Why Pay off the mortgage?

[brewer12345]

What I'm waiting for is the 100 year zero mortgage. 

Ah, the Methuselah mortgage! Its only a matter of time...

 

[Khan]

Ah, the Methuselah mortgage! Its only a matter of time...

Japan had 100 year mortgages during its RE bubble.

Wonder what became of them.

 

[Gone4Good]

Japan had 100 year mortgages during its RE bubble.

Wonder what became of them.

Foreclosures.

 

[limpid lizard]

I debate myself on this.

My expenses run $1400 per month. This covers everything I need or want. Half of that is for the mortgage. It is 40K. The interest is 5.75. Of each payment, almost exactly 2/3 goes to principal and 1/3 to interest after the insurance and tax contributions are taken out.

I refinanced 75K in 2002 for the interest rate, and I had been paying extra principal until 5/06 when the ex ran off with the milkman. Since then I have not paid extra. I ended up with the house, and the mortgage is still in both names. She cannot afford to buy a house, but my payment history improves her credit rating.

I expect her to one day up and tell me she wants off the mortgage. So far, I have decided to let it ride. At the time I hear from her, I will be faced with the decision of refinancing or paying off.

I tell myself that psychologically I would be much happier paying off the house, but then I tell myself that the mortgage is not that large and the money is available. I tell myself that with the house paid, I could take the standard deduction and with income of about 9K per year pay virtually zero for income tax.

I do not think there really is a clear cut answer in my case. The payoff amount is not a significant portion of my portfolio, and I would feel better and pay less tax per year after paying it off. However, I would have to pay significant taxes the year I cash out investments to pay off the mortgage.

So, I continue to procrastinate. Each year the dollar I pay to the mortgage company is worth less due to inflation, and that provides some small comfort. I am hoping that by the time the ex tells me she wants off the mortgage, the pay off amount will be low enough to not put me into a higher tax bracket when I sell investments to pay it off. Along that line, I have been thinking that an extra 5K paid each January would not push me into a higher bracket and that perhaps in that manner I could get out from under the mortgage with out excessive tax burden.

 

[old woman]

. However, I would have to pay significant taxes the year I cash out investments to pay off the mortgage.

They are having a special on long term capital gain taxes in 2008. From what I understand if you sell a long term gain asset in 2008 you pay no tax if you are in the 15% bracket.
I am low income so intend to sell all my mutual funds in my taxable account and buy different mutual funds so my future gains will be less.

 

[walkinwood]

In addition to the good points made above...
If you are funding your retirement from taxable investments (as opposed to withdrawing from an tax-deferred account) then your tax bracket may be quite low. So be sure to adjust your mortgage interest deductions for this lower federal tax bracket.

 

[Rocket_J_Squirrel]

Two things to keep in mind about mortages from a little different perspective.

1) Not paying off a mortgage to 'keep the tax decuction' isn't really a good deal when you view it stand alone. Usually, the mortgage deduction will bring you over the standard deduction so you can itemize your deductions thus things like state income taxes, medical, property taxes, etc., can be deducted.

2) When you RE, calculate how much money you must have to fund the mortgage payment (P&I only). If you have $1,500 monthly mortgage payment that is P&I only, the annual outlay is $18k. For arguements sake, assume you earn 5% on your overall retirement portfolio. You'll need $360,000 in retirement savings to fund the $18,000 annual outlay (not taking into account your personal tax situation).

So for those of you worried about building a large enough pot of money to RE, having no mortgage would help out greatly by reducing your target amount.

RJS

 

[Nords]

So for those of you worried about building a large enough pot of money to RE, having no mortgage would help out greatly by reducing your target amount.

If the money to pay that mortgage comes from outside the ER portfolio (inheritance or lottery winnings) then this observation is helpful.

But savers are either going to develop: (1) an ER budget with a mortgage payment and a bigger portfolio balance, or (2) an ER budget with no mortgage payment and a smaller portfolio balance. Either one is equally within their grasp because the portfolio balance is either generating the growth/income to pay the mortage... or that balance is cannibalized to pay off the mortgage. Either way the Young Dreamer is the same number of dollars away from either one of their goals and the size of the portfolio doesn't make a difference to that remaining distance.

However one of the threads in the mortgage FAQ points out that a bigger ER portfolio (with a budget including a mortgage payment) has a higher FIRECalc survivability than a smaller portfolio without a mortgage payment. Your interest rates may vary, asset allocation matters, you have to be able to sleep at night, and a whole pile of other caveats emptor applies. But we did the math for our situation and we're happy that we kept our mortgage, even though it won't be paid off until I'm nearly 75 years old. Five years ago when we started ER that mortgage was nearly 40% of our portfolio. Today the mortgage balance is a tad smaller but it's only 16% of our portfolio. Heck, our CDs have a higher interest rate than our mortgage, let alone the last five years of small-cap value returns.

So if the mortgage is being paid from the ER portfolio, then paying it off won't accelerate the progress toward the ER goal. Paying off the mortgage (reducing the size of the ER portfolio) may even lower the ER portfolio's success rate.

 

[Sandy]

Also, because the mortgage payment does not need to grow or keep up with inflation (assuming a fixed rate loan), you don't need 25x funds to make this payment. If you don't want to pay off at once, you can still carve out a smaller bucket of your funds in a more stable investment to cover the mortgage and you don't need to worry about standard withdrawal constraints that keep you protected from variability and inflation.

 

[FinanceDude]

This thread has gone on forever...........FWIW, I am aggressively paying off my mortgage and saving a bunch for retirement......

 

[W2R]

This thread has gone on forever...........FWIW, I am aggressively paying off my mortgage and saving a bunch for retirement......

I did the same until mine was paid off about a year ago. Wait 'till you see how fast that retirement nestegg grows when it is paid off! I have not regretted paying mine off for one minute (but then, I plan to retire in just a couple of years).

 

[FinanceDude]

I did the same until mine was paid off about a year ago. Wait 'till you see how fast that retirement nestegg grows when it is paid off! I have not regretted paying mine off for one minute (but then, I plan to retire in just a couple of years).

I have 10 years left.......... But, I am trying to pay off the hosue in 4, and then SUPERSIZE the saving,and then pull the plug.........

 

[DblDoc]

We are paying off early at such a rate that our targeted retirement date and mortgage paid off coincide - roughly...

DD

 

[Spanky]

We paid off our mortgage two years ago and are appreciating the extra cash every month.

 

[cute fuzzy bunny]

One of the threads in the mortgage FAQ points out that a bigger ER portfolio (with a budget including a mortgage payment) has a higher FIRECalc survivability than a smaller portfolio without a mortgage payment.

Indeed asset allocation DOES matter. Leaving only the mortgage payment as a variable sure produces the described result. But why would you cut your expenses by half or more and change nothing else?

Most people keep a 3-7 year cash buffer to make sure they can make their monthly bills if theres a down market. Without a mortgage you'd need less of that. Most people also keep 40-50% in bonds to smooth out volatility and provide an income source to pay the bills. Pretty much dont need that as much either without a mortgage.

As we rehashed 20-30 times, someone with a million or two that has no mortgage, a one year cash buffer, and an 80/20 portfolio can retire earlier, with less money, with a higher firecalc survival rate, and with less budget risk than someone with a mortgage, a 3 year cash buffer and a 60/40 portfolio.

The exceptions to this are people with a decent pension or job that eliminates the debt payment and its risks, or someone with the intent to invest nearly 100% in equities regardless of payment obligations. Someone that is working towards retirement but is still 5+ years away SHOULD have a favorably priced mortgage since they have cash flow.

Otherwise an early retiree takes on more budget risk, payment risk, income tax risk, investment risk, and has to load up on lower returning investments to smooth out the ride, in the hopes of eking out a percent or two of arbitrage from the higher returning investment components, should the markets comply.

The budget risk is a biggie, IMO. My "must pay" monthly costs are around a thousand a month. My "nice life" costs are about $2k. At $3k I can live a very decent upper middle class lifestyle. All easily covered by interest and dividends and meaning that I never have to eat into principal even in a 500 year bear market.

The only economic situation that makes this a bad decision is a permanent bull market.

 

[RetireeRobert]

Why should I pay off my 6.25% mortgage with part of my nest egg when I retire?

- Shabber

Why not?

 

[aenlighten]

Borrowing and investing is interesting

The problem I had was my rate was not low and they didn't become low until after I became unemployed and then how does one refinance without an income since most of that is in tax deferred accounts. With the market also falling at that time, investing didn't look very good, and paying a lot of interest with no means of deducting it, also didn't look very good.

While it can increase your portfolio survival rate since most of the time more than 4% is safe, it can also increase your exposure to that time when greater than 4% is unsafe. With other means of paying it, and a low rate, a mortgage is attractive. Without other means of paying it, your portfolio would shift towards more bonds. More bonds are balanceable but bonds are quite unattractive now, so the advantage seems slight, but a low rate is difficult to beat.

 

[RetireeRobert]

I am working on a nestegg and doing a lot of reading. Why should I pay off my 6.25% mortgage with part of my nest egg when I retire, when I can get the tax deduction and only make the payment as usual? Seems that my portfolio well balanced should yield 7-9%?

Thanks in advance!

- Shabber

You know, one can go over the financial pluses and minuses, weigh the opportunity costs of paying off or not paying off, figure the tax angles one way or the other, and add up the scores to compare.

But there is a certain cachet, a certain allure, a certain pride, a certain freedom, that only comes when you can say---"I am debt free". Such debt freedom becomes a powerful tool to then geometrically improve your standing from that point forward. "I am debt free"---there is no feeling like it.

Value of being debt free?---Priceless.

 

[Nords]

You know, one can go over the financial pluses and minuses, weigh the opportunity costs of paying off or not paying off, figure the tax angles one way or the other, and add up the scores to compare.

But there is a certain cachet, a certain allure, a certain pride, a certain freedom, that only comes when you can say---"I am debt free". Such debt freedom becomes a powerful tool to then geometrically improve your standing from that point forward. "I am debt free"---there is no feeling like it.

Value of being debt free?---Priceless.

That makes sense when the factors are weighed up and then the basis of the decision is chosen-- quantitative or emotional. The decision is an informed one.

I have a problem with the oversimplifying guys like Ramsey who say "All debt is bad, end of story, no exceptions!"

 

[Shabber2]

So basically it isn't really a clear cut decision to pay it off. I think I am going to let it run and save up the nest egg. For emotionally I get a bigger charge out of having a "fat" nest egg than a paid off mortgage.

Fiscally, it makes sense to invest the money too.

 

[kombat]

[T]here is a certain cachet, a certain allure, a certain pride, a certain freedom, that only comes when you can say---"I am debt free". Such debt freedom becomes a powerful tool to then geometrically improve your standing from that point forward. "I am debt free"---there is no feeling like it.

Value of being debt free?---Priceless.

But isn't that really purely psychological? I mean, I have a mortgage (with 29 years to go). I could pay it off in 7 years, if I wanted to, and then be "debt free." But instead I'm choosing to invest that money.

Isn't being "debt free" mathematically identical to saying "my liquid assets exceed the outstanding value of my mortgage?" Aren't they pretty much interchangeable? I know the latter doesn't sound as "sexy" as the former, but doesn't it better facilitate accelerated savings growth than simply setting your clock back to zero?

 

[ERD50]

Value of being debt free?---Priceless.

How do you figure?

For example, if I pay off a $100,000 remaining on a mortgage, it cost me exactly $100,000. There certainly is a price to pay!

Would you say that having $100,000 of liquid value in an account 'priceless', or is it just $100,000? Then why is having $100,000 of illiquid value tied up in your home 'priceless'. I don't get it. It's net worth either way. One is more liquid than the other.

If you find a financial advantage to paying off the mortgage, go ahead - but I think you'll find it to be a fairly small advantage - not in the 'priceless' category at all.

-ERD50

PS - what kombat said

 

[FinanceDude]

How do you figure?

For example, if I pay off a $100,000 remaining on a mortgage, it cost me exactly $100,000. There certainly is a price to pay!

Would you say that having $100,000 of liquid value in an account 'priceless', or is it just $100,000? Then why is having $100,000 of illiquid value tied up in your home 'priceless'. I don't get it. It's net worth either way. One is more liquid than the other.

If you find a financial advantage to paying off the mortgage, go ahead - but I think you'll find it to be a fairly small advantage - not in the 'priceless' category at all.

-ERD50

PS - what kombat said

OK......this thread has been discussed to death. Really, for folks on here, there's a psychological "comfort" in having no debt. For instance, my parents bought a house for $30,000 ( a lot of money back then). They took out a 30 year fixed mortgage. 15 years later they had a mortgage burning party. They have not had a mortgage for almost 20 years, and they are happy about that.........

I think that if you are paying yourself first, have no debt other than a mortgage, and are on the path to FIRE, it's all good. However, if folks have extra money left over the pay off principal, I don't see that as being a "bad idea"........

The less I owe others, the "free-er" I feel...........

 

[cute fuzzy bunny]

I have a problem with the oversimplifying guys like Ramsey who say "All debt is bad, end of story, no exceptions!"

Ramsey is mostly preaching to people with serious spending and debt problems.

An alcoholic cant be allowed "just one drink this one time" because it'll lead to more. Similarly, someone with a debt problem cant be allowed "just a little bit of debt" even if someone without a problem would consider it to be "good debt".

Looking at his program, its practically a 12 step program for recovering addicts, including the bible thumping. Not for me, but god bless him for his efforts to help people.

Now if his investing advice didnt suck...

Certainly having no mortgage has a pleasing cachet. My wife feels pretty good when she tells people we own our house outright. To me its disaster proofing. I can invest anyway I like and wont ever be forced to liquidate holdings at an unfavorable price because i've got a big bill to pay.

I may choose to take on more volatile holdings to create a greater opportunity for returns, because I have no fear of volatility. I may also choose to take on less volatile holdings to create a better sleep at night factor, because I dont need all that extra money to service the debt I dont have.

I'm sort of doing both at this point. My "short money", the stuff I'll use over the next 20 years, is mostly in cash, bonds and LCV. My "long money" is all in LCV, SVC and REITS. Sort of a poor mans version of the Taleb strategy. I get a smooth easy ride for the next 20 years, and even if we spend all of that bucket, the long money will presumably appreciate to the level where we'll have more than enough for the next 25 years+.

Liquidity? Hardly a problem. I can draw on home equity via a line of credit or a reverse mortgage. Writing a check is even easier than selling a holding and waiting for it to clear. Should we live far longer than we should, and we run a little low on funds, our house will be worth between $1M and $2M. A "payment for life" reverse mortgage will carry us through.

 

[FinanceDude]

Ramsey is mostly preaching to people with serious spending and debt problems.

An alcoholic cant be allowed "just one drink this one time" because it'll lead to more. Similarly, someone with a debt problem cant be allowed "just a little bit of debt" even if someone without a problem would consider it to be "good debt".

Looking at his program, its practically a 12 step program for recovering addicts, including the bible thumping. Not for me, but god bless him for his efforts to help people.

Now if his investing advice didnt suck...

Certainly having no mortgage has a pleasing cachet. My wife feels pretty good when she tells people we own our house outright. To me its disaster proofing. I can invest anyway I like and wont ever be forced to liquidate holdings at an unfavorable price because i've got a big bill to pay.

I may choose to take on more volatile holdings to create a greater opportunity for returns, because I have no fear of volatility. I may also choose to take on less volatile holdings to create a better sleep at night factor, because I dont need all that extra money to service the debt I dont have.

I'm sort of doing both at this point. My "short money", the stuff I'll use over the next 20 years, is mostly in cash, bonds and LCV. My "long money" is all in LCV, SVC and REITS. Sort of a poor mans version of the Taleb strategy. I get a smooth easy ride for the next 20 years, and even if we spend all of that bucket, the long money will presumably appreciate to the level where we'll have more than enough for the next 25 years+.

Liquidity? Hardly a problem. I can draw on home equity via a line of credit or a reverse mortgage. Writing a check is even easier than selling a holding and waiting for it to clear. Should we live far longer than we should, and we run a little low on funds, our house will be worth between $1M and $2M. A "payment for life" reverse mortgage will carry us through.

Well, I don't often agree with you 100%..but I agree with you 100% on this one........

Ramsey and Orman and others are GREAT advisors on debt, NOT so good on investing...........I usually defer to Warren Buffet and a couple others with regards to investing........