Talked to 2 Retired Neighbors .. They didn't pay off mortgage, but both have pensions

[Musica40]

My Two Cents

As it has been stated here, there are two side to this argument. Many have not paid their homes because of the low interest that is being offered today. They'd rather invest. Past peformance does not gurantee future returns. In our case, we were determeined to pay off our home prior to retiring because we felt at peace doing that. As we approach retirement our income streams will be more than sufficient. We have military, VA, SS x2, 401K, Roth x 2 and 2 x regular IRA. We will live off our military and VA pensions until FRA. We live well below our means. There is just something about knowing that your biggest asset is paid for. If the market turns, house is paid off. There is no mortgage. To us, this is very satisfying.

 

[Koolau]

As it has been stated here, there are two side to this argument. Many have not paid their homes because of the low interest that is being offered today. They'd rather invest. Past peformance does not gurantee future returns. In our case, we were determeined to pay off our home prior to retiring because we felt at peace doing that. As we approach retirement our income streams will be more than sufficient. We have military, VA, SS x2, 401K, Roth x 2 and 2 x regular IRA. We will live off our military and VA pensions until FRA. We live well below our means. There is just something about knowing that your biggest asset is paid for. If the market turns, house is paid off. There is no mortgage. To us, this is very satisfying.

I think it is an almost irrational desire on my part to be out of debt. Folks here have made good cases to keep the mortgage and invest the freed-up money. BUT I think I just hate being in debt and I really hate paying interest. In any case, I don't need "more" so doing the "borrowing from the mortgage company to finance equities" is not necessary for me to stay FIREd. It's more psychological than practical or even prudent. BUT, YMMV.

 

[youbet]

I manage borrowing just like any other financial decision: by the numbers. I keep the impact of emotional factors such as “peace of mind” out of the decision making as much as possible. I don’t reject debt to “feel better” and I don’t seek debt because I crave things I can’t afford.

 

[Time2]

Nope...e.g. the rates at Interactive Brokers: Margin Rates

From posts over on Bogleheads others have managed to negotiate rates close to those at IB with other brokerages...much cheaper than the posted rates.

I recently open an IBKR account just so I could borrow money on margin to buy a house and make a mortgage with my Daughter and Son-in-law.
I borrowed at just over 1% and have a mortgage with them at 4%, and 6% second year. This is to keep them motivated to get a new mortgage, I expect within one year. They need to do some work on the house to get a normal mortgage, and it is getting done. Because the max margin is 50% and I was at 40%, I then applied for a HELOC and borrowed anther $100k just to pay down my margin account. The Heloc rate is 0.99% for the first 6 months. I'll see what things look like in 6 months and decide if I need the HELOC money or not.
It's a long story, but they were 8 months into trying to close on this HUD Repo through not fault on their part, and my money made the close easy.
One good thing, through the process they were into a second mortgage application with new appraisal and it came back $40k higher, just because of housing inflation.

 

[pb4uski]

Banks can also call and shut down your primary mortgage - they can. ...

No, they can't. As long as the borrower makes their payments on time and comply with all other contractual requirements, the lender can't do anything to accelerate the loan.

OTOH, many mortgages do have acceleration clauses that the lender can trigger, but only IF the borrower fails to perform in accordance with the mortgage terms. However, in most cases if the borrower remedies whatever faults have occured the lender will waive acceleration.

If you're expecting us to accept such poppycock then you need to provide citations.

 

[Musica40]

I think it is an almost irrational desire on my part to be out of debt. Folks here have made good cases to keep the mortgage and invest the freed-up money. BUT I think I just hate being in debt and I really hate paying interest. In any case, I don't need "more" so doing the "borrowing from the mortgage company to finance equities" is not necessary for me to stay FIREd. It's more psychological than practical or even prudent. BUT, YMMV.

I'm with you. The thought of carrying ANY debt scares us. We do not have a mortgage, car loans, credit card debt or any debt. We sleep well at night.

 

[RetiredHappy]

Debt should not scare anyone who has many times more in their investments/bank accounts than the amount owed.

 

[jazz4cash]

Debt should not scare anyone who has many times more in their investments/bank accounts than the amount owed.

+1. It’s cheaper to carry debt these days. Cash is trash but ya gotta have debt management skills. Whatever it takes to SWAN.

 

[ModestNestEgg]

I am currently working and vested in a pension and am on track to have my mortgage paid off before my 50th birthday (even if I make no additional payment towards principal), and am hoping to ER at around 52 give or take a year or two. That seems like a sensible plan to me.

 

[Markola]

Debt should not scare anyone who has many times more in their investments/bank accounts than the amount owed.

Especially fixed, low interest mortgage debt.

 

[meleana]

We are in our 60’s and haven’t had a mortgage since 2004. It feels great. We have no pensions either. And our cars were purchased with cash- 2013 and 2016 ( that one bought used).

On the other hand I have a friend in her 70’s. Never married and no kids. She bought her current house with a reverse mortgage for purchase, which I had never heard of. She put a big down payment down, after selling her former home, then the bank took care of the rest. She dies, the bank gets the house and she doesn’t care.

 

[dheb]

I'm retiring next year; no pension (all IRA, 401k, taxable accounts, etc.) -- but I took out a new mortgage on the house I'll be moving to. #0 years at under 3%. This lets me cash out my existing house when I sell it (why do I want that money tied up in an illiquid asset?) AND it acts as a hedge against inflation. The principal & interest portion of my mortgage is fixed - it never goes up. For the next 30 years.

 

[zippy2020]

We’ve been retired for 11 yrs. We paid off our mortgage before ER, but earlier this year (2021) took out a new, small mortgage. Talked it over first with our CFP firm and they agreed our reasons made sense:

• Have a large pension with annual COLA; covers all basic expenses
• Interest rates were dirt-cheap; we have a 2.75% loan – way less than we make on investments
• Were flirting with the idea of selling/moving to senior facility....but then the pandemic and lockdown hit. Idea got shelved. What’s the point in leaving a comfortable, custom-designed cottage in a great neighborhood with lovely neighbors, for a tiny (comparatively) apt, when we’re not able to travel anyway?
• Discovered we needed a foundation repair. In contractor-speak, “it’s a small job”, meaning less than $50K.
• Taking out $50K from our portfolio would be a noticeable tax hit (that large pension, plus my SocSec – all taxable).
• Value of the house skyrocketed over last three years. It literally went up $100K/yr (and it wasn’t cheap to begin with – we live in coastal Northern CA). Taking out $200K mortgage freed up some equity at very little cost to us. The monthly mortgage is less than we spent on groceries each month.
• We started a DAF acct this year on CFP/CPA advice, so the mortgage interest cost contributes to our deductions. It’s the first time we’ll be able to itemize since the last tax reform bill went through.

So: all very personal reasons, adding up to ‘how to use debt wisely’.

 

[swabby01]

Think this is a different answer for every person. For me it was one of the many milestones I set on the way to retirement. Mine were : Pay kids college, pay off mortgage, buy and pay off two cars within a year of retirement and then hit a minimum of $8M portfolio. With a decent amount of luck and some focused principal payment management all was achieved by age 62. I kept working until my job was no longer “fun” and I pulled the plug in 2018. The house being paid off is a major element in enjoying retirement for me. Happily hit SS FRA and see no need to pull the pin on that yet. Will wait until wife retires and we will both get SS at the same time which will replace her income almost completely. For us this was all made possible by having no mortgage or personal loan debt. Again I see this as a personal choice given your specific circumstances

 

[NoEZmoney]

Everyone's attitude is different. Some find a strong satisfaction in paying off a mortgage as a life-long accomplishment. Others do the math and figure out the "opportunity cost" when comparing potential return on the amount of a lump-sum payout invested gaining a higher return than the appreciation of the house for the same term. I get satisfaction knowing I could write the check to the mortgage company tomorrow and pay it off but I figure the amount is better at chugging away dividends and appreciation which I can use to pay the house note, so I can live with that.

 

[2177V]

For years, I have been buying houses in cash because the high bank fees, points, etc. My last two houses were paid in cash and I am currently working on house number 3. When I was young, I had a 30 years mortgage but I paid it off after 12 years and I never looked back. Once your house is free and clear, you can take out a HELOC and buy more properties. Leveraging in Real Estate can allow you to make more money than the stock market. I only invested in the stock market in my IRA for tax reasons. My point: Live below your means, buy real estate and stocks while you are young. You can then avoid any mortgages in retirement.

 

[Koolau]

I'm retiring next year; no pension (all IRA, 401k, taxable accounts, etc.) -- but I took out a new mortgage on the house I'll be moving to. #0 years at under 3%. This lets me cash out my existing house when I sell it (why do I want that money tied up in an illiquid asset?) AND it acts as a hedge against inflation. The principal & interest portion of my mortgage is fixed - it never goes up. For the next 30 years.

Sounds good though equities might be more risk now even though they certainly have been (in general - say through indexed funds) earning more than 3%. YMMV

 

[joedila]

Individual Choice

We moved 3.5 years ago and ended up with a 100K mortgage at 5.0 percent. It is our only debt. Our pensions, ira’s, 457b, wife soc sec and a sep bring in 140K per year, and we still have 1.5M in ret Accounts that we are not yet tapping. When COVID hit and we were unable to travel and dine out, we found ourselves cash rich. Therefore, instead of refinancing, we are aggressively paying off the loan. I have taken the loan from 95K to 39K this year, and will pay the remainder early next year. I feel good about wiping out a loan at 5.0 percent. We still have a lot of growth in our ira’s and portfolio

Bottom line: our approach is not for everyone, but I think it made great sense for us

 

[WhenIsItTime]

Here's why the negative bond analogy, while probably technically correct, just doesn't influence my decision at all. I accept that I'm taking on a bit more risk by investing the mortgage money at my chosen AA. I'm not trying to match the risk. But few things have been so historically on my side that I do accept that risk, I welcome it.



Put some numbers to that. A $1M portfolio at 70/30 and paid off mortgage, versus a $1.2M portfolio at 70/30 and a $200K low rate mortgage. Why do we invest at all? Because we expect that over the long term, we will gain. So having more money invested is expected to payoff, and it has historically (in every single 20-30 year period).



An analogy: You consider playing red/black at roulette, but realize the house on average grabs ~ 5.2% of your money. So you decline.



Now someone comes along, and says they'll give you a 30% discount on chips used to play roulette. That changes things to your advantage. But you need to play long enough to allow the variation to move to the average. You could still hit a bad streak.



There's a risk, but history says it's way in your favor. But you may still decline, because you hate the thought of even the small chance of losing.



And let's not forget, straight numbers don't tell the whole story, context is required. If historical returns were the whole story, we'd all be 100% invested in stocks. But studies like FIRECalc show that a 95/5 survives better than a 100/0. How can that be when stock returns are historical greater than bond returns? I'm pretty sure it's because of the buffering action of even a small % of bonds, that can be sold for expenses in a down market, preserving those stocks for the eventual recovery.



To me, it almost seems that someone who turns down a mortgage at these rates would also be afraid to have any money at all in stocks. OK, not quite, I can understand someone saying "enough is enough".



-ERD50

In your example, you’d have $140k of the “70” and $60k of the “30” incrementally to offset the $200k mortgage. What are your assumptions for return on the “70” and “30” vs mortgage rate %?

Even 30% of the S&P 500 historical avg would likely cover the low mortgage rates today.

Something else that might be missing from this conversation is home value/potential mortgage value as a % of investable assets. Folks with home value as low % of net worth might find the arbitrage not worth chasing.

 

[Perryinva]

If I had a 5% mortgage, I’d pay it off too!! Jeez!! I find it interesting that people are talking about the financial differences due to a $100k mortgage. Is the income generated or lost on $100k really enough to fret over vs what makes you feel better? We refinanced for 30yr @2.75% $450k on a $750k home. Every single home I have ever owned was mortgaged and as I bought, improved and sold, all previous 6 of them allowed me to buy more home and make more equity, in addition to leaving more invested, (plus when mortgage interest was even more discounted in taxes) which far outweighed the interest costs. I absolutely would not be where I am financially without leveraging the power of a mortgage. At 2.75%, the “little principal paid in15 years” does not really hold true for low rates. I have to double check, but its about $800/mo on mine. Interest is like $15k. I made more than $15k on one trade this year on a $450k buy/sell. That money not tied up in a mortgage allowed me to save more in after tax 401k when I worked, which was converted every year to a Roth. So much if my trades are done tax free on gains.

Our current mortgage is only 18% of our pension & SS incomes. If we have to contend with another $40k income when RMDs roll around, it is even much lower than that. I don’t see how having no mortgage debt is anything to help me sleep well. I’ve had it for the last almost 40 years. & I have always slept very well at all times.

 

[Sirka]

Paid off at zero interest rates

we paid off our mortgage before retiring at 55. we have three defined benefit pensions between us and we both took SS at 62. i believe strongly in zero debt and eliminating risk on that side of the ledger.

+1
Cash is paying 0.5%, why would we pay 3% for mortgage. So we are in no debt in retirement camp.
It came in handy when moving out of California. We bought a new house with mortgage, planning to pay it off after selling our CA house. Lot less pressure that way.

 

[jazz4cash]

My cash is still earning 3-4% and bonds are slightly more. As these products mature, I would consider pre-paying my 2.75% mortgage but only to the extent that it aligns with my AA.

 

[Katsmeow]

I don't have a pension and just rely on SS, 401K and IRA, so I feel like I need to pay off my house .. I have a Heloc now and I've been accelerating payments. I also read in some articles that more and more seniors are now retiring with a mortgage. I have a feeling that none of my retired neighbors have paid their homes.

We don't have a pension (DH had one but took a lump sum alternative many years ago). We have a mortgage. In fact, since retirement have bought and sold houses and gotten new mortgage and refinanced it.

I just don't see a good reason to try to be mortgage free. Most of our money is and was in tax deferred accounts. This was true before retirement. We did our saving in our tax deferred accounts. So, when we bought our current house we had our equity from the prior house. That wasn't enough to buy a new house (well, not one we would want to live in). We elected to put down an about 35% down payment. The mortgage payment is not that great. Then a year and a half after buying the house we refinanced which dropped the payment another $200 or so a month. The payment is very easy to make. To pay off the mortgage we would need to pull out money from our tax deferred accounts and pay taxes at a high rate pulling out that much money. And, that would leave more money in the house than I want to have there. I feel fine with having the mortgage.

 

[Koolau]

My cash is still earning 3-4% and bonds are slightly more. As these products mature, I would consider pre-paying my 2.75% mortgage but only to the extent that it aligns with my AA.

I too have cash paying 3-4% right now, but don't know where I'd go to repeat that "grandfathered" rate. I wish I did! I think most folks keeping or taking a mortgage figure on higher yielding (but also somewhat riskier) places to put the excess cash - equities in most cases, I'm guessing. Perhaps if I needed more equities to meet my AA, I'd consider a mortgage. Since my AA is where I want it (actually, I'm already a bit above my equity limit due to recent growth with no rebalancing) I'll just sit here with no mortgage. YMMV

 

[Magus]

If I had a 5% mortgage, I’d pay it off too!! Jeez!! I find it interesting that people are talking about the financial differences due to a $100k mortgage. Is the income generated or lost on $100k really enough to fret over vs what makes you feel better? We refinanced for 30yr @2.75% $450k on a $750k home. Every single home I have ever owned was mortgaged and as I bought, improved and sold, all previous 6 of them allowed me to buy more home and make more equity, in addition to leaving more invested, (plus when mortgage interest was even more discounted in taxes) which far outweighed the interest costs. I absolutely would not be where I am financially without leveraging the power of a mortgage. At 2.75%, the “little principal paid in15 years” does not really hold true for low rates. I have to double check, but its about $800/mo on mine. Interest is like $15k. I made more than $15k on one trade this year on a $450k buy/sell. That money not tied up in a mortgage allowed me to save more in after tax 401k when I worked, which was converted every year to a Roth. So much if my trades are done tax free on gains.

Our current mortgage is only 18% of our pension & SS incomes. If we have to contend with another $40k income when RMDs roll around, it is even much lower than that. I don’t see how having no mortgage debt is anything to help me sleep well. I’ve had it for the last almost 40 years. & I have always slept very well at all times.

Yeah, I wouldn't worry about a $100k mortgage personally. Agree on paying down principal with this low rate environment doesn't hold up. I'm at 2.0% and I pay ~$1125/mo in principal and ~$840 in interest on ~$500k mortgage currently. Well over $200k paid down in pricinpal in the first 15 years at that rate. I won't have a pension when I retire but I'll be generating 3-5x our annual expenses when I do with the mortgage ~10-12% of income.