Pay off mortgage or not, with standard deductions

[RetiredHappy]

This thread is by courtesy of @Koolau as he suggested we can spend all day discussing to pay off mortgage in retirement or not. A little tongue in cheek...

So, seriously, we have a mortgage payment, which amounts to 5% of our income and expenses, so yes, peanuts. We took a 30-year loan in 2021 at 2.75%. Because we have ridiculously high medical expenses, about $35K a year, we are itemizing deductions and mortgage interests becomes deductible, when we file federal income tax returns. However, I turn 65 in 3 years' time and will get on Medicare. It appears that we will take standard deductions so mortgage interests will no longer be deducted. This assumes that tax laws are not going to change much over the next few years. To pay off our mortgage, we will incur capital gains tax from selling positions in our taxable account. I am incline to do nothing and keep making mortgage payments, since it's only 5% of our income and expenses.

 

[MichaelB]

This thread is by courtesy of @Koolau as he suggested we can spend all day discussing to pay off mortgage in retirement or not. A little tongue in cheek...

He should know better than that!

We can (and have) spent years discussing it …

So, seriously, we have a mortgage payment, which amounts to 5% of our income and expenses, so yes, peanuts. We took a 30-year loan in 2021 at 2.75%. Because we have ridiculously high medical expenses, about $35K a year, we are itemizing deductions and mortgage interests becomes deductible, when we file federal income tax returns. However, I turn 65 in 3 years' time and will get on Medicare. It appears that we will take standard deductions so mortgage interests will no longer be deducted. Presumably tax laws are not going to change much over the next few years. To pay off our mortgage, we will incur capital gains tax from selling positions in our taxable account. I am incline to do nothing and keep making mortgage payments, since it's only 5% of our income and expenses.

So, what’s the question?

 

[athena53]

I agree. This has been discussed in general in other threads, but in your particular case, you're likely making more than 2.75% on your investments and the payments aren't hurting your cash flow. With the interest rate on the mortgage that low I doubt you're getting much of a tax benefit from deducting the interest, anyway.

I've made the same decision on my 3% mortgage although I can continue to deduct the small amount of interest I pay since my charitable donations put me well over the Standard deduction for a Single.

 

[RetiredHappy]

He should know better than that!

We can (and have) spent years discussing it …

So, what’s the question?

The question is whether you would pay off the mortgage in 3 years' time or not, when I can get on Medicare. To be precise, the mortgage interests is about $6K a year.

 

[cathy63]

The changes from the Tax Cuts and Jobs act are scheduled to expire at the end of 2025. If that happens (i.e. if Congress doesn't act), you may very well itemize again. In addition to your medical and mortgage interest, the unlimited SALT deduction and the 2% deductions will come back.

I personally would keep the mortgage and wait to see what happens with the tax code. The risk is that if you do wait and realize a lot of capital gains, that may throw you into the IRMAA range on your Medicare premiums for a year.

 

[GrayHare]

2.75% is near the long-term inflation rate, and since you repay with inflated dollars you're basically getting the loan at no cost. I'd certainly keep it.

 

[Montecfo]

I would keep the mortgage given the rate.And I currently have one so I'm consistent there.

Theoretically, it begins with opportunity cost. Paying off your mortgage generates a risk free return equal to the after tax cost of the mortgage.

Compare that to the after tax return you can reasonably expect to earn as you have the funds invested now over the same time horizon.

Then see what decision you would make based upon your investment parameters.

Then consider psychic factors like sleeping well at night, desire to have paid off home etc.

 

[RetireBy90]

I have a 2.375% 15 year mortgage and plan to not prepay a penny. We have a cola adjusted pension that pays the bill so I don't have reason to worry about having the funds to make the payments. If one of us goes before the loan is paid off we have funds available in the Roths to pay it off if that makes sense to the survivor.
I would keep your loan as long as you can. The deduction is icing on the cake IMHO.

 

[pb4uski]

The question is whether you would pay off the mortgage in 3 years' time or not, when I can get on Medicare. To be precise, the mortgage interests is about $6K a year.

I'm not sure that it matters given the amounts involved. In theory, from a purely financial perspective, if your after tax cost of borrowing exceeds the after-tax yield of the investments that will be redeemed to pay off the mortgage then you should pay off the mortgage, otherwise not. If your mortgage interest rate is 2.75% then even if it's not deductible you probably wouldn't pay it off unless the payoff money is languishing in a 0% checking account or something silly like that.

I paid off out 3.375% mortgage in December of 2019, using dry powder that I had in a money market fund paying not much and made commensurate adjustments to our target AA.

 

[DJRR]

Personally I would do nothing. I am keeping my low interest mortgage and don't worry about it. If I was really risk averse current 20 year Treasuries pay 4.32% so I would just buy the mortgage amount, use the interest to pay the mortgage every 6 months, and earn the extra 1.25%. Reevaluate in 20 years.

 

[MarieIG]

Under your circumstances, i.e. having such a very low interest rate locked in, having to incur capital gains to pay off the mortgage, and the mortgage being only a small percentage of your income I too would be inclined to just continue to make monthly payments. (You can always reassess should, for some reason, you believe circumstances so warrant.)

 

[tulak]

I have a 2.75% mortgage and no plans to pay it off early. Free money. If that ever changes, then I might think about it.

 

[Texas Proud]

Man, I am envious of the people who have these lower than mine rates...

I am at 3 1/8% 15 year and thought I got a deal... my balance was low so maybe that was the reason... heck, cannot remember but might not have paid the fees and got the higher rate...

 

[RetiredHappy]

Man, I am envious of the people who have these lower than mine rates...

I am at 3 1/8% 15 year and thought I got a deal... my balance was low so maybe that was the reason... heck, cannot remember but might not have paid the fees and got the higher rate...

For $1,500 we could have gotten it down to 2.5% but the BOA agent insisted that we didn't need to spend that money. Whatever. I would have preferred to pay the $1,500 to get it down to 2.5%. So no, we didn't pay down with "points". The difference was about $30 a month in mortgage payment.

 

[Badger]

Everyone has their own reasons for mortgage payments. Years ago once I had to start paying taxes with standard deduction and still had a mortgage (ours was at 8+% we started making an extra payment on the principle each month for a few years until it was paid off. I love not having to track another monthly payment.

 

[Koolau]

He should know better than that!

We can (and have) spent years discussing it …

Yeah, but I forget what we concluded about pay or keep the mortgage. Anyone remember?

 

[AZsniper]

In my case, I paid off a 3% interest rate mortgage to plan for early retirement.
The reason why, is to keep my expenses lower, so I can keep my income lower, so I can qualify for ACA subsidies. If I kept the mortgage, I would need an additional 20,000 of income per year to make those payments. There is strategy in everything I guess.

 

[2017ish]

We refinanced the year before retiring; also to a 2.75% rate. The monthly payment on our 15 year loan has been less than 5% of our monthly spend in each of the retirement years--that could change after a bad investment year, as we set our spending based on 12/31 portfolio value and currently have no other source of income.

At the time of refinancing, I floated the idea of getting rid of the loan to DW. She strongly believed it would be foolish to not take the low interest rate and stretch the loan out. She easily persuaded me--and that may be the only major financial decision that she has made in connection with retirement planning (well, apart from making nearly all the money on which we retired!).

Bottom line, even though we don't itemize, the 2.75 remains too attractive to dispose of--particularly since even the fixed income portion of our portfolio (US Gov and CDs) now has better returns.

 

[iRent2u]

This thread is by courtesy of @Koolau as he suggested we can spend all day discussing to pay off mortgage in retirement or not. A little tongue in cheek...

So, seriously, we have a mortgage payment, which amounts to 5% of our income and expenses, so yes, peanuts. We took a 30-year loan in 2021 at 2.75%. Because we have ridiculously high medical expenses, about $35K a year, we are itemizing deductions and mortgage interests becomes deductible, when we file federal income tax returns. However, I turn 65 in 3 years' time and will get on Medicare. It appears that we will take standard deductions so mortgage interests will no longer be deducted. This assumes that tax laws are not going to change much over the next few years. To pay off our mortgage, we will incur capital gains tax from selling positions in our taxable account. I am incline to do nothing and keep making mortgage payments, since it's only 5% of our income and expenses.

I chose to pay off my mortgage in 2009. It has been a wonderful decision. The dollars I paid in P/I are mine every month. It equates to another level of financial freedom! I don’t see the point of getting a tax deduction.

 

[jazz4cash]

Not only am I NOT paying off my 2.75 mortgage early, it makes me happy just thinking about it.

 

[Montecfo]

Man, I am envious of the people who have these lower than mine rates...

I am at 3 1/8% 15 year and thought I got a deal... my balance was low so maybe that was the reason... heck, cannot remember but might not have paid the fees and got the higher rate...

I think mine is at 2.6%. But it is not a fixed rate, it is a 5 year ARM with relock feature. I have had this style for about 15 years as I recall. You can relock for 5 years at any time for a small fee. Avoid closing costs of a big refi.

Just opportunistically re-locked.

I was concerned rate might eventually adjust up but now I am thinking that will be modest. And it is very small in amount.

If anything I would have been wiser to get a larger mortgage.

 

[hotwired]

This thread is by courtesy of @Koolau as he suggested we can spend all day discussing to pay off mortgage in retirement or not. A little tongue in cheek...

So, seriously, we have a mortgage payment, which amounts to 5% of our income and expenses, so yes, peanuts. We took a 30-year loan in 2021 at 2.75%. Because we have ridiculously high medical expenses, about $35K a year, we are itemizing deductions and mortgage interests becomes deductible, when we file federal income tax returns. However, I turn 65 in 3 years' time and will get on Medicare. It appears that we will take standard deductions so mortgage interests will no longer be deducted. This assumes that tax laws are not going to change much over the next few years. To pay off our mortgage, we will incur capital gains tax from selling positions in our taxable account. I am incline to do nothing and keep making mortgage payments, since it's only 5% of our income and expenses.

So I think you've already got your answer but I'm case this wasn't covered, in addition to the fact that 2.75 is a low hurdle to beat, keep in mind the actual interest paid declines each year, so it sort of becomes smarter to keep the mortgage as each year passes.

 

[Teacher Terry]

3 years ago when I sold my house and bought a condo the interest rate was 2.75 so I took a small mortgage.

 

[gianmatt]

I have a 2.125 rate on a 15-year. I think I locked in at or near the very bottom of the rate cycle. Pure luck. I remember my first house was at 9.75%.

 

[2017ish]

I have a 2.125 rate on a 15-year. I think I locked in at or near the very bottom of the rate cycle. Pure luck. I remember my first house was at 9.75%.

Us as well on the first house--and we were THRILLED to have less than 10%.