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

[tizod]

What I don't get is the "peace of mind" when you have ample assests to always cover the mortage. If you had a fear you could LOSE the house, having the debt paid off is a good idea. But scared of debt? Are you scared of a $5K visa bill when you booked a trip? No, you pay it off next month - no interest! A mortage at a very low rate against investment rate is a bonus. You can pay the mortage off whenever you want. Plus, many times just pay off extra principal (not sure why you want to unless you think the future might go to zero investment rates) and lower the mortage accordingly. Banks only give you cheap money when you don't need it. Should something tragic occur I'd rather have part ownership of the house with the bank as a partner. IMHO.

 

[albireo13]

I have a nice size fixed rate mortgage at 2.625% in retirement. The payments are just another bill like the electric utility.
My cash flow can afford it. I dont worry about paying it off.
I could pay it off but I like my big nest egg. : )

 

[Gumby]

Just like LBYM to save for FI the other concern for me was as you have posted. I just turned 76 and have been preparing for the day that I may not be as sharp as I used to be. The past year or so I have may have found myself with an occasional "fuzzy brain" so your thoughts are an important consideration for everyone. I still pay my bills through my credit union but not yet on auto-pay. I need to do that so it will not be a burden for my wife in case I kick the bucket early. Auto-pay will be addressed before the year is through. Thanks for the reminder.

Interestingly, when I signed on to my Vanguard account today, I was encouraged to designate a "trusted representative" to alert them if I should experience dementia issues. So far, I'm still on top of things, but I understand the issue and I am giving serious consideration as to whom I might ask to fulfill that role. I have no children, but I do have 8 nephews and a niece.

 

[corn18]

My spreadsheet says I would be an idiot to pay off my 2.25% 30 year fixed rate mortgage with 27 years left. I have enough cash to pay it off, but the after tax earnings from that cash pays my P&I. For now, my mortgage is free. That is peace of mind for now.

 

[Gumby]

My spreadsheet says I would be an idiot to pay off my 2.25% 30 year fixed rate mortgage with 27 years left. I have enough cash to pay it off, but the after tax earnings from that cash pays my P&I. For now, my mortgage is free. That is peace of mind for now.

In your situation, I would agree. I wish you many happy returns.

 

[SlowlySaving]

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!

You did the right thing! It's great to have piece of mind that your home is paid off and no more mortgage payments. The stock market could have gone the other way so its nice to have a paid off home and piece of mind! Don't look back. Congrats!

 

[Rustic23]

I'm in the cash is not everything boat. Ours is paid off. In TX, over 65 you can defer all property tax. Homestead laws protect it from most law suites, if not all. Yes the kids may get less, but, this guarantees we won't run out of money.

 

[Perryinva]

Same as others here, low mortgage rate (2.75%) with 25 years to go. About $400k. Just another bill, paying significantly less interest to Wells Fargo, that the same amount in my Roth is making. The longer you pay, the less it is thanks to paying it with inflated dollars. I’ve always had a mortgage and always slept well and never worried about it and leveraged the appreciation the better homes I could afford with one, for basically free home living each time. I’ve always made decent money on the homes I’ve bought & sold. I certainly remember when the thought of a $2500 mortgage would have paralyzed me. It’s much less than 25% of my fixed income now, and in fact, our Visa bill is typically more.

 

[catii]

DW has handled our money for more than 40 years, so I let her make the decision to pay off our low-interest mortgage before she retired (I'm 7 years older & was already retired, & taking SS). The math showed that we could have done better keeping the mortgage, but in the long run, it hasn't mattered, & her peace of mind was worth more than the investment would have paid.

 

[GaryInCO]

We paid off our house many years ago, but then I had to buy DW's half when she dumped me. And I made a not-smart decision to refinance and pull more $$ out of the house equity. So I have a large mortgage. Much of my net worth is tied up in equity on the house and a rental property. I could pay off my mortgage (and be debt free) but that would leave me with very little liquid assets. The mortgage is at 3.25% so I figure it's smartest to keep paying it off. The house is too big for me so eventually I'll probably sell it, so I consider the loan to be an enforced savings program. I pay off about $1000 of the loan each month.

 

[eyenitnoy]

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!

Your error is this:

NOW, you know what VTI did over the last 5 years. But at the time of your decision, you did not know what the future would be. VTI could have dropped by 50% in this time period. You had no way of knowing the future. What you did know is what you would get by paying off the mortgage.

You chose correctly.

BTW,, if you want to use the retro-spectoscope, consider this. IF you would have taken that $400K and bought Nvidia, well then you would have made 10.4 million dollars!

Don't beat yourself up over your inability to predict the future.

 

[ERD50]

Your error is this:

NOW, you know what VTI did over the last 5 years. ...

You chose correctly. ...

Your error is this: For most of us who decided to take advantage of the low rates, it's a 30 year mortgage. Five years isn't the test. See my earlier post on the 20 and 30 year rolling returns of the stock market.

 

[RetiredHappy]

Your error is this:

NOW, you know what VTI did over the last 5 years. But at the time of your decision, you did not know what the future would be. VTI could have dropped by 50% in this time period. You had no way of knowing the future. What you did know is what you would get by paying off the mortgage.

You chose correctly.

BTW,, if you want to use the retro-spectoscope, consider this. IF you would have taken that $400K and bought Nvidia, well then you would have made 10.4 million dollars!

Don't beat yourself up over your inability to predict the future.

I think instead of comparing VTI returns to mortgage rate, a better comparison would be to buy a 5/10 year MYGA or CDs that pay higher rates than the mortgage rate. At the end of the duration, you can re-evaluate and if the interest rate on a new MYGA or CD is lower than the mortgage, you can pay off the mortgage. Now, I don't do that as I don't hold any CDs and MYGAs in my taxable account. But technically, I could and it would be a better apples to apples comparison.

 

[imnontrad]

I went mortgage free even though I had a low interest rate. I was one of those "peace of mind" actions. Plus I had decided when I was 50 that my goal to be able to retire was a certain amount in investments and a paid off home by age 60. I missed the paid off home at 60 by 2 years but I paid it off and then retired.
HOWEVER, my home is a small portion of my (current) net worth and I knew that I could handle a large expense without being stressed because money was tied up in the home. AND I deliberately downside to a less expensive home when I bought this 10 years ago so I could pay it off quickly (and did in a little over 4 years).

 

[Onda]

I went mortgage-free at age 35, and that decision was a game changer for us. By eliminating the mortgage payments early on, we were able to take on more risk with our investments, knowing that we didn't have the financial pressure of a monthly mortgage hanging over us. Without that obligation, we had the flexibility to be 100% invested in stocks, which allowed us to maximize our growth potential. While I understand that having a mortgage and investing the extra cash might have yielded higher returns in theory, being debt-free gave us the confidence to pursue a more aggressive investment strategy without worrying about market downturns affecting our ability to pay off the house. Looking back, going mortgage-free gave us a foundation of financial security that allowed us to be bold with our investments, and for us, it was the right decision.

 

[pb4uski]

I'm in the cash is not everything boat. Ours is paid off. In TX, over 65 you can defer all property tax. Homestead laws protect it from most law suites, if not all. Yes the kids may get less, but, this guarantees we won't run out of money.

You can, but the unpaid balance accretes at 8% percent, and your taxes are reported as delinquent so it impacts your credit rating... I'm not sure that is a wise financial move.

 

[pb4uski]

Your error is this: For most of us who decided to take advantage of the low rates, it's a 30 year mortgage. Five years isn't the test. See my earlier post on the 20 and 30 year rolling returns of the stock market.

I think instead of comparing VTI returns to mortgage rate, a better comparison would be to buy a 5/10 year MYGA or CDs that pay higher rates than the mortgage rate. At the end of the duration, you can re-evaluate and if the interest rate on a new MYGA or CD is lower than the mortgage, you can pay off the mortgage. Now, I don't do that as I don't hold any CDs and MYGAs in my taxable account. But technically, I could and it would be a better apples to apples comparison.

I think the most appropriate rate to compare is the earnings rate on the money used to pay off the mortgage assuming that you adjust your AA and do not rebalance.

When I paid of my 3.375% mortgage at the end of 2019, I used liquidity that was earning around 2% and reduced my AA target for liquidity so I didn't refill it when I rebalanced; effectively forgoing earning 2% to avoid paying 3.375%.

Now if one was 100% in VTI then the expected return on VTI would be a relevant reference point for making a decision, otherwise VTI is a foolish reference point.

 

[corn18]

I think someone once told me I need to compare my mortgage to bonds with 14 year duration to match risk. Back when I got the mortgage, those were paying maybe 2%, which would be 1.2% after tax (I was still working). We moved to TX in 2019 and we decided to pay off that mortgage, so we were mortgage free for a short time. When we moved back to OH in 2020, we built a house and took out a mortgage even though we had the cash to buy it from the TX sale. That's when we got the 2.25% 30 year fixed rate. 14 year rates were darn near zero at the time, maybe 1%. I forget exactly. I know CDs were all really low. We just decided to take the mortgage and pay it off if we hated it. Came darn close to paying it off many times. Then inflation hit and 14 year rates were now close to 5% and that changed our outlook. Invested the mortgage money in rolling CD's and treasuries and are making lots of money. For now.

 

[eyenitnoy]

Your error is this: For most of us who decided to take advantage of the low rates, it's a 30 year mortgage. Five years isn't the test. See my earlier post on the 20 and 30 year rolling returns of the stock market.

Hi ERD50::

I went and read over your various replies. I agree with you almost fully. Not everyone takes intrinsic pleasure in paying off a mortgage. And, especially with rates that were at historic lows, borrowing for a home and then using your cash-purchase price money to invest is a reasonable and prudent financial strategy.

I, however, will make two modest counter-points. First, whether looking ahead along a 5, 10, 20, 30 or even 100 year timeline, you cannot predict how the market will perform in the future. I put this forth as fact, not opinion. I know a lot of people will rebel at this notion. And I am aware of past performance of market investments. I'd even grant that it's much, much, more likely than not that in the future those 7% or so returns will continue as opposed to the S and P opening in 100 years at 600. But you just don't know. While you can predict the future it's impossible to know the future at 100% certainty.

My second point is coming from me, the minimalist. I purchased my home in cash. By doing so, I bought less home. There's a fairly famous study that showed people at McDonalds purchased 30% more food when they paid with credit than with cash. (Which also answers why some places don't want cash even when they pay a fee to Visa on credit transactions.) I think the same is true for homes. By paying cash, I bought a smaller place than I would otherwise. Therefore my ongoing cost of ownership--taxes, insurance, utilities, upkeep-are all lower and I have that saved money to invest. One pet peeve I have when people compare the returns of borrowing to buy a house with the investment returns by arbitrage is they tend to leave out the increased cost of ownership having a larger house entails. (Edit: I note the O.P. did mention "downsizing" on his new home purchase.)

So, from a financial planning standpoint, I think either method is defensible and "correct." I just wanted to make the point to the O.P. that he should not be upset because he knows something today that was impossible to know fiver years ago. Thus, I made the Nvidia comparison.

Thank you for your comments and I enjoyed your well thought out and numerous posts in this thread.

 

[Surewhitey]

+1 on the ACA comments... I hope to take advantage of this soon.

A couple more thoughts I've had is...

1. Isn't a primary residence judgment proof? Similar to a 401k?

2. Timing. We paid off the first home in ~2005. Still fresh in mind of the dot com crash. Also higher rates back then. Made sense considering these 2 events at the time.

The other 2 saved time, better price negotiations and loan fees. Just made sense from our perspective. Loans in 2015 were ~5% so different there too. Maybe a different path for us if rates were <3% but who knew it was going that low? Home values were 10-15% of NW at the time...

 

[corn18]

Hi ERD50::

I went and read over your various replies. I agree with you almost fully. Not everyone takes intrinsic pleasure in paying off a mortgage. And, especially with rates that were at historic lows, borrowing for a home and then using your cash-purchase price money to invest is a reasonable and prudent financial strategy.

I, however, will make two modest counter-points. First, whether looking ahead along a 5, 10, 20, 30 or even 100 year timeline, you cannot predict how the market will perform in the future. I put this forth as fact, not opinion. I know a lot of people will rebel at this notion. And I am aware of past performance of market investments. I'd even grant that it's much, much, more likely than not that in the future those 7% or so returns will continue as opposed to the S and P opening in 100 years at 600. But you just don't know. While you can predict the future it's impossible to know the future at 100% certainty.

My second point is coming from me, the minimalist. I purchased my home in cash. By doing so, I bought less home. There's a fairly famous study that showed people at McDonalds purchased 30% more food when they paid with credit than with cash. (Which also answers why some places don't want cash even when they pay a fee to Visa on credit transactions.) I think the same is true for homes. By paying cash, I bought a smaller place than I would otherwise. Therefore my ongoing cost of ownership--taxes, insurance, utilities, upkeep-are all lower and I have that saved money to invest. One pet peeve I have when people compare the returns of borrowing to buy a house with the investment returns by arbitrage is they tend to leave out the increased cost of ownership having a larger house entails. (Edit: I note the O.P. did mention "downsizing" on his new home purchase.)

So, from a financial planning standpoint, I think either method is defensible and "correct." I just wanted to make the point to the O.P. that he should not be upset because he knows something today that was impossible to know fiver years ago. Thus, I made the Nvidia comparison.

Thank you for your comments and I enjoyed your well thought out and numerous posts in this thread.

I'll agree with the concept of you buy less when you pay cash hypothesis. When we were financing our cars, we would just buy a new one every 4 years. No real downside because we just kept having a payment anyway, might as well have a new car. We actually haven't bought a new (or used) car since we started paying cash. My truck is 9 years old and running strong. I found an awesome used truck to replace it but didn't want to fork over the cash since my current truck is fine. My wife's car is 5 years old and in perfect shape. She doesn't even want a new car because the one she has is perfect and she loves it. I hate forking over cash for a depreciating asset.

 

[eyenitnoy]

1. Isn't a primary residence judgment proof? Similar to a 401k?

Not always. It depends on the state. You should check something called the "homestead exemption." It varies widely state to state. In Illinois, for example, it only protects up to $15,000 of home value! Some states offer 100%, others various amounts. Nevada, for example, exempts $550,000-but you have to file a homestead declaration.

Check the amounts and the required procedures for the state you live in.

 

[pjigar]

I'm in the cash is not everything boat. Ours is paid off. In TX, over 65 you can defer all property tax. Homestead laws protect it from most law suites, if not all. Yes the kids may get less, but, this guarantees we won't run out of money.

Asset protection was one of the consideration for us when we paid off our acreage. Homestead is protected against all 3rd party judgements in Texas. And so it 401K/IRA where bulk of our assets resides. I still need to figure out how to protect rental RE. I know I can do LLC, etc. but it is not the same as ironclad protections afforded to homestead and retirement accounts.

PS: Some of the things protected in Texas from judgements: One homestead with SFH (up to 10 acres in city and up to 100 acres outside city), 1 vehicle per family member, farm vehicles/equipments, 2 firearms, 2 horses, home furnishing, and the list goes on!

 

[pjigar]

My second point is coming from me, the minimalist. I purchased my home in cash. By doing so, I bought less home. There's a fairly famous study that showed people at McDonalds purchased 30% more food when they paid with credit than with cash. (Which also answers why some places don't want cash even when they pay a fee to Visa on credit transactions.) I think the same is true for homes. By paying cash, I bought a smaller place than I would otherwise. Therefore my ongoing cost of ownership--taxes, insurance, utilities, upkeep-are all lower and I have that saved money to invest. One pet peeve I have when people compare the returns of borrowing to buy a house with the investment returns by arbitrage is they tend to leave out the increased cost of ownership having a larger house entails. (Edit: I note the O.P. did mention "downsizing" on his new home purchase.)

That is so true. We buy cars with cash so we tend to keep them a lot longer (10+ years) compared to when we bought them with a payment. We also accidentally bought the current home with "cash" aka rehab the second home with cash. So, we ended up with a lot smaller house (2300 sq ft vs 5000 sq ft) in the end! I also track expenses diligently (no real budget) for last 15 years which has a psychological effect of me spending less when a certain category moves out of it's norm. There a so many counterintuitive things when it comes to personal finance.

 

[ERD50]

I'll agree with the concept of you buy less when you pay cash hypothesis. When we were financing our cars, we would just buy a new one every 4 years. ...

That is so true. We buy cars with cash so we tend to keep them a lot longer (10+ years) compared to when we bought them with a payment. ....

Well, a person needs to know themselves. I can say w/o reservation that this has absolutely no bearing on my purchase decisions. It is not true for me (and many others).

I'd suggest to anyone who does think this way to work on altering their thinking. That is where they will benefit in the long run. It's the same mentality for people who spend more because they can put it on credit. I use my credit card for just about everything I can, to gain the rewards (2%~4%). I've *never* (and I'm in the 'never say never' camp!) spent more than I would otherwise, just because that card would allow me to do so.

Read up on "behavioral economics". It's quite enlightening.