our net worth (excluding $200K equity in new home) is around $5.5m (50/50 in qualified and non-qualified accounts with AA approx. 50/50) with a 2.8% SWR (includes all expenses, mortgage, taxes, healthcare, etc.). If we pay-off entire mortgage, our net worth would drop to $5m and then looking at a 2.05% SWR (no more mortgage payment and $500K goes into new home equity).

I would like to keep a few years worth of living expenses in cash or cash equivalents (T-bills, CD's, etc) but not looking to invest in the stock market with this money.

My DW says to pay off entire mortgage and I'll thinking of paying off maybe ½ ($250K or $300K).

Your thoughts please?

If your paying 6%, your actual cost isn't 6% if you are getting a tax write off from the interest. That would lower this 6% some and whatever the lower number is should be used for comparisons.

But since you are not investing in the stock market, I doubt even in this higher interest rate environment you would make more money investing the money you would use to pay off the mortgage. (And, remember to factor in taxes due on money invested in other investments.)

Run the numbers and do whatever the math says. You have plenty of liquidity (another factor of importance) so you should just do whatever the math says puts the most money in your pocket. My bet is it will show paying off the mortgage is best.

 

[cnocmmz]

I believe you would be fine paying off the mortgage, if in fact you have 5M. Doing the math, I do not see any concern unless you spend more than 150k annually

 

[MichealKnight]

Priorities

if you mean there are no guarantees in life...maybe. but a paid-for home provides security of a roof over your head. sure, you have property taxes, utilitie, maintenance, upkeep and repairs. but you'd have those things with a mortgage as well. a paid-off home is an addition to net worth. it's an asset. you may choose to not include that in NW calculations but we do. when we paid off our 15-yr fixed, early, I might add, it was a wonderful feeling. that as the last piece of the debt puzzle to disappear before I put in my papers.

I guess part of it is how much money one has, and needs. And at times I feel 2 mistakes I've made:

1.)Paid cash for my McMansion in 2012. 20/20 hindsight - a nice big mortgage would've given me money to invest....would've been great. BUT at that time I was honestly on top of world business-wise, was only dabbling with stocks for gambling fun. Just liked the NO payments, and knowing that nobody will come take it.

2.)2 years ago when I retired - my 2nd investment townhome - I paid $248k cash for. Back then it was barely 1% CD's. So I thought heck - 4% net rental income plus any appreciation, plus I'm diversifying into bricks vs paper.....do it.


#1 I regret. THat's 20/20 hindsight.

#2.)I'm fine with it. I like knowing that most of the rent-check is MINE. And I hope hope hope it never comes to this but if all the unthinkables happened....I just like knowing that there's a decent roof, with enough beds and baths where me and the family could camp out - a bit cramped - but camp out nevertheless.

 

[MdaPetralia]

I believe you would be fine paying off the mortgage, if in fact you have 5M. Doing the math, I do not see any concern unless you spend more than 150k annually

My budget for 2023 takes our spending and all expenses to about $100K (and that's probably a bit high but like to plan for worse case). So just about a 2% SWR excluding the money that I will be using to pay-off the mortgage (which will then be tied up in my home equity).

If your paying 6%, your actual cost isn't 6% if you are getting a tax write off from the interest. That would lower this 6% some and whatever the lower number is should be used for comparisons.

But since you are not investing in the stock market, I doubt even in this higher interest rate environment you would make more money investing the money you would use to pay off the mortgage. (And, remember to factor in taxes due on money invested in other investments.)

Run the numbers and do whatever the math says. You have plenty of liquidity (another factor of importance) so you should just do whatever the math says puts the most money in your pocket. My bet is it will show paying off the mortgage is best.

I asked the mortgage company for the pay-off amount and I plan on handing them a check on Monday. I'm doing so because, as you stated, I wouldn't invest that money in the stock market and do have 3-4 years of expenses already in cash. Therefore I wouldn't beat the 6% interest rate on the mortgage with short term investments, even with the tax deduction, at least as of today (but could be wrong as things always change).

Thanks for your, and everyone else's, input!

 

[Sirka]

Yeah, happy wife, happy life sort of thing.

+1
Pay it off and enjoy retirement ?

 

[Aerides]

Should I now keep or pay-off, part of or all of, new mortgage?

The upside on paying it all off is far higher than just paying off a big chunk of it.

The upside of sticking with your payments as planned, is also better than just paying off a big chunk.

Go big or (stay) home.

fwiw, at 6% with your assets, I'd just pay it off in full and celebrate.

 

[jgman]

+1
Pay it off and enjoy retirement ?

This. I just retired, sold house, and downsized to townhome. Paid cash, so no more mortgage. Now its time to enjoy my retirement

 

[Andre1969]

For me at least, this seems like one of those situations where there really isn't a right or wrong answer. With $5.5M in invested assets and only a $500K mortgage, to me it seems like you've already won the game, and whether to keep or pay off the mortgage, it doesn't really matter either way.

I'm guessing the principal+interest on that mortgage is about $4,000 per month? That part would bug me, but I'm also looking at it through the eyes of someone with a principal+interest payment of about half that. But also, about half as much in invested assets, so I guess it's about the same, proportionally. For me though, it's a 30 year mortgage at 2.875%, so I've chosen to just let it run its course.

In my mind at least, while 6% is a little high, it's sort of in those in between stages. If it was a 30 year mortgage, I might be tempted to pay it down more quickly, but at a 15, it's already paying itself down pretty fast.

My first mortgage, taken out in December 1994, was 9.625%. Now that one, I tried to pay extra on. But, in 1999 I refinanced it to 7.25%, I believe. At that point, I didn't feel a pressing need to pay any extra on it, but at the time the stock market was also pretty hot, so I thought I could make more money investing. But, fast forward to early 2003, and I refinanced again, this time to a 15 year at 5.5%. I figured doing this refinance was sort of a combination of getting the benefit of a lower rate, and forcing me to pay it down faster, and I was happy with that at the time. I ended up selling the place a year and a half after I refinanced.

If it was me, I might just keep the 15 year mortgage, as is. But where I might go against the grain, is if mortgage rates drop enough, refinance it. And if the interest rate between a 15 and 30 year mortgage isn't much different at the time, might even go with a 30. But, I'm really not concerned about being mortgage free. To others, that's very important, so I can see both sides of it.

 

[keithsherwood]

Pay off. You sleep better being debt free.

 

[dm]

When I moved a couple of years ago I took out a 30 year, 3.125% mortgage. I have the cash to pay it off, but never will unless I make it to 93. When I early retired in 2007, I had a paid off home, I always figured in a pinch I could take out a home equity loan. Well when housing collapsed that wasn’t a sure thing, and who knows at what interest rate.

I feel pretty comfortable with my current rate, I’m making a little more now of coarse, and since I itemize a hair more. With automatic withdrawals I don’t worry about missing a payment or tax bill. My SS payment gets deposited and it pretty much covers the house payment. I never counted on my SS anyway, I went 12 years without it.

 

[keithsherwood]

That's not sound logic. It's all about opportunity cost. Paying off the mortgage locks your cash into the real estate. If the market goes up 10% per year for ten years, you would optimally put the money into the market at the beginning. if you put it in gradually over time, you don't make as much money. So, not paying off the mortgage means that you are free to invest it other things. The value of the home is irrelevant.

1) market can also go down
2) would you take out a loan on your house to invest in the market? Keeping a loan balance and investing that cash in the market nets the same risk.

 

[W2R]

Paying off the mortgage or not is one of our eternal discussion topics that is never resolved. No matter what each of us says in these discussions, it seems that personal preference is truly the deciding factor for most of us.

My own personal preference is to have no mortgage as I grow older in retirement. I have no need for further money, and I like the independence of having little to no debt.

Writers on certain websites love to frighten us with stories about impending financial doom for all, and I can read these stories and know that even if the world may come to an end, at least I don't have to come up with a monthly mortgage payment any more. Could be worse. As for that infamous "opportunity cost", opportunity for what? Income/risk that I don't need? Not my cup of tea.

Others differ, as you have already seen in this thread.

 

[Markola]

^^^^^. I agree fully. Everyone’s plans for their housing situation is different, everyone has slightly different feelings about debt, some value convenience above all and prefer to rent.

 

[COcheesehead]

Renting is probably the least economically efficient method. My sister is retired and her rent just keeps going up and likely will continue to go up. I tried to get her to buy a home when prices were down and interest was cheap. She didn’t want a mortgage in retirement. That decision is now wrecking her retirement cashflow. She may have to get a roommate or move in with her kids. Both suboptimal.

 

[captain3d]

Renting can work if you take the money you didn’t spend on the house and invest.

Eg rent a $1mill home for $3,500 month in a HCL area. Buy $1mill of rental properties in Lower CL areas that rent for $8k-$10k a month.

I understand most people who rent do not think like this.

 

[Chuckanut]

What's the interest rate?

If I had one of the sub 3% fixed mortgages, I would keep it for now and collect 4%+ on CDs and treasuries. You can always pay it off later if the savings interest rates nose dive.

 

[jollystomper]

To the OP, honestly, given your assets, you could flip a coin or roll the dice to make the decision, and whatever the outcome was, it would be right . It is really an emotional, not a financial, decision for you. Go with the best route that both you and your spouse agree with.

 

[kgtest]

I had a friend who rented in SoCal until he retired at 39 yrs old. Always scratched my head as to how he made that work...but he lived like a pauper and always had roomates, sometimes would take MONTHS off while working to hike AP trail, canoe the MS river, PAC trail etc. I am still working though so maybe I am a ltitle jealous, but I also have a family and a legacy, and he does not.

I have a 2.75% on a 15 yr...only 8 yrs left on the mortgage. I am not paying it off early. I can earn more in almost every asset class out there over the next 8 yrs. BUT it will be paid off before I retire early to ease cash flow and lower tax burden if I had to withdraw against my earnings and pay higher taxes.

 

[Badger]

Paying off the mortgage or not is one of our eternal discussion topics that is never resolved. No matter what each of us says in these discussions, it seems that personal preference is truly the deciding factor for most of us.

My own personal preference is to have no mortgage as I grow older in retirement. I have no need for further money, and I like the independence of having little to no debt.

Writers on certain websites love to frighten us with stories about impending financial doom for all, and I can read these stories and know that even if the world may come to an end, at least I don't have to come up with a monthly mortgage payment any more. Could be worse. As for that infamous "opportunity cost", opportunity for what? Income/risk that I don't need? Not my cup of tea.

Others differ, as you have already seen in this thread.

About 15+ years ago I had an 8.75 mortgage and a modest income. After it no longer helped to itemize on taxes I put everything I could to make double payments (one for the monthly mortgage payment and one for a monthly payment on the balance). I paid it off in 3 years. Since that time I have had no debts or monthly payments except for CC, electric, water, phone, and internet service.
Now the house is worth 26 times what I paid for it.
It is nice to know I will always have a place to live.

Cheers!

 

[Markola]

26X on a house? Where do you live? Downtown Palo Alto, lol? Yes, in that kind of market the calculation would be a little different. Congrats on choosing your “location, location, location.”

 

[finnski1]

26X on a house? Where do you live? Downtown Palo Alto, lol? Yes, in that kind of market the calculation would be a little different. Congrats on choosing your “location, location, location.”

Yeah I thought that was a typo.

Lucky if mine is up 1.5-2x in 25 years.

Not complaining, just amazed!

 

[Badger]

26X on a house? Where do you live? Downtown Palo Alto, lol? Yes, in that kind of market the calculation would be a little different. Congrats on choosing your “location, location, location.”

Sorry I wasn't clear. I had already paid off half of the 30 year mortgage by the time I started with double payments (one went directly to paying principal).
But yes, it is now valued at 26X my original purchase price. It started at $50k.

Cheers!