pay off mortgage

[tednvon]

Hello,
We are in first year of phased retirement. Looks like we will be in the 15% tax bracket this year and from now on. Gross income about 45,000 for the next 4 years then will retire fully at age 62 and begin SS for both of us at about $25,000/year. We have set aside about 120,000 in post tax money to add about 20,000/year to income. We will try to keep this figure at about $120,000 in layered CDs for permanent 4 year cushion in fixed accounts.  Right now, this $$ is all in a large CD (3.25%) for another 6 months.  Our 403B is 75% stocks Goal is $60,000/year inflation adjusted indefinately. .(FireCalc says we are 100% on target). 
No other debts.

Our variable rate mortgage has been excellent over the last 5 year at about 4%. It is now going to adjust to 6.3 or another $93/month ($523 P&I). Balance is $78,400.

My question is:
What is advantage of paying off mortgage in Nov. this year? Is there a rule of thumb or calculator somewhere. Every calculator I find has to do with reinvesting the money not using the previous mortgage $$ to go toward monthly expenses in retirement.

I hope this explains my situation and my question...This site and FireCalc have been invaluable in helping me to plan our retirement and keep expenses very low using no load mutual funds with low expense ratios.
All the best...Ted

 

[laurence]

Well, at that tax bracket, your not getting much of a deduction for the mortgage. It sounds like the variable rate is going to creep up to a point where you can't match or beat it with investments especially if you don't want to take much risk (6.3% - 15% deduction = 5.35% real cost of debt you have to beat, which is more than your CD is getting you, plus you have to pay tax on the CD interest!). There was a thread on the old board about 500 posts long talking about the pros and cons of paying off your mortgage. I am working towards paying off mine because that's a garanteed (bond like) return on investment every month, lowers the income I need to live, thus lowering my tax burden, and will give me peace of mind (intangible, I know). But plenty of people here have made carrying a mortgage work. Alternately, you could look into refinancing under different terms...what's your mortgage balance?

 

[sgeeeee]

I'm often condemned and demonized on this board for presenting the minority report on mortgage payoff. A lot of people are better off financially with a fixed, low interest mortgage. If you have a fixed 30 year mortgage rate below about 5.5%, there has never been a time in history when you would not have done better with the money invested in a fairly standard equity/bond portfolio than with the mortgage paid off.

But in your case, you don't have a fixed mortgage and it is scheduled to already creep above 6%. There's still a chance that you could do better with investments over the lifetime of the loan, but the odds are beginning to work against you. I would pay it off at the earliest opportunity. If you have a fixed mortgage, you can examine your historical odds of beating the payoff through investment using FIRECALC. But in your case, the loan payment rate is not fixed -- another reason I would lean toward payoff.

 

[cabbage]

If I may add my 2 cents, I'm for paying off the mortgage. In all my born days I never felt free-er (?) than the day DH and I wrote the last check for the mortgage. Sometimes we stand way in the back yard and look towards the house and see all that was accomplished on a single teacher's salary with three rugrats on top of it. Sweet!javascript:replaceText(' ', document.postmodify.message);

 

[cute fuzzy bunny]

Jeez Louise SG, we're never going to stop this, are we?

Its a good idea to have a mortgage if you have no investments making less than your mortgage rate.

Over a 20-30 year period, you can do better than most fixed mortgage rates in a general stock fund like the s&p 500 - historically.

This does presume you're going to stay in the same home, with the same mortgage for that 20-30 year period...if you move or have to refinance, you're probably going to get a different and probably higher rate.

Over shorter term periods that the vast majority of people spend in a single home with a single mortgage (7-10 years), you can lose a lot of money in the stock market.

Not having any debt, mortgage or otherwise, also reduces your withdrawal rate, your tax rate, and your need for a high regular monthly income...which can drastically change your investing style. You can either get riskier, because you dont have to pay a bunch of big mortgage and debt bills every month...or you can get more conservative because...well...you dont have to pay a bunch of big mortgage and debt bills every month.

Theres also a psychological benefit. More than once a week when my wife and I are talking about our finances, bills or what our friends and relatives are doing with their money my wife says "I'm so glad we dont have a mortgatge or car payments...no matter what happens we can always scrape by".

I consider it another asset class thats very well decoupled from stocks and bonds, and even if its value plummets and never recovers...you can still live in it. Cant do that with most other investment classes.

But SG's point of taking a 30 year mortgage, staying in that mortgage for 30 years, and investing that money in the stock market for 30 years putting you a few percentage points ahead is historically accurate.

As a sidebar, if you took that bet 5 years ago, you'd have lost ~3% a year on your S&P 500 money through today. I "made" 5.5% on my unmade mortage payments every year, and paid no income taxes for three of the past 5 years due to a lower withdrawal rate.

If you're accumulating though and not retired, you're probably paying a ton in taxes, the tax deduction is a big help, and you'll be able to let your investments in equities "ride" while you have a steady income. Unless you're under 5 years to retirement, a mortgage may make sense.

In the meanwhile, most people own both stocks and bonds. Why someone would hold 20-60% of their portfolio in bonds paying 3-5% while paying more than that for the "bond" they issue to the bank (aka the mortgage) is a mystery to me.

 

[renferme]

I started one of the 'famous' pay off the mortgage threads a while back.
A small consensus said to keep the mortgage, as I could make more than the cost of the mortgage. My int. rate is 5.25%.
With today's market it may be tough to earn more than 5.25% per year.
Most analysts seem to think that the market may be a tough place to make money for maybe the next 10 years or so.
I could change my mind, but at this point, I believe I'll pay off the mortgage when social security begins for me in 3.5 years (age 62). Right now, the money that will go to pay off the mortgage is now invested in stocks, 2 Dodge&Cox Funds, and CDs. I get a decent return from the CDs and dividends from the stocks.
And my wife is still working - that helps.
I think the issue of whether to pay off the mortgage or not to pay it off, is mostly a pyschological thing. If you feel better or safer without the debt, then pay it off. Also, once you get down near the end of the mortgage, you may not have enough interest to itemize on your 1040. If you can't itemize, then maybe you should pay it off, as the interest payments on the mortgage aren't helping in any way.
By the way, this is an interesting subject and I'm glad someone brings it up every so often. We can get more and different perspectives from new people on the board.

 

[laurence]

I started one of the 'famous' pay off the mortgage threads a while back.
A small consensus said to keep the mortgage, as I could make more than the cost of the mortgage. My int. rate is 5.25%.
With today's market it may be tough to earn more than 5.25% per year.
Most analysts seem to think that the market may be a tough place to make money for maybe the next 10 years or so.

Don't say that! If the market trades sideways for ten years I'll cry! Some of us are trying to retire in 10-15 years!

tednvon, -SG has a point and depending on your level of sophistication, mortgage terms, and time horizon, that may be the way for you. I will be paying off my mortgage before I retire.

 

[sgeeeee]

Jeez Louise SG, we're never going to stop this, are we?

Its a good idea to have a mortgage if you have no investments making less than your mortgage rate.

. . .

Jeez Louie TH, do you even read my posts before you respond?  I suggested this is a case where payoff is advised.  I honestly do not understand what point(s) you are arguing about.

Investing rather than paying off a low-interest mortgage has often been finanically advantageous.  You can prove this to yourself.  Run FIRECALC.  It contains all the historical data you need to examine mortgage payoff effects over time.  Use a 50/50 portfolio.  Put in the 30 year mortgage numbers for a 5% mortgage.  You will see that this strategy pays off financially.  It's simply a historical fact.  There really is no argument here about the basic situation.  Even if you shift the portfolio toward bonds for the non-payoff option, the strategy pays off.

Now, if you want to place a bunch of restrictions on how you have to invest the payoff money, you can find restrictions that are not smart.  Don't do them.  And if you don't feel comfortable without those restrictions, then payoff your mortgage.  I don't see why anyone would argue with this.  If you want to either payoff your mortgage or buy 30 year treasuries today.  Then payoff your mortgage.  It would be stupid to buy treasuries today instead of payoff your loan.  

Taxes can alter the story -- both positively and negatively.  It depends on the individual's tax situation and how many years into the loan they are.  It really is a marginal impact for most people, but each person should consider it.  If the tax impact for an individual's situation is significant enough to be costing them money, they would be better off paying off the mortgage.  I can't see what problem you have with this part of the story.

A lot of what you say about this subject is not fact.  It is opinion.  If it is your opinion, then pay off your mortgage.  Surely, you don't argue with that.  Some posters here have talked about the psychological impact of paying off their mortgage.  Some have even mentioned how it made them feel closer to their father.  Good for them.  If paying off your mortgage makes you feel good or brings you closer to your family, then payoff your mortgage.  I think the world will be a better place for your decision.  I hope we have no argument here.

None of us can predict the future.  But I can examine past performance.  I chose to invest rather than payoff my own fixed, low interest mortgage in December 2001.  I keep very good records of every dime I spend and all of my investments.  I am not an agressive investor, but I am not a purely index investor.  I shop for bonds and I still hold some individual stocks where I feel like I have significant knowledge of the company and the market.  So far the decision to keep the mortgage has me significantly ahead financially (more than $50,000 the last time I ran the numbers).  Your mileage may vary.  If, at any time, I decide that I no longer like the choice I made, I can payoff my mortgage when that time comes.  I know you can't argue with the above.  This is simply fact.

So I am still baffled as to why you get so upset whenever I mention this option.  Surely, you don't deny that many people make money by putting low interest loans to work for them.  I understand that not everyone may feel comfortable doing this and I think I always mention that it is important to feel comfortable about this decision.  And I have never reccommended that everyone try this -- only that it is an option that can be quantified to some extent and should be considered.

I feel like there's something about how this topic affects you that you aren't telling us.

 

[Ginger]

We paid off our mortgage last August.  We initially had a 30 year loan, refinanced to a 15 and paid that off early.
Greatest relief in the world to know we will enter our retirement years not shelling out a house payment every month!   I was giddy for months afterwards.   Now I just use the extra cash as additional investment savings for our early retirement.  

 

[smooch]

We have 60K left on our mortgage at 5.875%. It is the biggest impediment to quiting work right now. We are paying it off as aggresivley as possible. When we write the last check, I will feel that I can either take a part time job I might actually enjoy - or just retire!

 

[laurence]

I thought the two of you were simply on different sides of the same coin! Short answer to this question is: it depends! I must reveal a caveat, I'm paying off my mortgage early by being in a shorter term loan. During the recent plummet in rates over the last few years, I locked in a 5%, 20 year mortgage. For now I'm following SG's plan, and as my portfolio reaches a point where I'm approaching my retirement goals, I will shift over to TH's plan and write a check for the balance. I think time horizon and taxes are the biggest variables in this decision from a numbers standpoint. The edge for me is purely the phsychological edge.

 

[KB]

Ginger, I know exactly how you feel, I felt the same when I paid off my mortgage.

My monthly expenses are now under 1000 and with my annual expenses, I still only need about 2000/month.
I'm to the point where I have too much cash in my Money Markets and need to start putting it in CDs or Ibonds.
I see that Corus raised their rate to 4.11 for a 1 year CD. That might be a good place, though the Ibond rae looks good too. I'm switching to working 3 days a week this month in preparation for ER. I still need health insurance for the 3 of us and the cost is mroe than I want to spend. So by working, I only pay a fraction of the cost.

I'm not sure how early I'll ER, hope it won't take too long.

 

[tednvon]

Thanks from Ted (tednvon). I will try firecalc. I guess there is no specific calculator that will figure in all the variables including taxes and say an 8% return on investments.
I am of the belief that the market is going to really chug and sprurt the next 10 years with a few opportunities to make money during some short rallies. So I am really not counting on stocks for quite a while.
Keep the good ideas coming and if anyone can give us the link to the old board discussion, it would be fun...

All the best...Ted

 

[BUM]

tednvon,

Its easy to get lost in the nickels and dimes. But unless you owe ALOT pay it off. I say no debt is better than any deby if you are close to ER.

BUM

 

[grumpy]

I paid off the mortgage on my previous house 2 years prior to retiring. I had refinanced with a 10 yr. fixed rate loan at 5 7/8%. I figured out how much added principal I needed to pay each month to have it all paid off by that time. Then I paid cash for the new house we recently moved into. Not having ANY debt makes for a very comfortable and worry-free retirement. I strongly recommed paying off a mortgage early.

Grumpy

 

[cute fuzzy bunny]

Gee SG, I did read your post and as always, acknowledged your primary point as being valid under a particular set of circumstances.

Then I outlined where it isnt and what the implications are.

I'm sorry you continue to take this personally. I certainly dont.

As far as using firecalc as a tool to illustrate this, as I've also demonstrated in the past, taking the mortgage payoff out of the bond holdings and then maintaining that new higher equity investment ratio ALWAYS comes out ahead with the historic data. With a better tax situation. With better resiliency in the event of a long term bear market. Only if you maintain the SAME investment ratios after paying off the mortgage as before do you come out ahead by keeping a mortgage. I just dont know why you'd do that.

 

[Mr._johngalt]

It's a mystery to me also.

JG

 

[cute fuzzy bunny]

Mmm hmm...seems like pretty simple math to me. No historic calculators necessary.

Pay 5.5% to a bank, increase your withdrawal rate so you pay a higher income tax rate, make 4% on your bonds.

 

[Sparky]

One other thing ...

The psychological impact of paying off the mortgage prior to RE'ing... I mean, it's really a great accomplishment. We paid off our mortgage 2 years before one of us retired.

We were lucky - bought low (1994) in a coastal city. So now we have options - we can move to a less expensive area, smaller house, etc.

And if the portfolio implodes, we can always get a job at the local Blockbuster ... explenses are low because of no mortgage.

But, then again, I'm sort of a belt and suspenders type of person, so ...

 

[JDARNELL]

This debate no matter how many time as a group we plow the same ground is by far the most thought provoking and entertaining.  Folks can articulate and formulate the most eloquent arguments for either side, but at the end of the day "what does you gut tell you?"

Right, wrong, or indifferent I am in the pay off the mortgage camp. 

JDW

 

[Sparky]

This debate no matter how many time as a group we plow the same ground is by far the most thought provoking and entertaining.  Folks can articulate and formulate the most eloquent arguments for either side, but at the end of the day "what does you gut tell you?"

Right, wrong, or indifferent I am in the pay off the mortgage camp. 

JDW

Me too.

 

[cute fuzzy bunny]

This debate no matter how many time as a group we plow the same ground is by far the most thought provoking and entertaining. Folks can articulate and formulate the most eloquent arguments for either side, but at the end of the day "what does you gut tell you?"

I've often said that people who enter or participate in these discussions have already made up their minds and are just seeking the right set of 'facts' to make themselves comfortable with their decision.

 

[sgeeeee]

. . . but at the end of the day "what does you gut tell you?"

I think it's clear that most posters (on this board anyway) do feel like this is a "gut" decision, or is based on "psychology", or gives them a "good feeling", or allows them to "sleep better" . . .

I think that's the most important thing.  Interestingly, I've said so many times, but that always seems to get lost in the exchange.  I think all of you are doing the right thing  because it's the right thing for you.  

Unfortunately, I don't share the "good feeling" so many get from paying off a loan.  I can't imagine sleeping any better than I do.  And my "gut" just doesn't tell me anything except when it's hungry.    I guess I'm unlucky that way.  So I try to look at other parts of the issue that do tend to influence me.  For me, the approximately $250,000 (on average) that investors would have made historically by keeping a mortgage like mine and investing in a balanced portfolio is worth the effort.  Especially since the historical downside is so small and I can choose to change my decision at any time.  I completely understand my tax situation, and I'm very happy with my current return.  I know there are others who have made the same decision as I have, but not many on this board.  That's okay.  I'm not right . . . or wrong.  I just hate to be criticized as ignorant.  I'm pretty sure I have my hands around this and I offer a financial alternative based on historical simulation for anyone who happens to share my lack of "gut" response to the loan question.

It really becomes a moot point soon as mortgage rates are climbing.  The higher the mortgage rate, the larger the risk of trying to come out ahead through investments.  

 

[unclemick]

Th - true, true.

The SO wanted to live on the water in 1979. Math and trade - off calc.'s were irrelavent.

If it was me and the dog - RENT! In this case - 'I' - recieved the offer I couldn't refuse.

 

[cute fuzzy bunny]

"Gut" doesnt play a very significant role for me. I ran the numbers. Made no sense for me. The psychological part is there, but its about 5th or 6th on the list.

One thing that was a major telling point for me: Last year I had a shot at a sub 4% 5/1 fixed/variable loan from my credit union. I was intrigued. I floated the question as to whether it might be worth a shot at taking this and dropping it into equities.

Surely I could beat 4% over 5 or 6 years before the variable rates climbed above the historic s&p500 annual return rate, right?

Not one person here thought that was a good idea. During periods of less than ten years there have been a lot of pretty bad bear markets. Only a very small fraction of people stay in their homes past 10 years...most move within 7.

Given that time frame, you could get better odds betting on black in roulette. Just as many bear markets as bulls during a 7 year period.

I've seen two real-life ER scenarios where a mortgage made good sense.

Nords has a mortgage, along with a 100% equities portfolio and a good indexed pension that more than pays the bills. And little intention to move within that ten year period. Makes sense. A lot of ER's dont have an income stream but a lot do hold bonds paying well under prevailing mortgage rates.

Raddr has a mortgage, a fairly large portfolio of equities and commodities. He could go either way and it probably wouldnt make any difference in the long run. A lot of ER's dont have really large porfolios and arent comfortable with commodities as their inflation protection and 'balast' in a portfolio.

Suggesting that a retiree with a balanced portfolio is better off with a mortgage than without? You can spin the numbers to make that case if its what you've already decided to do. For the few cases where you can make the numbers work, I can spin a hundred where you're better off without it.

Without a debt load, I could do an 80/20 portfolio, beat the pants off a 50/50, 60/40 or 70/30 port that included a monthly mortgage payment. I dont think most people would feel comfortable with that volatility level when their house is on the line. I can also do a 30/70 or 40/60 and with such a small withdrawal rate, live off the dividend payments, pay no income tax, and let my small equity portion maintain my inflation protection. But I cant do that and make enough income to meet a mortgage payment every month.

Especially considering that equities arent exactly underpriced right now, I wouldnt bet on a great return over the next 7 years.

Buit if you put rigid conditions like a 50/50 portfolio with and without a mortgage and not considering your broader financial options? Yep, that makes the case to keep a big debt load...