Pay Off Mortgage?

[Hanoi IG]

We are retired and have a low mortgage on our condo. It is a 4 year old loan so most is still interest. Our rate is about 3.5% so my rationale was that we could make more investing and got the interest deduction. We are now in a place where the Standard Deduction is higher than our itemizations.

Does it make sense to pay off the mortgage? The amount would be about 4-5% of our net worth. I am 71 and wife is 70.

 

[Free-quent Flyer]

You say you took out the loan because you thought you could make more investing the money. Are you making more investing the money? If so, then it sounds like your plan is working and you shouldn't jump ship without a reason. If not, then it's possible your plan was bad, and if so you might want to make a different plan. But whichever you decide you should decide based on a real, thought out plan, not how you're feeling on any given day. The absolute worst thing you could do is wait for the market to go down, THEN freak out and sell your investments and pay off the loan after it's gone from 4-5% of your net worth to 10-15% of your net worth.

 

[Duffmankc]

If you are no longer itemizing, then you are paying the full 3.5% on your mortgage (vs. say 3.5% * 75% for someone that itemizes and is in the 25% bracket). If the money you would pay off your mortgage is in a taxable account, then in order to break-even you would have to earn a rate of return = 3.5%/(1 - your marginal tax rate). For example, if you are in the 25% marginal bracket, then you would need to earn at least 4.67% on your investments to break-even.
Aside from the income side of the equation, at only 4-5% of your net worth I wouldn't expect any marginal investment gains to make much of a difference to your situation. Whereas if you paid off your mortgage no matter what else happens you will own your house free and clear and will not have to worry about mortgage payments. Seems like a good trade-off to me. In addition, we are in the middle of a very long bull market, which really picked up after the election - always better to get out on a peak vs in a valley.

 

[Hanoi IG]

If you are no longer itemizing, then you are paying the full 3.5% on your mortgage (vs. say 3.5% * 75% for someone that itemizes and is in the 25% bracket). If the money you would pay off your mortgage is in a taxable account, then in order to break-even you would have to earn a rate of return = 3.5%/(1 - your marginal tax rate). For example, if you are in the 25% marginal bracket, then you would need to earn at least 4.67% on your investments to break-even.
Aside from the income side of the equation, at only 4-5% of your net worth I wouldn't expect any marginal investment gains to make much of a difference to your situation. Whereas if you paid off your mortgage no matter what else happens you will own your house free and clear and will not have to worry about mortgage payments. Seems like a good trade-off to me. In addition, we are in the middle of a very long bull market, which really picked up after the election - always better to get out on a peak vs in a valley.

Good point. I made like 8.5% for most of these four years but now might not. I think even with the low payments it may just make sense.

 

[Cmonman76]

I vote pay it off.

No matter what the math says, if it was paid off you probably wouldn't take out a mortgage on it to invest the cash you pull out. So just pay it off. I would prefer the freedom of no mortgage.

 

[Hanoi IG]

I vote pay it off.

No matter what the math says, if it was paid off you probably wouldn't take out a mortgage on it to invest the cash you pull out. So just pay it off. I would prefer the freedom of no mortgage.

True that. We paid off our previous mortgage just to be safe, took out this mortgage figuring we might need cash and it's tiny payment, but in the long run..........we're all dead!

 

[AlaskanTraveler]

This is a good question for the group over Bogleheads. There answer would be, pay it off because bonds aren't returning 3.5% right now. The paid off house would be part of your fixed asset allocation.

 

[Matt]

This is a good question for the group over Bogleheads. There answer would be, pay it off because bonds aren't returning 3.5% right now. The paid off house would be part of your fixed asset allocation.

This is what I would say too.

 

[Hanoi IG]

This is what I would say too.

Thanks. I have to google fixed asset allocation lol. OK did it. I never really counted my house as an asset even though getting lucky when we sold ours and moved overseas led to our accumulating what little we have.

 

[SanDiego1K]

We are mortgage free and have been for many years. There is a great sense of freedom in knowing we own our house free and clear and have no monthly mortgage payments. I'm a very logical person but this is a place where I put logic aside. I love that the months come and go and I have no check to write to live where we do.

 

[GetawaysRus]

I'm another who has paid off the mortgage. Reading this makes me wonder if those of us in the miles and points community are the type of people who are more apt to want to pay off a mortgage.

Whether to pay off a mortgage or not is a complex decision with multiple variables. For us, we were quickly approaching retirement. I had a 2.875% 15 year fixed and, at the time I was making this decision, it was clear that I could buy tax free munis and get a double tax free yield that was going to be greater in the end than the cost of the interest on the 2.875 note. (I buy individual munis in my home state of California in the bond portion of my investment portfolio.) So financially, the clear choice was to keep the home loan and buy the munis. But my wife argued that she wanted the psychological security of having the loan paid off. So, as usual, I decided to let her win. The potential small profit from buying muni bonds just did not outweigh the security of owning a home free and clear.

 

[Hanoi IG]

I'm another who has paid off the mortgage. Reading this makes me wonder if those of us in the miles and points community are the type of people who are more apt to want to pay off a mortgage.

Whether to pay off a mortgage or not is a complex decision with multiple variables. For us, we were quickly approaching retirement. I had a 2.875% 15 year fixed and, at the time I was making this decision, it was clear that I could buy tax free munis and get a double tax free yield that was going to be greater in the end than the cost of the interest on the 2.875 note. (I buy individual munis in my home state of California in the bond portion of my investment portfolio.) So financially, the clear choice was to keep the home loan and buy the munis. But my wife argued that she wanted the psychological security of having the loan paid off. So, as usual, I decided to let her win. The potential small profit from buying muni bonds just did not outweigh the security of owning a home free and clear.

I never bought any bonds except US years ago which we just cashed in 2016. We don't care psychologically as our Social Security which is not high, covers mortgage and leaves about 16-1700$ a month so we can easily pay for the rest of the term by which time we will certainly both be dead. It's just that with Strumph as President, things are so uncertain so we might not make enough investing to cover the 3.5 or 3.6% plus we have no deduction so closer to whatever someone said early nearly 5%. Still, paying off the mortgage would then create more taxes for selling off investments so now I'm even less sure. I wish we could delete posts. I have so many out there

 

[Matt]

I never really counted my house as an asset

I never bought any bonds except...

You may not have bought many, but you've sold one. A Bond is a debt instrument. Corporate Bonds are issued by companies. Government Bonds by Governments etc... forget the house being an asset for a moment, and think about what a Mortgage is.

It's a Bond. The Bond is secured by the lien on the property.

The way Bond investing works is that you have a range of risk/reward. From the shortest term, government backed T Bills/Bonds to the long term junk bonds issued by shakey corporations. Mortgages replace the 'risk free' aspect of your portfolio. A portfolio should have risk free/low risk and potentially some more risk if it is needed for gain. I personally ignore junk though.

Regarding selling assets - you could go two ways:

1. Just accelerate payments to the mortgage rather than go all in.
2. Cherry pick assets that have the least appreciation. You might find if you open up the details of your positions you can find ones that are less appreciated. This happens when you've set things to DRIP, or you've manually bought more over time.

I'd highly recommend taking some weighting out of a 100% equity position and look at the mortgage and fixed income for a part of that allocation. Either one will make the future ride a lot less bumpy.

 

[Hanoi IG]

You may not have bought many, but you've sold one. A Bond is a debt instrument. Corporate Bonds are issued by companies. Government Bonds by Governments etc... forget the house being an asset for a moment, and think about what a Mortgage is.

It's a Bond. The Bond is secured by the lien on the property.

The way Bond investing works is that you have a range of risk/reward. From the shortest term, government backed T Bills/Bonds to the long term junk bonds issued by shakey corporations. Mortgages replace the 'risk free' aspect of your portfolio. A portfolio should have risk free/low risk and potentially some more risk if it is needed for gain. I personally ignore junk though.

Regarding selling assets - you could go two ways:

1. Just accelerate payments to the mortgage rather than go all in.
2. Cherry pick assets that have the least appreciation. You might find if you open up the details of your positions you can find ones that are less appreciated. This happens when you've set things to DRIP, or you've manually bought more over time.

I'd highly recommend taking some weighting out of a 100% equity position and look at the mortgage and fixed income for a part of that allocation. Either one will make the future ride a lot less bumpy.

????? We're not 100% equity more like 60-40 actually looks like 56-42 with some cash. I don't count house because you gotta live somewhere. Strange with the recent rise that I'm not closer to 60 or even a tad above. Last 10 years I guess include 2 Bush years and the early Obama years but with it all looks like 8.3% return which is not the worst. We are big on International in theory but it's hard to calculate exactly where we are since some funds have a mix of US and foreign.

Still own a few individual stocks Sorry didn't buy more Amazon and Baidu. Sentimentally hold a Vietnam fund since its our favorite place and our safe haven if Trumpism continues apace.

I'm sorry if I gave you the opinion that we are novice investors or don't keep track. I probably analyze way too much. Just throwing the mortgage thing out there to see what people thought. We are old but I think it's too soon to cash out. Paid off house might be a good thing, though unless they do away with Social Security entirely we can easily pay the mortgage, utilities and other core expenses. The only thing that made me think of paying it off was the fact that we don't really have enough to itemize. Our last house we paid off early and got a windfall because we had two years living in Hanoi with my wife's employer assisting and we stood pat even bought a bit during the Bush recession.

Thanks for all of the input. It gives me a bit more insight. Our only advice is from Vanguard's Flagship people and so far they have pretty much agreed with our ideas. We were lucky to move from expensive area to cheaper area and bought a tiny 2 bedroom condo so had enough to take advantage of the last few years.

So far we haven't had to touch principle but that day may be coming soon. Fortunately my wife taught 36 years in public school so unless they take away her pension(a possibility, however slight) we shouldn't outlive our money, though if inflation rears its ugly head, who knows?

 

[Free-quent Flyer]

@Hanoi IG since I'm apparently the only person on the other side of this I guess I'll chime in again.

You had a plan. You followed through on the plan. You paid a bunch of origination fees, closing costs, appraising fees, whatever.

Those are all sunk costs and I'm not trying to tell you to "take them into account" sunk-cost-fallacy-wise. I'm telling you to take into account the things you were thinking that led you to make the decision in the first place. If something has changed since you made that decision, or if you have learned more things and consider yourself better-informed and better-educated about the risks and rewards of investing in the market while carrying a mortgage, good, reassess your situation and potentially arrive at a different conclusion.

On the other hand, if you made the decision impetuously, and are now making another decision impetuously, then your problem is making impetuous decisions, not carrying a mortgage while investing in the stock market! Fix the real problem, which is not your mortgage/stock allocation.

And finally, you need to consider the possibility that your younger self was right. Maybe it was that younger self that thought through everything and decided that carrying the mortgage while investing in the market was worthwhile, and he thought through all the risks and rewards and arrived at a sensible conclusion, and would be furious that you, older self, are second-guessing his careful homework.

I'm not saying "don't pay it off," I'm saying don't treat every financial decision as an in-the-moment, do-I-go-left-do-I-go-right, split-second decision. Make decisions that you have enough confidence in that you'll stick with them for 5-15 years, and reevaluate them only when you have significant, new information.

 

[Matt]

I never bought any bonds except US years ago which we just cashed in 2016.

????? We're not 100% equity more like 60-40 actually looks like 56-42 with some cash.

Sorry for misunderstanding.. where I come from not buying any bonds doesn't imply a 60/40 position

A well designed 60/40 allocation should have a weighting in the risk free/very low risk area. You very likely hold these assets, either within a dedicated fund such as SHY or TIP or blended into a bigger fund, like BND.

A mortgage has the same risk as these low return assets, but your rate of return is the 3.5% (plus adjustments for any tax benefits) vs 0.x%. Therefore it's a smarter play (financially) to pay it off.

The concept that I remind people of is that the mortgage debt is always burning away at the 3.5% rate, whereas you will also always have cash that is earning 0%. My approach to that imbalance is to throw all cash at the mortgage or debt so that there's less chance that your money is losing money.

Vanguard is a good company, and I invest a lot in their funds, and their advisors are a step above what you'd find in a high st bank, but the advice you get there is still going to be a little generic/limited.

 

[Hanoi IG]

Sorry for misunderstanding.. where I come from not buying any bonds doesn't imply a 60/40 position

A well designed 60/40 allocation should have a weighting in the risk free/very low risk area. You very likely hold these assets, either within a dedicated fund such as SHY or TIP or blended into a bigger fund, like BND.

A mortgage has the same risk as these low return assets, but your rate of return is the 3.5% (plus adjustments for any tax benefits) vs 0.x%. Therefore it's a smarter play (financially) to pay it off.

The concept that I remind people of is that the mortgage debt is always burning away at the 3.5% rate, whereas you will also always have cash that is earning 0%. My approach to that imbalance is to throw all cash at the mortgage or debt so that there's less chance that your money is losing money.

Vanguard is a good company, and I invest a lot in their funds, and their advisors are a step above what you'd find in a high st bank, but the advice you get there is still going to be a little generic/limited.

I know but we don't actually follow it anyway. They wanted us 50-50 5 years ago and we were more like 65-35. Thanks for your input. We just want to be comfortable and die broke.

 

[Hanoi IG]

@Hanoi IG since I'm apparently the only person on the other side of this I guess I'll chime in again.

You had a plan. You followed through on the plan. You paid a bunch of origination fees, closing costs, appraising fees, whatever.

Those are all sunk costs and I'm not trying to tell you to "take them into account" sunk-cost-fallacy-wise. I'm telling you to take into account the things you were thinking that led you to make the decision in the first place. If something has changed since you made that decision, or if you have learned more things and consider yourself better-informed and better-educated about the risks and rewards of investing in the market while carrying a mortgage, good, reassess your situation and potentially arrive at a different conclusion.

On the other hand, if you made the decision impetuously, and are now making another decision impetuously, then your problem is making impetuous decisions, not carrying a mortgage while investing in the stock market! Fix the real problem, which is not your mortgage/stock allocation.

And finally, you need to consider the possibility that your younger self was right. Maybe it was that younger self that thought through everything and decided that carrying the mortgage while investing in the market was worthwhile, and he thought through all the risks and rewards and arrived at a sensible conclusion, and would be furious that you, older self, are second-guessing his careful homework.

I'm not saying "don't pay it off," I'm saying don't treat every financial decision as an in-the-moment, do-I-go-left-do-I-go-right, split-second decision. Make decisions that you have enough confidence in that you'll stick with them for 5-15 years, and reevaluate them only when you have significant, new information.

I was still old when we took out the mortgage but the fees were low and no points. After the Bush debacle years we didn't have as much cash so thought the market would bounce back and we should use ours. We haven't quite doubled since then but nearly and of course we travel about half the year now(186 days last year). Points/miles have helped cut some costs, like airfare.

Hey, if I were making an impetuous decision, I wouldn't have asked the forum . I think there is no wrong answer so won't agonize over it. We also took Social Security early which proved a good choice. We needed the $ more then than we need bigger $ now.

Since our costs are so low and Social Security will more than cover them, I may just let it ride. Maybe we will have big medical bills and then will get the mortgage deduction again.

In the long run........We are all dead.

 

[jmw]

Your liquidity goes down 5% once you pay this off. 5% of your cash will be trapped in the walls unless you can cash out refi with no closing costs.

No idea what is your total net worth, but IMHO you must consider the cost of catastrophic health events over the next 15 years, which is much more likely. In particular, can you afford to pay the max out-of-pocket for your Medicare part A/B/C as well as Part D for multiple years for both of you? Can you afford assisted living and boarding care for one person for at least one year? Look up the cost in your area and see if you have enough cash to last for a year or two. You do have a potentially useful Trump healthcare hedge with Vietnam, and maybe I would consider that if you were willing to move back if it was needed. Healthcare in the US is stupid expensive. You better have enough money for it. That's why I'd lean towards not paying off the mortgage at age 70.

 

[Hanoi IG]

That is, of course, the X factor. Of course, if we have a catastrophic injury or illness life would not be worth living, no matter how much money we have. I like your reasoning more than "You will be safer with a paid up house."

 

[Hanoi IG]

Sorry for misunderstanding.. where I come from not buying any bonds doesn't imply a 60/40 position

A well designed 60/40 allocation should have a weighting in the risk free/very low risk area. You very likely hold these assets, either within a dedicated fund such as SHY or TIP or blended into a bigger fund, like BND.

A mortgage has the same risk as these low return assets, but your rate of return is the 3.5% (plus adjustments for any tax benefits) vs 0.x%. Therefore it's a smarter play (financially) to pay it off.

The concept that I remind people of is that the mortgage debt is always burning away at the 3.5% rate, whereas you will also always have cash that is earning 0%. My approach to that imbalance is to throw all cash at the mortgage or debt so that there's less chance that your money is losing money.

Vanguard is a good company, and I invest a lot in their funds, and their advisors are a step above what you'd find in a high st bank, but the advice you get there is still going to be a little generic/limited.

I've been trying to delete my account but it never seems to take. You must be in charge here so maybe you can figure it out? It says it will be deleted in 24 hours but I've tried a couple of times and it never seems to work,

 

[Matt]

I've been trying to delete my account but it never seems to take. You must be in charge here so maybe you can figure it out? It says it will be deleted in 24 hours but I've tried a couple of times and it never seems to work,

You're leaving again? I can delete your account, or you can just not log in?

 

[Cytraveler]

I don't about where you live, but for us, the property taxes are about 40% of our monthly housing payment. We've accelerated our mortgage payment, but even when it's paid off, we'll still have those pesky taxes. And thanks to PA legislature increasing retirement benefits for teachers, the taxes are on the rise. So by the time we pay off the mortgage, taxes will probably be half the total amount.

Chances are your property taxes are less than mine, but they're still a cost whether you pay them annually or as part of the monthly mortgage payment.

 

[Hanoi IG]

My wife is a former teacher and her benefits will never go up. Our taxes here in "The Sweetest Place on Earth" are about 200/month