Did I do the right thing going mortgage free before retirement?

[surprising]

Back in 2019 as I was getting ready to retire, one of the things I wanted to do was get rid of mortgage payment to try to reduce expenses as much as possible before pulling the trigger. We downsized and were able to purchase our new home outright ($510K) with proceeds from previous home sale plus some cash. So we've been mortgage free for 5+ years now.

But.. what if instead I had gotten a $400K mortgage and used that extra $400K to invest in, say, VTI for 5 years? Let's do math.

Without mortgage, the only gains I get is from the house appreciation. Today the house is worth $670K, so that gives $160K in 'profit' going mortgage free thus far.

Investing $400K in VTI 5 years would currently be worth $730K today plus $15.746/sh in dividend = $40K, total is $770K, about $370K in gains.
House has appreciated to $670K, which gives an additional $160K in profit.
Subtract off 5 years of mortgage payments of $120K ($2000 * 12 * 5) = $410K profit investing instead of going mortgage free.

Did I do the math right? If so, it looks like I made a very bad decision!

 

[TheWizard]

It's probably a wash since had you not paid it off, you would have been still paying down the mortgage these past few years.

I think it's fine to retire with a few years remaining on your low rate mortgage; that's what I did.
Then once I paid it off several years ago, I got a nice increase in my monthly disposable income which I've been investing in stock index funds...

 

[Qs Laptop]

Looks like you did the math right. I understand you are proposing a hypothetical question. And, yes, you would have profited more from investing the $400K over the profit from your new house appreciation.

This is a question DW keeps asking me--"Why don't we pay off the mortgage (about $90K) and get that off our backs?" And my answer is always the same--"Because we are making 5% interest on our money in a money market and our mortgage is costing us 4.25%. Why would we take out money earning 5% to pay off a balance that is costing us 4.25%?"

To me, logically, it doesn't make sense. We'd be losing money. To her, emotionally, it makes sense. She'd have peace of mind there is no mortgage payments anymore. Typically, this is what the question, "Should I pay off the mortgage early" usually comes down to.

 

[bloom2708]

Doing this type of exercise never wins. What if the market had dropped 50%?

Did you invest any of the $2,000 per month?

Did you calculate your mortgage interest you didn't pay?

I'd crumple up your calculations and move forward. If you don't like your paid off house, take out a new mortgage and put it in the market.

 

[Romer]

I paid of my mortgage before I retired. It was one of my pillars to be able to retire along with a certain amount of $$ and buying all the toys I think I will want to have in retirement (Cars, Camper etc)

I have no doubt with a 2.88% 15 year with 4 years left I would have been better off financially investing it wisely. At the time fixed investments were low and investments come with risk, BUT the peace of mind to me was key. One less thing to worry about and I could afford to do it without impacting my next egg. If I made a little extra $$ investing, it wouldn't have made a difference in my spending our retirement plans.

It is a personal thing. I have no regrets and have not thought once about the "what if"

 

[Kings over Queens]

Did I do the math right? If so, it looks like I made a very bad decision!

from a financial perspective, yeah, you stepped on a rake. dope. bad move. you'd have more money today if you invested it.

is that the "right" decision?

that depends on what right is.

More money? Yeah, you blew it.

Peace of mind knowing your house is paid in full? Yeah, brilliant move. best move ever!

I can't tell you what is right for you, only you know that.

I paid my mortgage off in 2015 and never looked back despite knowing that the money invested over time would be worth much more.

 

[GrayHare]

I have more peace of mind when my risk level is lower. My risk level is lower when someone else has taken on some of my risk by giving me a mortgage that I have the funds to pay off any time I want.

 

[Jerry1]

I don't need to see the math to know that I'd feel best about not having a mortgage. That's what I did. I agree that for me it's more of an emotional decision, but I can see regretting owning my home outright. We did take out a small loan against the house when we put in the pool, but the main benefit of that is that I didn't have to pay taxes on a withdrawal from my IRA, which is where the money would have had to come from. Also, at the time, we were maxing out Roth conversions to the top of the 12% bracket. So, drawing money out of my IRA would have started at 22% tax. Now, we have the cash to pay off the loan, but its rate is 2.75% so I'm not paying that off any sooner than I have to.

 

[street]

I see nothing wrong with a mortgage in ER. I will say it is always interesting when people ask if they can ER and one of the first questions/answers is I owe no one anything. No debt!!!

I have seen many of guidelines for ERing people and one of the things at the top of the list have no debt. Interesting to me. I also see many that don't follow that rule and are advocates for debt in ER.

I have no real care either way and if markets/economy/inflation etc. works out while in debt it may be a good or bad thing.

 

[TheWizard]

Peace of mind comes a few different ways in this situation.
Assume you have $100k mortgage balance but also OVER $100K in your taxable account, growing each month with new contributions.

Not all retirees can accomplish that but it's good for those who can ...

 

[gianmatt]

I have more peace of mind when my risk level is lower. My risk level is lower when someone else has taken on some of my risk by giving me a mortgage that I have the funds to pay off any time I want.

This.

 

[Dash man]

Not being able to predict the future of the markets, the price of housing or the health of ourselves or our family, you shouldn’t second guess yourself. We paid off our mortgage in 2010. Since then we’ve paid for three more properties with cash, our investments have grown significantly and we remain debt free. Could we have made a few more bucks by getting mortgages? Who cares. We’re retired debt free and comfortable.

 

[rk911]

Back in 2019 as I was getting ready to retire, one of the things I wanted to do was get rid of mortgage payment to try to reduce expenses as much as possible before pulling the trigger. We downsized and were able to purchase our new home outright ($510K) with proceeds from previous home sale plus some cash. So we've been mortgage free for 5+ years now.

But.. what if instead I had gotten a $400K mortgage and used that extra $400K to invest in, say, VTI for 5 years? Let's do math.

Without mortgage, the only gains I get is from the house appreciation. Today the house is worth $670K, so that gives $160K in 'profit' going mortgage free thus far.

Investing $400K in VTI 5 years would currently be worth $730K today plus $15.746/sh in dividend = $40K, total is $770K, about $370K in gains.
House has appreciated to $670K, which gives an additional $160K in profit.
Subtract off 5 years of mortgage payments of $120K ($2000 * 12 * 5) = $410K profit investing instead of going mortgage free.

Did I do the math right? If so, it looks like I made a very bad decision!

We are risk averse and had decided and then planned to retire at 55. That plan included to be 100% debt free.

Our sole stream of income for the first 7-years in retirement would be our pensions as we decided long ago to not touch our investments (we've made one or two exceptions since 1982 but they were planned...specifically targeted). Our investments were our "nest egg" meant for comfingencies and emergencies.

In retirement we calculated that we could not pay the mortage AND my health insurance premium so between that and the desire to be debt free it was an EZ decision. We paid off the mortage a couple of years before we retired. We still consider that to have been one of our better decisions.

 

[FlaGator]

If you really want to get pedantic about it, you would include (deduct) the P&I payments you would have made from your stash, and calculated your (leveraged) return on the house based on what you would have put down. That may make you feel better, may not. But it doesn't matter - you made the decision and second-guessing it now isn't useful. Don't get a do-over, maybe you do something different going forward.

I paid off the prior house while working and enjoyed several years of pumping that money into the market after the 2008-09 crash. That worked out well. Took out a mortgage on the current house right after ER to preserve cash and provide flexibility while in the red zone for Sequence of Returns Risk (SORR). That has also worked out well.

The next house will be cash. I'm single, the kids are gone, I'm tired of managing the cash flow requirements and I'm past the SORR phase after 9+ years. Plus mortgage rates are now closer to a realistic conservative rate of return. This too will work out well. Different circumstances, different strategies.

 

[motley]

Doing this type of exercise never wins. What if the market had dropped 50%?

Did you invest any of the $2,000 per month?

Did you calculate your mortgage interest you didn't pay?

I'd crumple up your calculations and move forward. If you don't like your paid off house, take out a new mortgage and put it in the market.

I more or less agree with this. Plus OP I just did the same thing, so yes you made the right decision.

Not doing so was the argument that (surprise!) the agent who worked for the bank I was looking at getting a loan from made: "don't put all of that money on paying off the house; you can make more investing it, even though you have a mortgage!" IMO debatable at best, and in the end I didn't care: one of my lifetime goals has always been to have a house paid off before I retired so I didn't have that expense in retirement. Much to my own surprise tbh I now have that and love it. Enjoy it and don't look back.

 

[Badger]

Since our mortgage was for $48k with a 8.75% interest rate (I bought in 1983) once a mortgage was no longer a benefit for us to itemize we started an additional payment on the principal and got rid of the mortgage in a couple of years. We then continued to pay into our 403b(s) until retirement with the same money since we were used to living without it. Now we are in "high cotton" and totally debt free on everything except what we pay off each month on the CC.
Was it a good idea? Would it be a good idea for you? I don't know. I'm not a math person. I just know it worked for us to enjoy eliminating a debt.

 

[FLSUnFIRE]

Having a mortgage would require higher cash flow and likely more gains realized and taxed to pay the P&I. I too paid cash for my home before FIREing. Hindsight, I'd be richer had I taken a cheap mortgage and stayed invested (especially since I took a pretty big tax hit to raise some of the cash) but I don't regret it. Of course, hindsight is 20/20 but if I was able to act with perfect hindsight I'd make Mr Buffet look like an amateur investor! Having the house paid off is good psychologically for me and reduces my cash-flow needs and that allows me to manage my MAGI so I'm accruing savings (Income?) with the PTC I wouldn't have if I had to raise the cash to pay P&I. I did get a HELOC to give me a liquidity buffer and allow me to shift gains into future years if an unplanned emergency or opportunity arises.

 

[iloveyoga]

Everything is not always dollars and cents to me. Peace of mind and simplifying are important to me too. I have never been sorry we paid ours off and it set me on the path to a very nice early retirement.

 

[CaptTom]

The reason staying invested gives higher returns than paying off the mortgage is largely because the risk is higher. Like any investment decisions, it comes down to your risk tolerance.

It's not just the risk of the housing market going up or down. Home ownership also offers special protections from some "worst case" risks. They may not be able to take your home for medical bills or liability judgements, for example.

 

[Koolau]

We paid ours off before FIREing and, nearly as I can tell, it was near a "wash" financially, so the "feeling" of being debt free came at very little or no cost. YMMV

 

[MarieIG]

Hind sight is 20/20.

There is no crystal ball as to what the markets will do and even the most professional stellar investors do not always make the most profitable investment decision.

 

[surprising]

No regrets with the decision, I am quite happy not having a $2K mortgage payment going into retirement. I was able to invest that extra $2K/month for the past 5 years to build up my pre-401k bucket.

 

[RetiredHappy]

We paid for our previous 3 homes in cash while still working. With our current home which we bought after we retired, we took a mortgage because interest rate was very low. It's a case of taking a mortgage by choice as opposed to being able to afford to pay cash or not.

 

[Tetto]

I paid mine off, but then again I only had like $15k left...no biggie and it was all psychological for me

 

[Montecfo]

Generally, in a low rate environment it generally makes sense to take out or continue a loan and let investments ride. This assumes you have at least say a 5 year horizon.

Paying off the mortgage before retiring is kind of an old concept, which maybe works for some people who need that goal as an incentive to save. But a mortgage is just an expense you budget for. Pay it off when numbers say so.

And hopefully at this point it is not a large expense anyway.