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

[ERD50]

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. ...

We are in agreement, but I think you will see that I described it as a very good 'bet'. It is still a bet, there is no certainty. But it does stand out as a very good bet with 3% fixed 30 year rates. IMO such a good bet that I would not pass it up. Other people decide to turn down, or simply not pursue that bet - fine, their choice, but it makes me wonder how they are comfortable with any investment, and the inflation threat.

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. ...

I addressed this in the replies to you on this. Short version - no, that did not influence me, not relevant (for me). I'm not 'people', I'm me. This is like all the articles out there saying that 'people' aren't financially prepared for retirement. Well, that doesn't apply to most of the people on this forum, does it?

... 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.
...

And I made the same point - it's not about 5 years of anything, it's about the very good odds that investing that 3% fixed 30 year mortgage money will be a winner over 20~30 years.

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

Thank you as well.

 

[ERD50]

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). ...

That is one viewpoint, and I'm not going to say it is 'wrong', there is some basis for it.

But, as I believe I've said upstream, portfolios aren't really all that sensitive to shifts in AA, and my mortgage is a small enough % of my portfolio that I don't feel the need to adjust my AA for it. And even if I did, the overall return of my portfolio likely would not be affected much at all. So my 'bet' is that my ~ 70/30 AA will outperform the cost of my 3% mortgage over 20~30 years.

 

[corn18]

Paying off a 2.25% 30 year fixed rate mortgage is behavioral economics. Plain and simple.

 

[Onda]

Paying off a 2.25% 30 year fixed rate mortgage is behavioral economics.

This is not exactly the case if CDs and Money markets have after tax return below 2.25% which in last 23 years happened only 2005-2008 and in last 2 years.

You can't compare equity returns to your mortgage rate. You can compare it to returns on cash.

 

[corn18]

This is not exactly the case if CDs and Money markets have after tax return below 2.25% which in last 23 years happened only 2005-2008 and in last 2 years.

You can't compare equity returns to your mortgage rate. You can compare it to returns on cash.

CD and MM rates have been well north of 2.25% over the last two years. Am I reading your response incorrectly?

 

[Onda]

CD and MM rates have been well north of 2.25% over the last two years. Am I reading your response incorrectly?

My last posting is pretty poorly written. In the last 23 years, cash returns have only exceeded 2.25% during two periods: from 2005 to 2008, and again in the last two years.

 

[jazz4cash]

My last posting is pretty poorly written. In the last 23 years, cash returns have only exceeded 2.25% during two periods: from 2005 to 2008, and again in the last two years.

I get your point about only comparing to cash but if the funds to pay off the mortgage are coming from equities (or bonds) the cash-only comparison is flawed. I use an AA that would never have much more than 12% cash so I would certainly need to withdraw from bonds or equities to raise enough cash to pay off a mortgage. Plus I have very easily beat my 2.75 mortgage for at least the last 20 yrs using ‘safe’ fixed securities primarily CDs and treasuries. The lowest rate I can recall is 3.05%

Anyone that enjoys the feeling of being mortgage free should do so and there is no need to justify the early payoff math.

 

[Onda]

I get your point about only comparing to cash but if the funds to pay off the mortgage are coming from equities (or bonds) the cash-only comparison is flawed. I use an AA that would never have much more than 12% cash so I would certainly need to withdraw from bonds or equities to raise enough cash to pay off a mortgage. Plus I have very easily beat my 2.75 mortgage for at least the last 20 yrs using ‘safe’ fixed securities primarily CDs and treasuries. The lowest rate I can recall is 3.05%

Anyone that enjoys the feeling of being mortgage free should do so and there is no need to justify the early payoff math.

Agreed. It is interesting, though, how many people are against paying off their mortgage because they believe they can make more money elsewhere. At the same time, those individuals won’t even dare to go 100% into equities.

That is many of last 23 years they have ton of money sitting in cash or equivalents making after taxes less than their mortgage.

 

[jazz4cash]

You’ve described me because I have chosen not to payoff my long cheap mortgage but I am not 100% equities. I see no connection between payoff or no payoff to being 100% equities. To carry a mortgage is a form of diversification just like holding bonds, cash, etc. My main point is you don’t need to optimize every penny. Do what feels right. It’s great to have the choice to do so.

 

[pb4uski]

You could flip it around and frame paying off the mortgage as buying a period certain SPIA. With a period certain SPIA, if you make a deposit of $x, you get $y per month for n months.

If you pay off your mortgage, if you pay $x, you avoid having to pay $y per month for n months where $x is the payoff, $y is the monthly P&I payment and n is the remaining term in months.

A negative outlay is economically the same as income... both are positive.

The IRR of paying off is the mortgage interest rate, just like the IRR on a period certain SPIA can be calculated.

 

[corn18]

Here's a mind bender. My military COLA pension has gone up 16.83% since 2021. Guess what? The real cost of my mortgage has gone down 16.83% since 2021. No investment required. If inflation stays at 2.25% for the next 26 years, the real interest rate on my mortgage is 0%.

I ran the numbers for the full 30 year term of my mortgage using actual inflation rates for 2020-2023 and 2.25% inflation for the remainder. The data show that I will pay $450,471 real dollars on a $500,715 mortgage. That makes me happy.

 

[jazz4cash]

Here's a mind bender. My military COLA pension has gone up 16.83% since 2021. Guess what? The real cost of my mortgage has gone down 16.83% since 2021. No investment required. If inflation stays at 2.25% for the next 26 years, the real interest rate on my mortgage is 0%.

I ran the numbers for the full 30 year term of my mortgage using actual inflation rates for 2020-2023 and 2.25% inflation for the remainder. The data show that I will pay $450,471 real dollars on a $500,715 mortgage. That makes me happy.

That's a 10% discount! The inflation protection/advantage of carrying a mortgage is often overlooked. Very early in my career I met with an FA that advocated 40 or 50 year mortgages because of the inflation advantage. At the time there was some momentum gathering for longer terms but it never really materialized. Currently I would like to see some longer term products (along with builder incentives) to promote home ownership for 1st time buyers.

 

[rayvt]

If you pay off your mortgage, if you pay $x, you avoid having to pay $y per month for n months where $x is the payoff, $y is the monthly P&I payment and n is the remaining term in months.

A negative outlay is economically the same as income... both are positive.

Nope. Avoiding a payment is not the same as getting an income.

If it was, then when I pay off a $2000 credit card bill every month is the same as having a $2000 paycheck.
I also did not make $25,000 last month by deciding to not buy a Honda Civic.

 

[rayvt]

There's a fairly famous study that showed people at McDonalds purchased 30% more food when they paid with credit than with cash.

I call BS on this study.
It could not be comparing the same person buying with cash vs. card. It could only have been the set of people paying cash vs. the set of people using card.

It could very well be (probably is) that the people paying cash paid cash because they were broke and HAD to spend less. Or people who bought only a small snack used cash.
They paid cash BECAUSE they were making a small purchase.

When we used the drive-thru to get a $1 soda and $1 fries, we always paid cash. I would be embarrassed using a card for a $3 order. But when we got a full meal it was easier to put a $15-$20 order by swiping the card.

And nowadays when you order in the app or at the kiosk you just about have to use a card.

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.

Right. But the most likely long-term future will be similar to the long-term past.
You cannot even predict tomorrow. As my neighbors discovered yesterday in a car crash.

 

[twirler]

That's a 10% discount! The inflation protection/advantage of carrying a mortgage is often overlooked. Very early in my career I met with an FA that advocated 40 or 50 year mortgages because of the inflation advantage. At the time there was some momentum gathering for longer terms but it never really materialized. Currently I would like to see some longer term products (along with builder incentives) to promote home ownership for 1st time buyers.

Can you explain the inflation protection advantage of carrying a mortgage? I keep trying to wrap my head around it. I have an amazing mortgage at 2.125. I’ve had it since 21.

 

[rayvt]

Can you explain the inflation protection advantage of carrying a mortgage?

Sure. Check the usinflationcalculator.

A $1500 mortgage payment in 2000 has the same $1500 payment now in 2024. But after inflation the purchasing power equivalent is $819. Each year you are paying with cheaper and cheaper dollars.

On the 30'th year, if your 1994 payment was $1500 today that only costs you $705 of purchasing power.

My Dad told me on the 25'th year of his mortgage that the tax & insurance part of his payment had grown to be more than the P&I part. The P&I stayed the same while the T&I grew with inflation.

 

[jazz4cash]

Can you explain the inflation protection advantage of carrying a mortgage? I keep trying to wrap my head around it. I have an amazing mortgage at 2.125. I’ve had it since 21.

That IS amazing. Actually any 30 yr fixed rate mortgage that can be refinanced cheaply is amazing. We take it for granted but most places in the world don’t have this option.
Rayvt did a good job explaining the inflation protection angle.

 

[twirler]

That IS amazing. Actually any 30 yr fixed rate mortgage that can be refinanced cheaply is amazing. We take it for granted but most places in the world don’t have this option.
Rayvt did a good job explaining the inflation protection angle.

Mine is a 10 year. I still love the rate.

 

[ncbill]

It's a psych thing, like pursuing dividend stocks or indices for income instead of total return.

Sure, if I had a sub-3%, 30-year mortgage I'd never pay it off.

But understand those rates won't be seen again in our lifetime, short of something worse than merely another Great Recession.

My kids & their kids will be paying at least double that on any future first mortgages or refis.

 

[jazz4cash]

It's a psych thing, like pursuing dividend stocks or indices for income instead of total return.

Sure, if I had a sub-3%, 30-year mortgage I'd never pay it off.

But understand those rates won't be seen again in our lifetime, short of something worse than merely another Great Recession.

My kids & their kids will be paying at least double that on any future first mortgages or refis.

Yup, but I think it’s mire than psych. I’ve told many folks anything under 7% is actually pretty good but the prices are so high and we old coots are hanging onto our cheap mortgages and not downsizing.

 

[pb4uski]

Nope. Avoiding a payment is not the same as getting an income.

If it was, then when I pay off a $2000 credit card bill every month is the same as having a $2000 paycheck.
I also did not make $25,000 last month by deciding to not buy a Honda Civic.

So wrong, yet again. Minus 1 times minus 1 equals plus 1.

If rich uncle comes along and pays you $2k/month for 60 months are you better off?

If instead, rich uncle comes along and says the he will make your $2k/month mortgage payment for you for the next 60 months aren't you equally better off?

In case you are confused, the correct answers are yes and yes.

 

[pacergal]

Paying off your mortgage is very similar to the when to take SS questions.
The answer is it all depends-- your finances, your emotions, your or your spouses comfort level.
Everyone makes the choice that is right for them. And usually, no amount of discussion will change that persons mind.
Our mortgage was paid off, then we had some unusually large bills. We could have taken money out of investments, but chose instead to do a 15 year 2.6% mortgage. Our monthly cash flow easily handles the payments and our investments, so far, have largely added that amount back. And our house value continues to rise.
It was the right decision for us.

 

[albireo13]

It all depends on your financial situation and comfort with carrying mortgage debt. There is no right/wrong answer.

I retired in 2020 and my wife retires next year. We carry a healthy 2.625% fixed rate mortgage, 25 years left.
The payments are part of our budget and cash flow easily handles it. We are very comfortable carrying the mortgage. To us it's just another bill. We could easily pay it off but, we prefer to see that larger nest egg! : )

Our property value has increased significantly so, we have a good chunk of equity as well.

In any case, good luck with your decision. Do what makes yourself comfortable.

 

[RobLJ]

I think a lot of this is psychological, although there are some numbers. In our case, we got lucky; I took a University job in Houston in 1990 just as Houston and the Southwest was coming out of the Credit Union Real Estate Depression in the Southwest, which was crushing for those who experienced it.
The house we bought had been vacant for 2 years; we paid 113,000 for a 2500 square foot house with a pool and half an acre. I knew we would have to put a new roof on it soon and put in a pool heater and some fixtures, which had been stripped. The mortgage was 9.75%.
We had a 3 month old and a 3 year old, and were up against the wall until the 3 month old was close to kindegarten, when suddenly we had a huge influx of cash (little day care expenses). We refinanced down to 7.5, then took a 15 year mortgage at 5% when suddenly due to pay raises, the decrease in mortgage costs, etc, we suddenly had extra money--what a concept.
I think we paid off the house in 2007 or 2008 or so (might have been 2006 since we used a cash bonus to pay off the rest of the mortgage), which psychologically allowed the DW to agree to retire early in 2015. We had taken a second in fears we would need the cash to send the youngest to college, which--due to fortunate bonuses for DW--we never had to use.
It's quite possible we would have wound up with more money had we just stuck with the 6% 30 year, but then there was the Great Recession and the Tech crash, so it's quite possible we would have wound up with a lot less. My parents were lower middle class preacher family and my wife was from a poor Polish family just outside Philly, so I never imagined I would retire early and in (relative) luxury, perhaps not luxury compared to many here but luxury indeed, which is a state of mind.

 

[CaliKid]

Tomato or tomato. It's fine. Don't worry. Enjoy life!