I saw it mentioned in the Countdown to retirement thread you shouldn’t retire unless your home is paid off. I’m reasonably sure this was a generalization and not meant to cover all situations.
But it got me thinking, my mortgage is fairly small and my rate is only 2.625%. I’ll clearly never refinance and I see little reason to pay off the mortgage and collectively we’re earning more than 2.625% on our investments. Even as we go more and more conservative on our investments, I think it shouldn’t drop below 4%. So my thinking is keep the mortgage and keep that money invested.
I’m in New Jersey, so my property tax is high and I live in a windy Bayshore town so even my insurance is a bit high. Thankfully, no need for flood insurance. We may eventually move to another state where the property taxes aren’t one of our biggest burdens.
Definitely keep the mortgage. You get a write off on the interest which makes the effective rate even less. You’ll do much better investing the money that you would have used to pay off that particular debt.
IANAFA. Saying that, I would definitely not pay off the loan until you have decided to move. I have seen CD’s right now at 5%, so you seem to be ahead in your loan to investments. And at that low of a rate, after a few years, if you decide to move, in a Bayshore location, I might even look at doing an AirBnB or renting the place, and keep the loans as is.
I just went through this myself and the tipping point for me was that I only had 2-1/2 years left on my mortgage, so the amount of interest I was paying was minimal compared to say 10 years ago. In short, the tax benifit wasn’t much. I paid it off and it was great to not have to pay a mortgage payment every month.
So its a personal choice and not the same for everyone. Much depends on where you are in your mortgage and how you feel about being debt free (or not). For me I just have to remember that I still have taxes and insurance to pay and that I no longer have an escrow account to take care of that.
Maybe you get a write off on the interest- if the mortgage proceeds weren’t used to buy , build or improve your home , the interest isn’t deductible. So if someone used a home equity loan/line of credit to pay off other debt or to pay college tuition , that interest won’t be deductible. And then , you have to have enough deductions to itemize - not everyone with a mortgage does , especially with the limitation on state and local taxes.
We have a sizeable amount in a liquidity account that earns 5.32% currently. So even better than a CD. Next month a big chunk of that is going into SPY though, I’m still a little aggressive with part of our investments.
I’m slowly but surely getting out of almost all of our stock investments over the next 3-5 years. Especially the high risk ones.
I have the exact same interest rate, but likely a longer payoff horizon (2041). If you have the payoff amount available, I think you’re right in keeping it invested. I’d go so far as to take the specific payoff amount and invest it completely separate from the rest of your funds - I like to compartmentalize like that. Of course, you don’t have to open a separate account or anything - if you are normally piling money into SPY, maybe put the mortgage amount into SPLG or FZROX.
Is that before or after you pay tax on your return on investment? Suppose your marginal tax rate (state + federal) is 35% and the rate of return on your investment is 4%. Then the effective rate of return is only 2.6%. The answer also depends on whether you itemize deductions or just take the standard and is further complicated by the limits put in in the 2018 tax law.
It’s a lot harder than it used to be to actually get a tax break from deducting mortgage interest. The 2017 TCJA increased the standard deduction by quite a bit, and capped the state/local tax deduction. If you bought a $700,000 house with 20% down and a 2.5% interest rate in January of a year, the first year interest would be $13,855. That would just barely exceed the filing-single/married-filing-separately standard deduction for 2023, so such a filer would come out ahead if they’re in a state with significant state/local income or property taxes, or if they significant deductions. A married couple filing jointly would need $13,845 in other itemized deductions (SALT, donations, etc) just to make itemizing worthwhile.
We refinanced at 2.375% in 2021 and are currently earning ~5.3% on FNSXX, so although we could easily pay off a huge chunk of the loan at any time, we’re profiting to the tune of thousands of dollars a year by not doing so (even without necessarily deducting the interest).
The suggestion for the paid off mortgage in retirement is made with an eye to cash flow at a time when your income at retirement is lower than it was when you are working. For some people, lower gross income in retirement results in lower net income, so not having a mortgage payment helps make ends meet. For others, and for a variety of reasons, net income may stay the same or even rise in retirement. In those cases, continuing to pay a mortgage isn’t necessarily an issue as the cash flow can continue to make the payments.
The ability to make a bit by arbitrage between the two interest rates is nice, but the reason for the suggestion to pay off the mortgage has little to do with the rates, and more to do with reducing expenses.
One more factor to keep in mind is that cash is a much more readily available asset than real estate. For some people, it’s worth paying a monthly bill in order to have cash on hand in s pinch.
We paid off ours after the new tax law. It was relatively small, and the interest was within the standard deduction, so we no longer got a benefit from the interest. Reduced our capital but improved our cash flow, and one less thing to remember every month.
I paid ours off just before we retired. There wasn’t a huge amount left and I believe the interest rate was about 4.1%. This frees up $2,000 a month for us, which felt like a raise which was needed just as our income was lowered.
It’s not logical, I know, but you can’t discount the emotional comfort of owning your home outright in your old age.
Yep on the remarks upthread about money market funds. You can find lots that are above 5% right now. Not to mention CDs that are also above 5%, and they’re even more secure and your rate is locked in. We just bought a Goldman Sachs one through my Schwab account that’s paying 5.3%. If that rate would just stay like that for twenty or thirty years, we’d put all our funds there!
When I had a mortgage I would pay extra fairly frequently (and the extra amount would vary), so setting it on autopay wouldn’t have worked as well as the cable bill or something like that.