Why Pay off the mortgage?

Anything can happen to this economy and, certainly, something will eventually. Debt-free homes belong to the owners, not to the lenders, and one of the best ways owners can be assured that they can eventually have a debt-free home is to pay off their home mortgages as soon as possible.
 
I don't think it really makes a big difference. I think it’s mostly mental. I'm a big believer in LBYM & not having a mortgage enables you live off much less dollars per year. This will lower your stress, while investing the money that you didn't use to pay off your loan may actually raise your stress.
 
kz said:
Currently we have a 4.75% mtg while our CDs are earning 5.35%.

4.75% fixed? That's a very cheap rate! I agree - why pay down the mortgage when CD is returning at 6%?
 
sgeeeee said:
If you you have an interest rate less than about 6.5%, and time remaining on your mortgage of a dozen years or more, you will almost certainly find that keeping your mortgage is not only most likely to pay off financially, but will actually produced a larger (safer) long term withdrawal rate.

In retrospect, we should have accepted an offer for a home equity loan at 5.75% five years ago - no closing cost or points.
 
Because you can.......and it feels good!
 
At 6.25 you need a guaranteed after tax return of at least 5.25-5.50 to equal it.The key is equal it with what? The comparison should be against other risk free investments since this return is guaranteed .At this point it would be very difficult to beat paying off the mortgage as 5.5 after tax with zero risk is hard to do..While yes long term the markets can beat that the fact is you would be comparing 2 different risk levels.Borrowing the money for your house and taking your own money and putting it in the markets after a higher return is now akin to buying on margin.If you wouldnt buy stocks on margin at this point then dont do this as its the same thing,your borrowing the money to invest your own in effect.
 
Nords said:
Yep, we posted this on the second try and finally got it right on the third refinance...

http://early-retirement.org/forums/index.php?topic=1390.msg20740#msg20740
Nord's - that quote is in response to my question "has anyone taken out an extra $200K equity..." I read the original post and assumed that by refinance ("We signed the refinance papers today for a credit union 30-year 5.5% mortgage. We'll be making only the monthly payments and no additional principle so this one won't be paid off until the end of 2034 (when I'm 74).") you meant that you were finally able to get the payment on the existing debt reduced to a level that you can cover the payment with your pension while keeping the remaining expenses under 4% of your portfolio. We refinanced the existing debt several times over the years to get the monthly payments down -- and each time did it with a 30 year mortgage like you to maximize the tax benefits.

But did you actually do an equity take out and invest the extra $200K or whatever in the market?
 
"has anyone taken out an extra $200K equity..." 

My old boss in mega corp did this at the top of the tech run (Jan 2000).  Rolled it all in the NASDAQ.  He's not too happy with the results.  But still managed to retire at 55.

Would do lunch with him every day and if the topic came up his standard reply was "I am not worried, it'll come back." Still waiting and waiting ....
 
mathjak107 said:
At 6.25 you need a guaranteed after tax return of at least 5.25-5.50 to equal it.The key is equal it with what? The comparison should be against other risk free investments since this return is guaranteed .At this point it would be very difficult to beat paying off the mortgage as 5.5 after tax with zero risk is hard to do..While yes long term the markets can beat that the fact is you would be comparing 2 different risk levels.Borrowing the money for your house and taking your own money and putting it in the markets after a higher return is now akin to buying on margin.If you wouldnt buy stocks on margin at this point then dont do this as its the same thing,your borrowing the money to invest your own in effect.
This is one of the myths of early payoff fans. Owning a home is not risk free. A home has inflation risk, liquidity risk and several other types of risk associated with it. If people just "feel good" paying off their mortgage like some posters have indicated, then they should do it. If they want some historical data to help make a financial decision, they should run Firecalc scenarios and look at the data.
 
I'm not sure it saying a home has inflation risk makes sense in the context of the discussion since both options (pay off mortgage or invest) would carry same inflation erosion risk on rates or return.
 
Spanky said:
4.75% fixed? That's a very cheap rate! I agree - why pay down the mortgage when CD is returning at 6%?

1) because the 6% is less than that once you consider the taxes you must pay on it. (unless the money is in tax deferred status)

2) because what nobody has mentioned thus far in the discussion is that although you can write off the interest on the mortgage, you aren't usually really getting all of this writeoff effectively. You should first subtract off the standard deduction (you'd get that much anyway, without the mortgage), and use that amount, plus any other miscellaneous deductions that add to it for the comparison. For many, the mortgage deduction isn't as attractive when viewed that way.
 
donheff said:
But did you actually do an equity take out and invest the extra $200K or whatever in the market?
We kinda backed into it.  Over the years it was easier to refinance the mortgage than to cash in a chunk of the ER portfolio.

It's a calculated risk, the long-term odds are in our favor, we don't have any bonds in our ER portfolio, I have a govt pension with a COLA, and we sleep fine at night.  But I wouldn't recommend this without an extremely reliable pension or a small mortgage.  

FIRECalc claims that we have a good chance to come out ahead over a 30-year mortgage if we invested it in equities, and interest rates have dropped even further since I realized that.  What clinched the analysis is that a larger retirement portfolio is generally more survivable, even if that larger portfolio consists partly of invested mortgage money and results in a higher SWR than without it.

You have to run FIRECalc for your original expenses & portfolio, and then run it again with the additional mortgage payments plus the larger portfolio.  Our FIRECalc runs tend to be pretty long, 75-80 years, so we probably have less data than most people's runs.  But even running a 30-year mortgage through FIRECalc all by itself is generally a winner-- especially at 5.375%.

So last year we decided to keep the mortgage.  Its payment (plus utilities, gas & groceries) is covered by my pension, which is also rising with inflation.  Our SWR is higher now but our portfolio will be boosted by my spouse's pension (in 2022) plus Social Security (2022-3).
 
Nords said:
We kinda backed into it. Over the years it was easier to refinance the mortgage than to cash in a chunk of the ER portfolio.
DW and I have done something equivalent, although I always assumed it was financially nuts. She has to file quarterly self employment taxes but cash flow is a mess -- she gets the bulk of her income in the second half of the year, sometimes as much as 40% in the final quarter. With auto-investments, etc., we frequently found ourselves with insufficient cash to pay the first quarter (which includes whatever is due for yearly, plus the first quarterly). Like you, virtually everything is in equities so we would take out a home equity loan for the taxes and pay it off later in the year. We just didn't want to get into the habit of tapping into the ER fund for any reason.
 
kowski said:
Debt-free homes belong to the owners, not to the lenders, and one of the best ways owners can be assured that they can eventually have a debt-free home is to pay off their home mortgages as soon as possible.

Don't kid yourself into believing that you own your home if you pay of the mortgage. The property tax man can always take your house if you don't pay your taxes. Other then in California where there is Prop. 13 protection, you have little control over escalating property taxes. That said I am in the debt free camp and can sleep at night.
 
So the yrs you had the mortgage you lied awake at night tossin n turnin ?

I think numbers say one thing and the emotions say another.

I think if your going to say investing is risky theres also the chance that your investments will yield a lot more .
 
WRBT said:
I'm not sure it saying a home has inflation risk makes sense in the context of the discussion since both options (pay off mortgage or invest) would carry same inflation erosion risk on rates or return.
No. Real estate appreciates or depreciates quite differently than the rest of your portfolio. If you have your money in other investments, you can easily rebalance those parts of your portfolio as prevailing rates of return and inflation change. But if property values stagnate and all your money is in your home, it's hard to rebalance.

This is a point a lot of pro-payoff people seem to miss. If you payoff your mortgage, your portfolio is diminished by the payoff amount. When people talk about cash flow improvement, they are ignoring the fact that they made a huge payout that reduced their cash flow by an amount that they will not overcome for many years. The odds are that they have reduced the value of their nest egg forever.

Run the numbers in FIRECalc. Many people don't want to acknowledge the results or try to modify the ground rules to justify payoff. But run the numbers and you will see -- for balanced portfolios, ~6.25% mortgage rates or lower, remaining time on loans >~10 years, the financial advantage has historically been with keeping the mortgage. Paying off the mortgage actually increases the risk of running out of money in retirement. It may make you feel good, but it isn't neccesarily making you financially safer. You need to run the analysis to see what works out best for your situation. :)
 
I paid cash for my house. This allowed me to hammer the seller with a lower price since the seller had no contingencies to price in, no points and other stuff that allows the cash to leave your control at closing.  Quite a shock to the system to cut out the assorted pirates in the real estate game, but if you have cash, you can save large amounts of money simply by avoiding all the extra costs required by the lender that do not add any value for you as the owner.  Title insurance is not really as important as a good title search. A survey on a tract home is a waste of money if the original plat was well surveyed, and they typically have to be to be platted.  Then there are so many hiden costs that you avoid, especially the mortage amortization that is so scewed against you on the front end.  Just pay cash and LBYM if thats what it takes.
 
sgeeeee said:
If you payoff your mortgage, your portfolio is diminished by the payoff amount. When people talk about cash flow improvement, they are ignoring the fact that they made a huge payout that reduced their cash flow by an amount that they will not overcome for many years. The odds are that they have reduced the value of their nest egg forever.

Run the numbers in FIRECalc.

Yes, you have reduced cash flow significantly. But you have reduced expenses at the same time. Once again, $1.0M portfolio with a mortgage payment vs. $800K portfolio without a mortgage payment. Which one comes in under 4%? Depends on total expenses including the amount of the mortgage payment, which depends on the original amount financed. If the payment is high but the principal is low (e.g. 20 years in) you could always refinance the pricipal due but that still may not meet the target.

Agreed - "run the numbers in FIRECalc."
 
Question for astromedia: How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.

Just curious.

Azanon
 
Azanon said:
Question for astromedia: How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.

I'm betting she will jump all over it as soon as you start reading what's been previously posted in a thread before duplicating it in your post... ;)

Andre1969 said:
My thoughts on aging? DON'T DO IT!! :D

REWahoo! said:
I suppose you are one of those who believe it has a limited future...

Azanon said:
Don't do it; There's no future in it.
 
I'm betting she will jump all over it as soon as you start reading what's been previously posted in a thread before duplicating it in your post...

Oh I didn't realize i wasnt entitled to have the same opinion as someone else.   Have any more apples/oranges comments or is that the only one?

As soon as I find the time to read through entire threads at work, i'll let you know ok?

Also, what's wrong with your mod features? We're 4 pages deep now and its still open ;)
 
Az, it sems to me we have multiple threads on many topics--is there something special about to mortgage or not to mortgage that we should carefully combine threads that arise a couple times a month (as a guess)? I am loathe to close down a useful thread and tack it onto a previous one, even if redundant--especially long threads, and especially on a very important question that every retiree has to resolve, maybe more than once. After all, one can continually revisit this issue, especailly if one's circumstances/knowledge/gut-feel/insomniac tendencies change.

If other moderators (or posters) disagree with me, they will let me know!

PS--I like the variation "astromedia" on my screen name "astromeria" (whether typo or deliberate) and can only wait for the appropriate opportunity to use it.
 
I agree with you.

They do pop up over and over, and do get the standard early-thread references to previous threads, but people can't resist the discussion so it's always interesting. If people didn't want to engage in it there wouldn't be pages of posts so quickly.
 
For those of you who favor having a mortgage for cash-flow, investment, etc. reasons:

At what point does the mortgage become such a small part of your portfolio, that not having to deal with a mortgage would be more attractive to you? For instance, if your home's value was 5% of your portfolio, would you still feel compelled to have a mortgage? Or is there no point at all at which you would not give up the financial benefits of having a mortgage?

Additionally, if you could borrow other money at home mortgage rates, how much debt would you take on (as a percentage of portfolio, or however you wish to measure it) in order to invest elsewhere? For instance, assume you could walk into a bank and get an unsecured loan at 6%, how much would you take for investment purposes?
 
Azanon said:
Question for astromedia:  How many pay off the mortgage vs not paying off the mortgage threads are we going to have before they're just closed early on and links are posted to the existing 10 others.
Just curious.
Azanon
Judging by the response to this and all the other mortgage threads, many of which I've linked here already, it's a popular topic.  While certain grizzled veterans may no longer find some threads interesting, every day someone on this board discovers something new to them and can probably find at least one other person as interested in it as we once were all those hundreds of posts ago.  That's the water & fertilizer that keeps a board fresh and growing, so I wouldn't pee on it.  You can choose which threads you read, and if you don't have something to contribute then you don't have to say anything.

Geez, Az, with all your complaints about the board and its posters, it seems hypocritical for you to waste any more of your time here.  

We moderators get a lot of complaints similar to your mortgage-thread sentiments, only they usually read "How many times are we going to have to read this guy's outraged trolling bait before he's just closed off and links are posted to his other existing rants?"

Unless you're volunteering for moderator duty or contributing to Dory's server fund, maybe you should go start your own board where your complaints can be dealt with more appropriately... and certainly more constructively.
 
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