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

[Beldar]

We never considered the value of our physical home in any net-worth calculations. However, we did wish to enter retirement with no debt obligations.

So, while still w*rking, I received a small inheritance, enough to retire the mortgage. Kinda helped satisfied one of our ER requirements.

_B

 

[Gallaher]

Two thoughts:
1) don’t dwell on the past….its over
2) would you have borrowed money to invest in VTI? That’s essentially what you are describing here.

I guess a final point. With a crystal ball we all are great investors. Without one we face reality.

 

[Jeffman52]

DW and I paid ours off about a year before we retired. It was a security thing for DW and she was not going to be onboard unless we did so. We used the money from not paying a mortgage to beef up our liquid assets.

 

[AZsniper]

I paid mine off and wouldn't change a thing. Enjoy it! Don't worry about "optimizing everything."

 

[Steeler75]

Still remember the awesome feeling when we sent in the large last check to pay off the mortgage a few years before retiring.

I don’t know anyone who regrets owning their home free and clear.

This topic has certain parallels to the question: do you regret taking Social Security at 62! Make the decision and don’t look back.

 

[5Miler]

When I retired in 2012, interest rates were such that money markets earned just about nothing and I owed $17K on a 5% rate mortgage. It probably would have been better to use the money to invest in S&P500 or something similar but if I was that close to making it, I wouldn't have retired in the first place.

 

[CSdot]

I paid off the remaining $175,000 on my mortgage in 2020. Not making those mortgage payments freed me up to increase my monthly savings. I suspect I saved more than I otherwise might have since I am completely debt free. No regrets.

 

[Texas Proud]

I find it interesting that so many people seem to feel 'better' or some other word not having a mortgage... I really do not care that I have debt... it does not bother me one bit...

I only look at debt as a means to an end... and the deciding factor is interest rates... if I get debt with low interest I am happy... I never get debt at a high interest rate, so I am happy...

It is really easy to 'manage' the debt.... I put in to pay the monthly payments for the rest of the loan... I do not have to do anything but make sure I move enough money into the checking account each month... but since I am paying other bills that has not added anything to my 'work'... just figure out the total of the bills and move money...

I also did this for my cars... did not pay them off early either as I had low rates...

BTW, there are no gotchas with these as opposed to those zero rates on CCs they used to have... if you screw up it cost you big time... so I never did do that...

 

[ERD50]

From the OP:

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

Since you asked if you did the math right, let me address that, and skip the never-ending debate of 'feel good' vs 'might have made more money'.

So no, I don't think you did the math right (but it doesn't matter much for a few reasons).

First - simplify your calculation - the house appreciates or depreciates the same amount, whether you have a mortgage or not. That's a wash, it's the same calculation in each case - so just skip it. Now, if you purchased that house strictly as an investment (not a primary residence that you'd need to replace when you sold, and would probably need to pay more for the new house anyhow), then you could look at a mortgage as leverage and would have a higher rate of return on your investment. But this is your home, I don't think any of that applies or matters.

Second - Don't count the entire mortgage payment as an 'expense', some is going to principal, that's really just moving money from one account to another - it's still your money.

Third - other than just analyzing what happened in the past as an exercise (you can't do anything about it now), there is no value to it. It's a bit like saying "I bought a lottery ticket and won, so buying lottery tickets is a good idea." - No, on average you expect to lose with a lottery ticket, it's never a good idea. The occasional winner doesn't change the decision process.

Here is how I think the calculation and decision process should go:

A) What is the interest rate and term on the mortgage?
B) Compare this to historical market returns for that time period.

I got a 30 year mortgage @ ~ 3% in 2021. Here's a chart that shows the 30 year rolling returns for the market. You will see that the market's WORST performance was ~ "The lowest annual return over any 30 year period going back to 1926 was 7.8%. ... — the worst 30 year return over the past 100 years or so was a total gain of 850%."

An eyeball of the average looks to be ~ 10%.

Deconstructing 10, 20 & 30 Year Stock Market Returns - A Wealth of Common Sense

A look at the historical long-term returns for the U.S. stock market.

awealthofcommonsense.com

So, my viewpoint was, if I can get a 3% mortgage, and the historical very, very, WORST market return was over twice that, well that sounds like an offer too good (for me) to refuse. So I took it.

Pretty much every investment decision we make has an element of risk/reward to it. Even something like CDs have interest rate risk. When I see a risk reward ratio like that, I see opportunity knocking.

One could also have the view that even with that knowledge, there is still a chance that the market could perform way worse than the worst of the past. And they'd be right, it is possible. So if that bothers you, don't do it. But I wonder how they make ANY financial decision, if they can't bite at this one? Money in your mattress is losing to inflation.

So to me, "how did I do for 5 years?" is not a valuable question. The market might have gone down in that time, I would not consider my 3% mortgage to be a "bad decision" - that will be determined over the life of the mortgage. History gives me a LOT of confidence this was a good decision (I should leave notes for my heirs, they will be the real beneficiaries!). And if it wasn't, I doubt it will be "bad" by very much, and that is a risk I am very, very willing to take.

 

[jazz4cash]

It’s personal choice but another component of keeping a mortgage in place that is not usually mentioned is inflation IMO. My deflated dollars don’t go as far at the grocery store but they are valued the same as always when I pay my mortgage. It is one of the marvels of long term mortgages that many countries don’t offer.

 

[HI Bill]

Having a mortgage would require higher cash flow and likely more gains realized and taxed to pay the P&I.

We bought a house just before ER. We hadn't sold our condo yet, so we had to sell a bunch of taxable brokerage funds for the down payment. Ended up putting $500K down, and financing $500K at 2.675%. We now pay about $1K/mo in interest, and $1K/mo in principal. By leaving the $500K invested, using the simple math of an annualized stock market return of 10% (7% after inflation), we're making $35K/year in earnings, and paying back about $24K towards the mortgage. Due to our interest rate and impact on one-year taxable distributions, this by far made the most sense. We pay far less in taxes on the $24K now per year than we would have if we had taken the extra $500K from the brokerage accounts.

 

[WhenIsItTime]

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!

In the mortgage scenario, you should reduce the $400k investment overtime by amount of mortgage payments reducing the return slightly. Alternatively, if you have other money to make mortgage payments, then that money should be invested in scenario one and increase return there.

Also, depending on your situation the capital gain on house could be tax exempt. Gain on stock would be taxed to look at a liquid end-state.

Could also argue somebody with a mortgage should have a more conservative AA than somebody without due to shorter-term cash needs.

Adjusting for these items would reduce the difference.

I'm in similar situation where paying off a mortgage cost me money vs. having more investments and a mortgage. However, had no idea stock market would stay/go on a run for extended period of time. Pretty happy with how it all turned out!

 

[dm]

I retired in 2007, in February of 2020 we bought our current home, after not having a mortgage since about 2005, we financed around 70%. We did spend quite a bit of cash to upgrade the house though.

We had the money to pay cash for the house if we wanted to.

I was surprised that we could get a 30 year loan at 3%. I’ll have to live to be 93 to pay it off.

After living through 2007-2010 there is something to be said about having cash available. If needed you may not be able to access cash from your home.

And I’ve just parked it in money market funds, I’m pretty confident I can beat 3% over time, and if rates were to drop way below that I still have the option to pay it off, or refinance maybe.

The bank withdraws money from my checking account and pays my taxes and insurance when needed. I actually feel pretty good.

 

[ERD50]

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. ...

This is another oft-heard comment from those in favor of not having a mortgage. But it begs the question - what were the tax consequences of the sudden large cash flow needed to buy the home for cash? If that was after-tax money, then it also could have been used to pay the mortgage with no tax hit.

And by not using the cash to buy the home, you have the cash to pay the mortgage!

... 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 ...

Again, "accruing savings", because no mortgage payment? But you just used a big chunk of savings to buy the home. With a mortgage, you already HAVE the 'savings', you don't need to "accrue" it.

 

[FLSUnFIRE]

Again, "accruing savings", because no mortgage payment? But you just used a big chunk of savings to buy the home. With a mortgage, you already HAVE the 'savings', you don't need to "accrue" it.

I don't disagree, there is always an opportunity cost. There is not right or wrong -just discussion of things to consider and not prescribing my decision (nor claiming it is optimal) for others as everyone's MMV. That said, the accrued tax savings over the years from being able to keep my MAGI low is not insignificant. If I had financed, the additional cash-flow needed to cover the mortgage would require realizing enough income to lose most of the PTC (~$5-7K/year -and if the cliff comes back all of it) and would also kick my cap gains up a bracket. I would then have to realize additional taxable income to cover the lost PTC and to pay the additional income tax which would increase my tax load further.

I did lose the impact of leverage on my investments which given the market/inflation and low interest rates in 2019 when I bought would have been significantly positive IN HINDSIGHT. With leverage there is additional risk so not apples to apples to compare leveraged vs non-leveraged returns. Had we entered another lost decade, I'd have had to sell and lock in losses to cover that mortgage.

 

[FLSUnFIRE]

This is another oft-heard comment from those in favor of not having a mortgage. But it begs the question - what were the tax consequences of the sudden large cash flow needed to buy the home for cash? If that was after-tax money, then it also could have been used to pay the mortgage with no tax hit.

It was significant (I was still working so had earned income too). I did mitigate it some by borrowing from my TSP which I aggressively paid off with earned income prior to ER. Looking back, I'd still do it but I could have been more tax efficient -at the time I was still unwinding financial/real estate from a divorce and optimizing taxes was not the primary concern. As it turned out, buying when I did was a very good thing as real estate exploded shortly after I bought and I'd be priced out of retiring in my city had I kept renting.

I'm not motivated to recalculate 5 years of pretend taxes but it would be interesting to know what the IRR was on that "investment" of paying taxes up front. I suspect it is close to 0% at this point and would trend slightly positive until I lose PTC either through legislation or my taxable income increasing when I begin drawing from my deferred accounts.

 

[Surewhitey]

The past 2 homes we paid cash but for more reasons I've seen. Yes, peace of mind is a biggie, but we also saved any loan fees for said loan of ~1% and we had an advantage (personal opinion) and reduced offers by ~$25k each. One was pre-market opportunity. Other was a probate sale with lots of offers in a hot 2018 market.

We cleared, after all closing costs and remodel, $100k (tax free) on a $275k on the first in 2.5 years and the second one is ~$500k with a basis of $282+30k (post remodel).

3x s&p investment would be ~$775k on the original $275k, but that doesn't include the price of interest, closing fees and taxes on distributions and eventual gains (tax free with the house).

And we like simple in our financial life...

 

[DJRR]

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!

If you want to feel really bad you could have put that $400k in Nividia and you would have no problems today as you post from vacation in the Maldives.

You make the best choice available at the time and move on. Personally, I will keep my low rate mortgage into retirement and the payment is the last thing I worry about. It's a bonus that I can deduct the interest and my money market pays more after tax than the mortgage.

 

[VanWinkle]

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.

For that small difference in rates, I would pay it off and make her happy. The benefits of her being happy out weigh the small difference in rates.

 

[Montecfo]

"I wanted to pay off my XYZ note early so I would have more money in retirement"
"Ok, what did you use to pay it off?"
"Money, of course"
"Hmm, I see"

These seem to be mainly psychic benefits, but those type of benefits are real.

 

[iloveyoga]

I find it interesting that so many people seem to feel 'better' or some other word not having a mortgage... I really do not care that I have debt... it does not bother me one bit...

I only look at debt as a means to an end... and the deciding factor is interest rates... if I get debt with low interest I am happy... I never get debt at a high interest rate, so I am happy...

It is really easy to 'manage' the debt.... I put in to pay the monthly payments for the rest of the loan... I do not have to do anything but make sure I move enough money into the checking account each month... but since I am paying other bills that has not added anything to my 'work'... just figure out the total of the bills and move money...

I also did this for my cars... did not pay them off early either as I had low rates...

BTW, there are no gotchas with these as opposed to those zero rates on CCs they used to have... if you screw up it cost you big time... so I never did do that...

I agree the numbers make sense. I think for me it goes back to our days when we did not quite have enough money, surely no money for extras. I guess I have not forgotten that feeling and that is why I love having no debt and few bills. Definitely an emotional thing.

 

[CaliKid]

I'd rather have a paid off house and wish I had done that when I had the chance... but that's hindsight!

 

[twirler]

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!

My short answer. I vote to pay off the mortgage, however I am remiss to say that may not be correct. Are you FI after the mortgage is paid off? If yes then pay it off.

My reasons are (yes I know it’s not min maxing your financials) but, it’s really hard to go broke when you don’t owe other people money. Having a high free cash flow when FI with no debt is amazing. You’ve already won the game.

Do you really need a bigger number for NW calculations at the end of the month?

With the cash flow you can do home improvements, enjoy life more, undertake more investments without worry of the mortgage, so higher risk ones if you so desire, and I could go on.

Altruistically, you honor a huge obligation you’ve undertaken. It helps your lenders bottom line and if you bank with them well it’s great to help the people that handle your money. in a small way it improves the whole economy. The bank frees up capital to lend elsewhere; to those who need it.

 

[jazz4cash]

I personally make no distinction between paying off the mortgage using a lump sum vs. keeping the mortgage and having the lump sum invested. That part is just math (and emotion). Isn’t there a middle ground though? How about making extra principal payments from income or savings that do not impact your marginal tax rate? Similar to how we approach Roth Conversions.

 

[NgineER]

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!

Hindsight is 20/20. Sleeping well makes a huge difference in quality of life. I don't plan to retire any cheap debt early. My main mortgage will be paid off in 2043 at age 68, our rental properties somewhere between 2031 and 2054. My ER date is 2030 at this point. I might snowball the debt payments after I retire to increase cashflow when it is all paid off, but at this point I am happy keeping the debt obligation.