I hate my mortgage but shouldn't pay it off

[corn18]

We paid off our house in TX in 2019. Then we moved to OH in 2020. We could have paid cash for the OH house, but decided to take a 2.75% 30 yr fixed rate mortgage on the new house. We put the cash from the TX house into the market in May 2020. That turned out to be a great move. Made $56,000 net of mortgage interest. Yeah us!

But now, as we are 57 days and a wake up from retirement, I have come to hate this mortgage. All the models say keep it. And now that the invested cash from the TX house has giant short term cap gains, it isn't as simple as just paying it off. I'll have this boat anchor until age 84.

No real action, just a rant.

 

[RunningBum]

The gains will be taxed at a better LTCG rate in 3-4 months. Or you could use other money with less of a tax impact to pay off the mortgage.

Why do you hate the mortgage? Some business gave you a whole bunch of money at a really low interest rate. Sounds like a sweet deal to me. You could be laughing every month that you trickle their money back to them. But if you really hate it, pay it off.

 

[anothercog]

I go back and forth with my love/hate relationship with my mortgage but I think it makes the most sense for me to pay it off within the next 5-7 years before I retire. If I don't need enough income to make the payments, I can probably have low enough income that will qualify me for ACA subsidies and low taxes. Along with piece of mind, that is a significant benefit that should alleviate market FOMO.

 

[CardsFan]

My first question on this is always: Right now, if you had no mortgage, would you mortgage the house to invest in the market? Because that is basically what you are doing.

That said, it depends on how much the mortgage is and what are the payments. If you have a large amount of cash earning less than 1%, maybe put some of that towards it.

Despite the fact that we (the FIRE community) LOVE to discuss the topic, paying off the mortgage is a very personal decision.

Full disclosure: We (DW and I) always had the attitude that all the money from a sale went into the next house, keeping the mortgage low. When the last house was paid off, we sold for a tidy profit, bought the current townhome/condo, and invested the rest.

 

[braumeister]

But now, as we are 57 days and a wake up from retirement, I have come to hate this mortgage.

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

 

[corn18]

Why do you hate the mortgage? Some business gave you a whole bunch of money at a really low interest rate. Sounds like a sweet deal to me. You could be laughing every month that you trickle their money back to them. But if you really hate it, pay it off.

Mental aversion to debt.

My first question on this is always: Right now, if you had no mortgage, would you mortgage the house to invest in the market? Because that is basically what you are doing.

That said, it depends on how much the mortgage is and what are the payments. If you have a large amount of cash earning less than 1%, maybe put some of that towards it.

Despite the fact that we (the FIRE community) LOVE to discuss the topic, paying off the mortgage is a very personal decision.

Full disclosure: We (DW and I) always had the attitude that all the money from a sale went into the next house, keeping the mortgage low. When the last house was paid off, we sold for a tidy profit, bought the current townhome/condo, and invested the rest.

We made that decision in May 2020. We could have kept that money in cash and paid off the new house. We did that because we thought we had the option to pay it off at any time later if we hated the mortgage. Didn't think about huge cap gains because we were in the middle of the coronavirus bear market. I just looked and our cap gains are up to $64k now.

 

[REWahoo]

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

^ This. All the cost/benefit analysis in the world pales in comparison.

 

[mopar lover]

I went against the grain and payed mine off when I was in my thirties. I had everyone tell me I was losing money, but I work construction and I love the peace of mine it brings me if things every get bad for me.

 

[CardsFan]

I went against the grain and payed mine off when I was in my thirties. I had everyone tell me I was losing money, but I work construction and I love the peace of mine it brings me if things every get bad for me.

I have many friends that worked in the trades, so I know the ups and downs of employment lapses and income losses you face. I imagine having a paid off home reduces a LOT of the anxiety. Good move.

And just out of curiosity how many of those friends telling you that you are losing money are driving $50k pick-ups, with a big loan?

 

[Dash man]

We paid ours off eleven years ago. The only debt has been short term car financing to take advantage of deals, but the get paid off quickly. I despise debt. We have plenty in the market and taking a mortgage to invest more would seem to be risky to me.

 

[phil1ben]

Whether you are taking a deduction for the mortgage interest (i.e. taking the standard deduction or itemizing) should factor into the equation. If the government (i.e. the rest of us) is paying a significant amount of your interest (say you fall above the 35% bracket and you itemize) then it militates towards keeping the mortgage. However, if your are taking the standard deduction and paying the interest without help from the government (i.e. us) I would pay it off.

 

[RunningBum]

Mental aversion to debt.



We made that decision in May 2020. We could have kept that money in cash and paid off the new house. We did that because we thought we had the option to pay it off at any time later if we hated the mortgage. Didn't think about huge cap gains because we were in the middle of the coronavirus bear market. I just looked and our cap gains are up to $64k now.

But you still have that option, right? Making a boatload of money doesn't change that. If that's your only source of money to pay off the mortgage, you wait until May 2021 so that it's a LTCG, sell off that investment, pay the $9600 ($64K * 15%) tax on the LTCG, and whoop it up with the ~$54k extra you have from the gains, and sleep well with no mortgage. Maybe it's somewhere around $40K after accounting for the mortgage interest you were paying. Still very much a total win. Why is this a hurdle? Would you rather have minimal gains to cover the mortgage interest and tax, leaving you none extra? I really don't understand.

 

[corn18]

But you still have that option, right? Making a boatload of money doesn't change that. If that's your only source of money to pay off the mortgage, you wait until May 2021 so that it's a LTCG, sell off that investment, pay the $9600 ($64K * 15%) tax on the LTCG, and whoop it up with the ~$54k extra you have from the gains, and sleep well with no mortgage. Maybe it's somewhere around $40K after accounting for the mortgage interest you were paying. Still very much a total win. Why is this a hurdle? Would you rather have minimal gains to cover the mortgage interest and tax, leaving you none extra? I really don't understand.

Hadn't thought about it that way. My brilliant financial mind managed to net $54k by taking a mortgage for a year. If the market tanks between now and May 2021, then I won't have any cap gains. I win either way.

 

[FLD3C]

I've always believed that the most important thing is to do whatever helps you to sleep soundly at night.

+1

 

[statsman]

Maybe you can refinance to a 15 year mortgage at the same rate or slightly better. Increase your payment amounts and reduce the duration of the mortgage.

 

[corn18]

But you still have that option, right? Making a boatload of money doesn't change that. If that's your only source of money to pay off the mortgage, you wait until May 2021 so that it's a LTCG, sell off that investment, pay the $9600 ($64K * 15%) tax on the LTCG, and whoop it up with the ~$54k extra you have from the gains, and sleep well with no mortgage. Maybe it's somewhere around $40K after accounting for the mortgage interest you were paying. Still very much a total win. Why is this a hurdle? Would you rather have minimal gains to cover the mortgage interest and tax, leaving you none extra? I really don't understand.

Well, this got me thinking, so I went and had a closer look. I only need $100k out of the taxable account that has capital gains. If I pull out $100k, I'll have about $25k of cap gains. I can get that out @ 0% LTCG tax because our income is so low. I just won't do as big a Roth conversion next year. So that roadblock is gone.

 

[RunningBum]

Well, this got me thinking, so I went and had a closer look. I only need $100k out of the taxable account that has capital gains. If I pull out $100k, I'll have about $25k of cap gains. I can get that out @ 0% LTCG tax because our income is so low. I just won't do as big a Roth conversion next year. So that roadblock is gone.

Congrats on a brilliant move!

 

[bada bing]

I made a similar decision back in 2010. I choose to use a mortgage to purchase a vacation house that I had cash on the sidelines earmarked for. The attraction was the 2.625% rate. I invested the cash in a separate account in my normal 60-40.

Fast forward 10 years - the investment account has tripled (although considerable unrealized gains yet to be taxed). The house value is up 150%. Single best financial move of my life. My second house has been more than "free" due to the arbitrage success. I don't hate my mortgage at all. The invested account is now more than 1/2 the money I have outside of retirement accounts and that positioning is extremely useful for funding my early retirement spending and Roth conversion taxes.

 

[corn18]

I made a similar decision back in 2010. I choose to use a mortgage to purchase a vacation house that I had cash on the sidelines earmarked for. The attraction was the 2.625% rate. I invested the cash in a separate account in my normal 60-40.

Fast forward 10 years - the investment account has tripled (although considerable unrealized gains yet to be taxed). The house value is up 150%. Single best financial move of my life. My second house has been more than "free" due to the arbitrage success. I don't hate my mortgage at all. The invested account is now more than 1/2 the money I have outside of retirement accounts and that positioning is extremely useful for funding my early retirement spending and Roth conversion taxes.

That's what my model screams at me every day: DO NOT PAY OFF YOUR MORTGAGE, YOU IDIOT! And if inflation ever gets above 2.75%, my mortgage is free.

 

[Markola]

Maybe isolate enough dough to pay off the mortgage in a separate account then, like bada bing, invest it at 60/40 or whatever the rest of your portfolio’s AA is. Have the payments withdrawn from that separate account. Pretend it’s not there and don’t look at it for ten years or more. Your future self might then start to actually enjoy seeing your separate account balance eventually outpacing the mortgage balance.

 

[rk911]

My first question on this is always: Right now, if you had no mortgage, would you mortgage the house to invest in the market? Because that is basically what you are doing.

That said, it depends on how much the mortgage is and what are the payments. If you have a large amount of cash earning less than 1%, maybe put some of that towards it.

Despite the fact that we (the FIRE community) LOVE to discuss the topic, paying off the mortgage is a very personal decision.

Full disclosure: We (DW and I) always had the attitude that all the money from a sale went into the next house, keeping the mortgage low. When the last house was paid off, we sold for a tidy profit, bought the current townhome/condo, and invested the rest.

+1.

 

[RetiredAt55.5]

I go back and forth with my love/hate relationship with my mortgage but I think it makes the most sense for me to pay it off within the next 5-7 years before I retire. If I don't need enough income to make the payments, I can probably have low enough income that will qualify me for ACA subsidies and low taxes. Along with piece of mind, that is a significant benefit that should alleviate market FOMO.

Depending on how much you owe on the mortgage and the monthly payment, it might make more sense to build up a stash of liquid money in a "safe" taxable account and use that for living expenses once you're on ACA, so you can keep your income low enough for subsidies. Obviously, none of that money would count as income, except a small amount of interest on it.

 

[corn18]

Depending on how much you owe on the mortgage and the monthly payment, it might make more sense to build up a stash of liquid money in a "safe" taxable account and use that for living expenses once you're on ACA, so you can keep your income low enough for subsidies. Obviously, none of that money would count as income, except a small amount of interest on it.

I am blessed with Tricare for Life, so I pay $50 / month for healthcare for my wife and me until 65. Then Tricare becomes a free supplement to Medicare.

 

[corn18]

Maybe isolate enough dough to pay off the mortgage in a separate account then, like bada bing, invest it at 60/40 or whatever the rest of your portfolio’s AA is. Have the payments withdrawn from that separate account. Pretend it’s not there and don’t look at it for ten years or more. Your future self might then start to actually enjoy seeing your separate account balance eventually outpacing the mortgage balance.

This is a great idea! Except I will just do the accounting in my spreadsheet. Pretty easy to do since I know exactly what I bought with the money I would have used to pay cash for the house.

 

[Out-to-Lunch]

Maybe isolate enough dough to pay off the mortgage in a separate account then, like bada bing, invest it at 60/40 or whatever the rest of your portfolio’s AA is. Have the payments withdrawn from that separate account. Pretend it’s not there and don’t look at it for ten years or more. Your future self might then start to actually enjoy seeing your separate account balance eventually outpacing the mortgage balance.

This is a great idea! Except I will just do the accounting in my spreadsheet. Pretty easy to do since I know exactly what I bought with the money I would have used to pay cash for the house.

You could google "defeasance" for pleasure!