Paying Down the House Before Retirement

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Alf 101
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Paying Down the House Before Retirement

Post by Alf 101 »

My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Here is our situation. Sadly my mother passed away. She had inherited a sizable IRA when my father died, and now this will be split between myself and two brothers. My older brother is the executor, and while in no way contentious, lawyers and accountants are involved to ensure we do this properly.

My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.

Where we owe money, like many people, is our home. We closed on our house in November 2017, with a 30 year mortgage at 2.95% If we made the minimum payments, the home would be paid off in December 2047. As it happens, we've been paying extra toward the principal, the equivalent of 15 payments in a year, and if we continue with this our payoff date will be February 2036.

Now let's say we want to retire in January 2030 or 2032. A lump sum payment toward principal, particularly still only five years into the loan, could definitely bring the payoff date forward. On the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.

The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
SubPar
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Re: Paying Down the House Before Retirement

Post by SubPar »

While I am still a ways away, it is certainly a priority for me. DW and I plan to ride off into the sunset with not a cent owed to anybody.
count damoney
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Re: Paying Down the House Before Retirement

Post by count damoney »

With 10-12 years until you plan to retire, keep investing in taxable and re-assess a couple years out from retirement.
My guess is you'll have plenty in your taxable to pay off your mortgage at that time.
SpaceMonkey
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Re: Paying Down the House Before Retirement

Post by SpaceMonkey »

Many people advocate for paying off your mortgage before retirement in order to reduce your expenses and therefore lower your "sequence of returns risk" -- that is, the risk that a market downturn occurs just when you are about to or have recently retired, requiring you to draw a higher percentage from your portfolio.

How important this is depends on your risk tolerance and how big a factor your mortgage is in your annual expenses.
6U7a9Zfym64CRBB8gY3v
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Re: Paying Down the House Before Retirement

Post by 6U7a9Zfym64CRBB8gY3v »

SubPar wrote: Thu Oct 14, 2021 9:11 am While I am still a ways away, it is certainly a priority for me. DW and I plan to ride off into the sunset with not a cent owed to anybody.
I felt the same way, but now that my mortgage is sitting under 3% it is hard to justify paying it down early.
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Re: Paying Down the House Before Retirement

Post by pizzy »

If you plan to retire and remain in the same location, same house - then I think it makes sense to have your mortgage scheduled to be paid off at the same time as retirement.

However, if you plan to retire and move to a "retirement house" like many choose to do for various reasons (weather, downsize, single level, etc.) then paying off early isn't as important since you will be selling and paying off the mortgage at that time.
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likegarden
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Re: Paying Down the House Before Retirement

Post by likegarden »

We finally did our last mortgage payment when I retired at 62 1/2 age and it felt good. That was nearly 20 years ago - no more loans thereafter.
HomeStretch
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Re: Paying Down the House Before Retirement

Post by HomeStretch »

You will likely receive responses from both sides - payoff your mortgage by retirement vs. not pay it off as you may earn more after-tax in the market if the funds were instead invested. Historically, the “leave it invested” option probably gave higher returns in the recent bull market. No one knows for sure if that will be true in the future.

So I think the decision to pay off the mortgage by retirement is a personal one based on your attitude towards debt, projected future market returns, your asset allocation and whether you believe having a paid-off home helps with “sequence of returns” risk at/in retirement.

Spouse and I paid off our mortgage early (well before retirement) and maintained a higher equity % for our retirement portfolio. We never regretted the pay-off decision as during financial hardships (like unexpected job loss, illness) our lower monthly expense levels without a mortgage payment made us feel more secure.
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retiredjg
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Re: Paying Down the House Before Retirement

Post by retiredjg »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
Not a priority for me. My rate is less than I expect to bring in from my investments over the long run.

High priority for others. I think this falls into personal preference. You are already paying it at an accelerated rate. I'd just keep that up until it seems clear to you that it is time for the mortgage to go. Then pay it off.
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Re: Paying Down the House Before Retirement

Post by Tom_T »

You could also look into refinancing to a 15-year loan. Given that you've been paying extra anyway, it's possible that you'll end up with a reasonable monthly payment. You didn't mention the loan balance, but if it's 200K or more, you can get a rate in the 2 percent ballpark. It gives you some leeway and will save on interest if the new payment is manageable. Ten years down the road, when you're ready to retire, you can pay it off with your invested funds.
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vanbogle59
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Re: Paying Down the House Before Retirement

Post by vanbogle59 »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
It was a priority for me long before retirement (I am just getting really close to that now).
I hate being in debt. I have lost much more sleep over that than any stock market behavior.

But I understand those who use low-cost debt as part of a larger plan. Some of those plans are, no doubt, better than mine.

The one thing I can say for certain, your plan will be SIMPLER if you have no debt.
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Krui24
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Re: Paying Down the House Before Retirement

Post by Krui24 »

I used to obsess a little about this issue, but I stuck with the regular amortization and plowed the rest into the market

I found that once my taxable account exceeded my mortgage balance, the anxiety dropped precipitously. Now, thanks to a great market and continued amortization, my taxable is more than double my mortgage balance. Even in a colossal market meltdown, i could liquidate and pay off the mortgage in one shot.

This helped me (mentally) stick with the very inexpensive, government-subsidized debt and seek better returns on the market. Even in retirement I'll keep the mortgage as long as I can.
SubPar
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Re: Paying Down the House Before Retirement

Post by SubPar »

6U7a9Zfym64CRBB8gY3v wrote: Thu Oct 14, 2021 9:14 am
SubPar wrote: Thu Oct 14, 2021 9:11 am While I am still a ways away, it is certainly a priority for me. DW and I plan to ride off into the sunset with not a cent owed to anybody.
I felt the same way, but now that my mortgage is sitting under 3% it is hard to justify paying it down early.
Yeah, understand that paying it down early is probabilistically sub-optimal based on historic market performance and current rates. Just a personal thing for us. I don't feel that paying our home down on a 15 year am (which is what we're doing) is going to materially alter the end result. We're still maximizing all tax-advantaged space and piggy-banking a decent chunk to taxable every year.
exodusNH
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Re: Paying Down the House Before Retirement

Post by exodusNH »

SubPar wrote: Thu Oct 14, 2021 9:44 am
6U7a9Zfym64CRBB8gY3v wrote: Thu Oct 14, 2021 9:14 am
SubPar wrote: Thu Oct 14, 2021 9:11 am While I am still a ways away, it is certainly a priority for me. DW and I plan to ride off into the sunset with not a cent owed to anybody.
I felt the same way, but now that my mortgage is sitting under 3% it is hard to justify paying it down early.
Yeah, understand that paying it down early is probabilistically sub-optimal based on historic market performance and current rates. Just a personal thing for us. I don't feel that paying our home down on a 15 year am (which is what we're doing) is going to materially alter the end result. We're still maximizing all tax-advantaged space and piggy-banking a decent chunk to taxable every year.
You may already know this, but unless your mortgage company "recasts" your mortgage, paying a big chunk does not lower your monthly payment. It obviously cuts the length of the loan, but does not lower your monthly outflow.

It's probably worth calling to find out if they will recast. There might be a small fee. But then, you can pay a chunk and then benefit from the lower payment. If you keep the same payment, you're obviously paying it off faster, or you can redirect the difference into a taxable fund.

I have not been mortgage free since 2002, when I bought my first place. I cannot tell you what it feels like. From what I've gathered, about half of people take great comfort in not having a mortgage.
SubPar
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Re: Paying Down the House Before Retirement

Post by SubPar »

exodusNH wrote: Thu Oct 14, 2021 9:56 am
SubPar wrote: Thu Oct 14, 2021 9:44 am
6U7a9Zfym64CRBB8gY3v wrote: Thu Oct 14, 2021 9:14 am
SubPar wrote: Thu Oct 14, 2021 9:11 am While I am still a ways away, it is certainly a priority for me. DW and I plan to ride off into the sunset with not a cent owed to anybody.
I felt the same way, but now that my mortgage is sitting under 3% it is hard to justify paying it down early.
Yeah, understand that paying it down early is probabilistically sub-optimal based on historic market performance and current rates. Just a personal thing for us. I don't feel that paying our home down on a 15 year am (which is what we're doing) is going to materially alter the end result. We're still maximizing all tax-advantaged space and piggy-banking a decent chunk to taxable every year.
You may already know this, but unless your mortgage company "recasts" your mortgage, paying a big chunk does not lower your monthly payment. It obviously cuts the length of the loan, but does not lower your monthly outflow.

It's probably worth calling to find out if they will recast. There might be a small fee. But then, you can pay a chunk and then benefit from the lower payment. If you keep the same payment, you're obviously paying it off faster, or you can redirect the difference into a taxable fund.

I have not been mortgage free since 2002, when I bought my first place. I cannot tell you what it feels like. From what I've gathered, about half of people take great comfort in not having a mortgage.
Thanks, yes, I am aware. I literally meant that our loan term is 15 years, so I'm not technically paying it off early...just early relative to a 30 year mortgage.
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Re: Paying Down the House Before Retirement

Post by Raycpact »

I have been self-employed and used various debts sources to fund my business growth which included using the house equity. I am now in the process of using excess cash for paying down debt and investing.

I am using a formula that "feels right" to me to determine how much debt vs. investment to apply excess cash. When my interest rate on my highest debt was 9% then I used 90% to debt and 10% to invest. Now my highest rate is 4%, and I will take 40% of the excess cash and apply it to the debt while investing the rest.

The exception was my 2% mortgage. I gave priority to pay it down (after the 9% was gone and before the 4%) enough so that when my wife (who is youngest) is 62, that our mortgage is on track to be 50% of the fair market value. This will enable us to convert the debt to a reverse mortgage. I don't necessarily intend to but I wanted the ability to for a safety net. Now that the goal has been reached, I am continuing to pay down other business debts using my formula.
mtn biker
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Re: Paying Down the House Before Retirement

Post by mtn biker »

Sounds like it has a value to you, outside of the financial aspects. Nobody else can determine how much that non-financial value is other than you. And nobody knows the financial advantage of keeping the money in the market instead of paying off the mortgage. But it's a great discussion and I read every one of these threads, knowing I'll eventually have that same decision. For now I'm not paying off mortgage early, but I'm influenced by my desire for simplicity, and will likely lean toward having it paid off. At that point I might pull money out of the house if the market crashes, much like I found a bit extra to throw in March of 2020, but it will just be at the level of fun money, not with any great need to profit.
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Re: Paying Down the House Before Retirement

Post by forgeblast »

For my wife and I who will have defined pensions, it made sense for us to pay off the house early as we can put the rest of the mortgage payment towards our daughters college and hopefully have it paid for. Once she is settled down after college then we will have cash flow to move near her if needed, and hopefully still keep our home.
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Re: Paying Down the House Before Retirement

Post by oldfatguy »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
Not a priority to me, and will not happen.
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Re: Paying Down the House Before Retirement

Post by KlangFool »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am
My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.
Alf 101,

<<<We have started to talk about retiring early, maybe in the next 8-10 years.>>

That means you do not have ENOUGH to retire now. So, how does it makes any sense to pay down your 2.95% mortgage?

Do you believe that your portfolio would return on the average of less than 2.95% per year over the next 8 to 10 years?

Invest in your taxable account and retire earlier. Pay off your mortgage when you have ENOUGH to retire.

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Re: Paying Down the House Before Retirement

Post by obafgkm »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am We have started to talk about retiring early, maybe in the next 8-10 years.
KlangFool wrote: Thu Oct 14, 2021 1:41 pm
That means you do not have ENOUGH to retire now. So, how does it makes any sense to pay down your 2.95% mortgage?
I don't think at all that necessarily means that Alf 101 does not have enough to retire now. I think it means that maybe in the next 8-10 years they will retire.

Speaking for myself, I have enough to retire now, but I do not want to for many reasons. For me, it is not all about money.
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SGM
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Re: Paying Down the House Before Retirement

Post by SGM »

We paid off our mortgage well before retirement. I only used money that was in bonds. If I had a mortgage of $200k and I had $200k in bonds I would use that to pay off the mortgage. What is BND paying ?
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Cash is King
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Re: Paying Down the House Before Retirement

Post by Cash is King »

It's not on my to do list and I don't see that changing. I just closed on a 20 yr @2.375%.
delamer
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Re: Paying Down the House Before Retirement

Post by delamer »

Tom_T wrote: Thu Oct 14, 2021 9:26 am You could also look into refinancing to a 15-year loan. Given that you've been paying extra anyway, it's possible that you'll end up with a reasonable monthly payment. You didn't mention the loan balance, but if it's 200K or more, you can get a rate in the 2 percent ballpark. It gives you some leeway and will save on interest if the new payment is manageable. Ten years down the road, when you're ready to retire, you can pay it off with your invested funds.
Or even 10 year. We did a 10 year in our 50’s. Minimal interest over the life of the loan.

Take what you need from the inheritance to make the higher payment, if needed, but don’t put a lump sum in.

Or listen to KlangFool’s advice and pay off the current mortgage later once you are FI, and can pay if off all at once.

I’m sorry about your mother.
Last edited by delamer on Thu Oct 14, 2021 4:16 pm, edited 1 time in total.
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EnjoyIt
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Here is our situation. Sadly my mother passed away. She had inherited a sizable IRA when my father died, and now this will be split between myself and two brothers. My older brother is the executor, and while in no way contentious, lawyers and accountants are involved to ensure we do this properly.

My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.

Where we owe money, like many people, is our home. We closed on our house in November 2017, with a 30 year mortgage at 2.95% If we made the minimum payments, the home would be paid off in December 2047. As it happens, we've been paying extra toward the principal, the equivalent of 15 payments in a year, and if we continue with this our payoff date will be February 2036.

Now let's say we want to retire in January 2030 or 2032. A lump sum payment toward principal, particularly still only five years into the loan, could definitely bring the payoff date forward. On the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.

The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
Unless you are ridiculously debt averse, it is in your financial best interest to keep plowing money into your taxable account as per your desired asset allocation. Once you are financially independent you can consider the luxury of being mortgage free. This of course means ignoring the thinking that a mortgage is a negative bond. This is especially true when you don't have much of any taxable investments. If I had the means, I would want a bit more after tax investments before I worked on paying off such a low interest rate mortgage.

Once you are getting close to being financially independent, and have lots of bonds in your portfolio, it will make a lot of sense to start understanding that a mortgage really is a negative bond and get rid of some of those bonds to pay off your mortgage. I would not do this if the mortgage would decimate your bond holding completely. I would only choose this option when the mortgage is a small portion of your bond holdings. Such as a 2.5 million portfolio that is 70/30 ($750k in bonds) and you have $100k left on your mortgage type of scenario.

The idea is, when you are financially ready to start paying off your mortgage, you can do it relatively quickly. Within just a couple of years at most. The real big benefit of paying down a mortgage is when its paid off completely and not somewhere in between.

One common strategy is instead of paying off the mortgage now, you put all that extra cash in an after tax brokerage account and invest it in index funds. Once that account equals the mortgage, you just sell everything and pay off the mortgage. This strategy will likely have your mortgage paid off sooner (even after paying some capital gains tax) as compared to simply sending the cash directly to the mortgage holder (bank) every month.
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stoptothink
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Re: Paying Down the House Before Retirement

Post by stoptothink »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am
The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
We chose to use all extra funds after maxing out tax-advantaged space to the mortgage. We are VERY debt averse. This resulted in us paying off our mortgage in 4.5yrs, in May of '20 (while we were in our mid-late 30's). In hindsight, it was a terrible decision as far as wealth-building, but there are some psychological benefits to not having a mortgage. Put in the same position again, I'd probably split it halfway.
EnjoyIt
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

stoptothink wrote: Thu Oct 14, 2021 3:16 pm
Alf 101 wrote: Thu Oct 14, 2021 9:05 am
The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
We chose to use all extra funds after maxing out tax-advantaged space to the mortgage. We are VERY debt averse. This resulted in us paying off our mortgage in 4.5yrs, in May of '20 (while we were in our mid-late 30's). In hindsight, it was a terrible decision as far as wealth-building, but there are some psychological benefits to not having a mortgage. Put in the same position again, I'd probably split it halfway.
That would have only made your decision a 50%
stoptothink wrote: Thu Oct 14, 2021 3:16 pm terrible decision as far as wealth-building
I'm just kidding.

The reality is that being extremely debt averse can handicap other decision making ability and the only way to break free is to just get rid of the debt. For those people, paying off a mortgage quickly is the best solution even if it is not the best financial decision.
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Admiral
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Re: Paying Down the House Before Retirement

Post by Admiral »

Your post starts out with an inheritance, which you describe as rather large. But I don't see where you say what the inheritance is, either in dollar terms or as a percentage of your assets.

What is it?

How old are you?

What is your mortgage balance?

If you've received hundreds of thousands of dollars added to your $1.7m, AND you owe a few hundred thousand, then perhaps I might suggest a refi to a 15 year, and using the inheritance to pay the mortgage payment each month, while keeping the bulk of it invested. You'll save lots of interest but won't sink all the money into a non-liquid asset. If you owe 100k, then I'd probably just pay it off.

Much depends on your age. Are you 45/50 or 55/60? What is your expected WR with and without the mortgage? When do you plan to take SS?

In very few cases, based on the limited info you've given, would I a) keep the 30 year mortgage or b)prepay it. There's a lot to be said for having it paid off when you retire. But there's also a lot to be said for having a big pile of money in retirement. If you're retiring early early, then you'll need taxable funds on which to live, or to use to pay the taxes on Roth conversions.

ETA: If you run the amortization table on a sub 3% 15 year note, you'll see that by year 8, around 80-85% of the interest will have been paid. Can't know exactly without numbers but point being, if that's your retirement date, the remainder that you owe will be almost all principal, so you're simply paying yourself back. At that time you can pay it off, or just keep your money and dole it out month to month. The savings in interest is tiny. Right now any sub-3% loan is free money. Or for that matter sub-4%.
Last edited by Admiral on Thu Oct 14, 2021 3:48 pm, edited 2 times in total.
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vanbogle59
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Re: Paying Down the House Before Retirement

Post by vanbogle59 »

EnjoyIt wrote: Thu Oct 14, 2021 3:36 pm The reality is that being extremely debt averse can handicap other decision making ability and the only way to break free is to just get rid of the debt. For those people, paying off a mortgage quickly is the best solution even if it is not the best financial decision.
+100 for me.
And, you only really know your an idiot with hindsight.
Even then, you are an idiot who owns a house.
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Jovby
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Re: Paying Down the House Before Retirement

Post by Jovby »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am
My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
Paying off my mortgage before retirement is not a priority for me, mostly because I live in a VHCOL area and its not possible (at least not right now). I do think there may be a significant benefit to not having a mortgage as my required cash flow would be less, so I may reconsider as my income rises.

In your case I would invest the money in a taxable account, and invest for 8 to 10 years. When the balance is such that you actually CAN pay it off (including taxes) then I would make the decision at that point. I would want to keep some liquidity outside of retirement accounts .
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Re: Paying Down the House Before Retirement

Post by miket29 »

Alf 101 wrote: Thu Oct 14, 2021 9:05 amwe've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.
Instead of putting money into a taxable account, perhaps you could put at least some of it into a Roth 401K via a megabackdoor roth. This is up to about $38K apiece if your 401K plan allows this. See https://www.nerdwallet.com/article/inve ... roths-work or other websites for an explanation. The cost would be the same as a taxable account, but all future returns would be tax-free. And as a bonus you can always withdraw the initial principal without penalty should you need the money (by contrast you have to sell in a taxable account and may owe capital gains)

As others have pointed out, you may be able to lower your monthly payments on the mortgage by either taking out a shorter mortgage or recasting the current one based on the principal you now owe.

Regarding paying down the mortgage, you are in a sticky time frame. If you were retiring in 20+ years then I'd feel comfortable with leaving the money in the market. If retiring in 5 or less years then I'd want the money in relatively low-risk investments (and paying down the mortgage with the money might be such an investment). For retirement 10 years out I'd probably leave it in the market, knowing I'm taking a risk. But as that horizons shortens I'd be more worried about a prolonged bear market. Here is a link showing market returns over a few time periods (1, 5, 10, 20 years) https://www.visualcapitalist.com/stock- ... 1872-2018/
Last edited by miket29 on Thu Oct 14, 2021 4:11 pm, edited 1 time in total.
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JoeRetire
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Re: Paying Down the House Before Retirement

Post by JoeRetire »

Alf 101 wrote: Thu Oct 14, 2021 9:05 amOn the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.
I wouldn't pay off such a low rate.
Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.
We each get to do non-rational things. If having one less bill makes you feel better even though you know you could get better returns, then you are certainly entitled to do so. Since you've already been making extra payments while having such a low rate, paying the mortgage off is not much different from your existing pattern.

Sorry for your loss.
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Watty
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Re: Paying Down the House Before Retirement

Post by Watty »

Having a paid off house when you are retired likely means that you can keep your taxable income lower which can have these advantages;

1) You may be able to qualify for a larger Affordable Care Act subsidy.

2) You may be able to do more Roth conversions in a low tax bracket.

3) You may be able to take capital gains in the 0% federal long term capital gains bracket.

4) Less of your Social Security may be taxed, there is a wiki on this and you can end up in a surprisingly high effective tax bracket.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

5) Your asset allocation is more straightforward. There are lots of old threads about looking at a mortgage as a negative bond that you can look up. For example if you have a $100K mortgage and $100K in bonds, then figuring out you asset allocation is not obvious.

6) You may be able to avoid paying extra taxes on high income like IRMAA or NIIT.
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JoeRetire
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Re: Paying Down the House Before Retirement

Post by JoeRetire »

Watty wrote: Thu Oct 14, 2021 5:06 pm Having a paid off house when you are retired likely means that you can keep your taxable income lower which can have these advantages;
If I understand the OP correctly, the money for paying off the mortgage comes from an inheritance. Thus there's no connect between their paying off the mortgage and having a lower income.
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Re: Paying Down the House Before Retirement

Post by radiowave »

OP, I retired last summer and we paid off the mortgage last December, mostly for the cash flow advantage. Every situation is different, but without the mortgage and spouse still working and I have a modest pension, we won't have to dip into our portfolio for basic expenses so our portfolio continues to grow without any withdrawal and we can both push back taking social security past FRA.

YMMV
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JoeRetire
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Re: Paying Down the House Before Retirement

Post by JoeRetire »

radiowave wrote: Thu Oct 14, 2021 6:10 pm OP, I retired last summer and we paid off the mortgage last December, mostly for the cash flow advantage. Every situation is different, but without the mortgage and spouse still working and I have a modest pension, we won't have to dip into our portfolio for basic expenses so our portfolio continues to grow without any withdrawal and we can both push back taking social security past FRA.
Where did the money you used last December to pay off the mortgage come from? Couldn't you have used that money now to pay the monthly mortgage and thus still avoid dipping into your portfolio and still delay taking your social security benefits?

Consider checking https://opensocialsecurity.com/ before deciding when you should start your benefits.
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Re: Paying Down the House Before Retirement

Post by 260chrisb »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Here is our situation. Sadly my mother passed away. She had inherited a sizable IRA when my father died, and now this will be split between myself and two brothers. My older brother is the executor, and while in no way contentious, lawyers and accountants are involved to ensure we do this properly.

My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.

Where we owe money, like many people, is our home. We closed on our house in November 2017, with a 30 year mortgage at 2.95% If we made the minimum payments, the home would be paid off in December 2047. As it happens, we've been paying extra toward the principal, the equivalent of 15 payments in a year, and if we continue with this our payoff date will be February 2036.

Now let's say we want to retire in January 2030 or 2032. A lump sum payment toward principal, particularly still only five years into the loan, could definitely bring the payoff date forward. On the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.

The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
You're 10 years out and are doing the right things and have a high level of wealth. I guess it doesn't matter but you don't say what "sizable" means nor do you say what you owe on the house. If it were me; I'd be lump summing or lump sum the mortgage until it's gone. You've got plenty of money in retirement and I'm guessing plenty in taxable. Get rid of the mortgage even if it is 3%. I'd rather have a paid off house that is appreciating (hopefully) than I would give a bank money. I'm nearly 6 years into my 15 year and am doing everything I can to get rid of it. I retire next year and will still have a few years left.
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Re: Paying Down the House Before Retirement

Post by LittleMaggieMae »

I do like the idea of having a paid off house going into retirement. Even with a "paid off house" - it's still an expense - you will have property taxes and insurance and you will need to do maintenance to it. I'm not debt adverse and I do think everyone situation is different and carrying a mortgage into retirement might not be that big a deal for some while it is a big deal for others.

The only advice I can offer is that I would treat the inheritance as a "windfall" - and would do some sort of split between debt(the mortgage)/savings/and fun - so maybe a 20% to mortgage, 70% to savings/investments and 10% to fun money (do something meaningful to you with the money your parents left you).

Remember - there's nothing that says you can throw some extra at your mortgage now - and then again in a year or two or three after you've had some time to see how things are going.

Another thing to think about is that you don't want to pay down your low interest mortgage and then have to borrow money at higher interest rate in the future for something. You don't mention having kids - but something like school loans/costs for example. Or some big home improvement. I have no idea what other things people borrow money for... it's up to you to look out into the short term future (up to 5 or 6 years out) and think about what you might need $$ for that cannot be cash flowed.
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Re: Paying Down the House Before Retirement

Post by radiowave »

JoeRetire wrote: Thu Oct 14, 2021 6:21 pm
radiowave wrote: Thu Oct 14, 2021 6:10 pm OP, I retired last summer and we paid off the mortgage last December, mostly for the cash flow advantage. Every situation is different, but without the mortgage and spouse still working and I have a modest pension, we won't have to dip into our portfolio for basic expenses so our portfolio continues to grow without any withdrawal and we can both push back taking social security past FRA.
Where did the money you used last December to pay off the mortgage come from? Couldn't you have used that money now to pay the monthly mortgage and thus still avoid dipping into your portfolio and still delay taking your social security benefits?

Consider checking https://opensocialsecurity.com/ before deciding when you should start your benefits.
No, if we kept the mortgage we would have had to dip into investments to cover monthly payment.
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Re: Paying Down the House Before Retirement

Post by av111 »

miket29 wrote: Thu Oct 14, 2021 4:08 pm
Alf 101 wrote: Thu Oct 14, 2021 9:05 amwe've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.
Instead of putting money into a taxable account, perhaps you could put at least some of it into a Roth 401K via a megabackdoor roth. This is up to about $38K apiece if your 401K plan allows this. See https://www.nerdwallet.com/article/inve ... roths-work or other websites for an explanation. The cost would be the same as a taxable account, but all future returns would be tax-free. And as a bonus you can always withdraw the initial principal without penalty should you need the money (by contrast you have to sell in a taxable account and may owe capital gains)

As others have pointed out, you may be able to lower your monthly payments on the mortgage by either taking out a shorter mortgage or recasting the current one based on the principal you now owe.

Regarding paying down the mortgage, you are in a sticky time frame. If you were retiring in 20+ years then I'd feel comfortable with leaving the money in the market. If retiring in 5 or less years then I'd want the money in relatively low-risk investments (and paying down the mortgage with the money might be such an investment). For retirement 10 years out I'd probably leave it in the market, knowing I'm taking a risk. But as that horizons shortens I'd be more worried about a prolonged bear market. Here is a link showing market returns over a few time periods (1, 5, 10, 20 years) https://www.visualcapitalist.com/stock- ... 1872-2018/
Good points Mike however the money won't be needed in 8 years when they retire. They already have 1.7m that they can draw from. So technically they are safe from the volatility

OP
This new money is giving you a freedom to make your choice. Do you feel the need to have more money {= invest aggressively) or do you want to have more peace (reduce volatility, risk and expenses - pay off mortgage =3% return) . These are two end points on the chart. You can decide wherever you want to be on the chart. For example, you appear to have good money in the retirement already. So you can decide to send 50% of the new money to mortgage and 50% to taxable investments
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

Personally, I think the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational and short-sighted. In my particular case, I would not have been able to retire as early as I did (53) had I paid off mine, because the end result is, yes, no monthly payment to worry about but also much lower liquidity and often too much of your net worth being tied to one asset -- your home.

I just turned 60, and have been retired for over six years. I have two mortgages -- a $723,000 mortgage on our primary residence worth $1.65 million, and a $423,000 mortgage on an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month. The interest rate on our primary residence is 1.7 percent, and on the investment property it's 1.875 percent. Both loans are adjustable and will begin to fluctuate seven years from now. At the point, I assume they will have nowhere to go but up, at which point I will either pay them off -- or, in the case of the investment property, sell.

I arranged my mortgages them through Schwab/Rocket Mortgage, which was a piece of cake. The mortgage on the primary residence was cost free.
Fees and costs were unavoidable on the investment property, but they can be written off against income. The Schwab/Rocket Mortgage program will reduce your interest rates by up to .75 percent below market rates depending upon the size of your portfolio in your Schwab accounts. I assume other brokerage firms have similar programs.

I currently have a balance of about $5.5 million in my retirement and brokerage accounts combined (all with Schwab). It makes zero sense, in my view, to reduce the balance in those accounts by nearly $1.2 million to pay off mortgages at these ridiculously low interest rates. To the contrary, to coin the old cliche, you need to let your money work for you -- not the other way around. A smart money manager looks for ways to healthily leverage. That applies to mortgages as well.
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Re: Paying Down the House Before Retirement

Post by Jovby »

JoeRetire wrote: Thu Oct 14, 2021 5:52 pm
If I understand the OP correctly, the money for paying off the mortgage comes from an inheritance. Thus there's no connect between their paying off the mortgage and having a lower income.
I think he is referring to their income in retirement. If they invest the inheritance, then take withdrawals in retirement, that will increase their retirement income. If they pay off the house, there will be no extra income from the invested inheritance, and therefore their income will be lower.
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Re: Paying Down the House Before Retirement

Post by vanbogle59 »

BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month.
Why can't you convince your daughter to follow your advice?
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Re: Paying Down the House Before Retirement

Post by flyingcows »

I paid mine off once I no longer wanted to be 100% equities. After adding ibonds the optimal return math favored paying off mortgage before adding any marketable bonds to my portfolio. In my situation I took the standard deduction and couldn't itemize the mortgage interest, and my mortgage was a recourse loan. Also the house is only about 15% of NW

I did add a 0 balance heloc on the home, which I can convert to a fixed rate 20 year in the future if i want at prime minus 0.5%, or 2.75% currently

If I lived in cali I would have kept the non-recourse mortgage as insurance against a total loss not covered by insurance
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Re: Paying Down the House Before Retirement

Post by Admiral »

BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am Personally, I think the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational and short-sighted. In my particular case, I would not have been able to retire as early as I did (53) had I paid off mine, because the end result is, yes, no monthly payment to worry about but also much lower liquidity and often too much of your net worth being tied to one asset -- your home.

I just turned 60, and have been retired for over six years. I have two mortgages -- a $723,000 mortgage on our primary residence worth $1.65 million, and a $423,000 mortgage on an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month. The interest rate on our primary residence is 1.7 percent, and on the investment property it's 1.875 percent. Both loans are adjustable and will begin to fluctuate seven years from now. At the point, I assume they will have nowhere to go but up, at which point I will either pay them off -- or, in the case of the investment property, sell.

I arranged my mortgages them through Schwab/Rocket Mortgage, which was a piece of cake. The mortgage on the primary residence was cost free.
Fees and costs were unavoidable on the investment property, but they can be written off against income. The Schwab/Rocket Mortgage program will reduce your interest rates by up to .75 percent below market rates depending upon the size of your portfolio in your Schwab accounts. I assume other brokerage firms have similar programs.

I currently have a balance of about $5.5 million in my retirement and brokerage accounts combined (all with Schwab). It makes zero sense, in my view, to reduce the balance in those accounts by nearly $1.2 million to pay off mortgages at these ridiculously low interest rates. To the contrary, to coin the old cliche, you need to let your money work for you -- not the other way around. A smart money manager looks for ways to healthily leverage. That applies to mortgages as well.

All due respect--and this is in no way a criticism--but you are quite rich. Probably borderline UHNW, but certainly very, very wealthy. You can/could afford to do anything and you will be fine. I'm not sure your particular set of circumstances are applicable to most here (maybe a few dotcom zillionaires).

That said I do agree that with sufficient assets and retirement income, paying off a sub-3% mortgage before retiring, even if easily done, is no longer a no brainer (if it ever was).
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Re: Paying Down the House Before Retirement

Post by JoeRetire »

radiowave wrote: Fri Oct 15, 2021 9:14 am
JoeRetire wrote: Thu Oct 14, 2021 6:21 pm
radiowave wrote: Thu Oct 14, 2021 6:10 pm OP, I retired last summer and we paid off the mortgage last December, mostly for the cash flow advantage. Every situation is different, but without the mortgage and spouse still working and I have a modest pension, we won't have to dip into our portfolio for basic expenses so our portfolio continues to grow without any withdrawal and we can both push back taking social security past FRA.
Where did the money you used last December to pay off the mortgage come from? Couldn't you have used that money now to pay the monthly mortgage and thus still avoid dipping into your portfolio and still delay taking your social security benefits?

Consider checking https://opensocialsecurity.com/ before deciding when you should start your benefits.
No, if we kept the mortgage we would have had to dip into investments to cover monthly payment.
:confused
This is confusing.

You used money from somewhere to pay off the mortgage last December. Where did that come from? Did you dip into investments then?
If you hadn't paid off the mortgage this money would still be there and could be used for monthly payments.
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am Personally, I think the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational and short-sighted. In my particular case, I would not have been able to retire as early as I did (53) had I paid off mine, because the end result is, yes, no monthly payment to worry about but also much lower liquidity and often too much of your net worth being tied to one asset -- your home.

I just turned 60, and have been retired for over six years. I have two mortgages -- a $723,000 mortgage on our primary residence worth $1.65 million, and a $423,000 mortgage on an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month. The interest rate on our primary residence is 1.7 percent, and on the investment property it's 1.875 percent. Both loans are adjustable and will begin to fluctuate seven years from now. At the point, I assume they will have nowhere to go but up, at which point I will either pay them off -- or, in the case of the investment property, sell.

I arranged my mortgages them through Schwab/Rocket Mortgage, which was a piece of cake. The mortgage on the primary residence was cost free.
Fees and costs were unavoidable on the investment property, but they can be written off against income. The Schwab/Rocket Mortgage program will reduce your interest rates by up to .75 percent below market rates depending upon the size of your portfolio in your Schwab accounts. I assume other brokerage firms have similar programs.

I currently have a balance of about $5.5 million in my retirement and brokerage accounts combined (all with Schwab). It makes zero sense, in my view, to reduce the balance in those accounts by nearly $1.2 million to pay off mortgages at these ridiculously low interest rates. To the contrary, to coin the old cliche, you need to let your money work for you -- not the other way around. A smart money manager looks for ways to healthily leverage. That applies to mortgages as well.
May I ask? How much do you spend a year? How much of that is the mortgage? Where is that money coming from and how much in taxes are you paying to cover the mortgage? What about health insurance? Do you get health insurance on the open market? If so, how much subsidy are you missing out on because your taxable income is high since you have to service the mortgage? Are there any other credits or subsidies you are being phased out of because of needing to service the debt?
What about Roth conversions? are you missing out on Roth conversions at lower tax rates today and will be forced into higher tax brackets in the future when taking Social Security and RMDs?

There is a very good reason to be obsessed with being debt free in retirement. Especially early retirement when one is buying their own health insurance on the open market. Health insurance subsidies are worth about 9% (I don't know the exact number.) What this means is having $10k in less taxable income is equivalent to losing 9% or $900 in healthcare subsides (It is a bit off from 9% but 9% is close enough.) Also, if one is jumping from the 12% to 22% tax bracket, that is worth another 10% in taxes for another $1k. Then, by being out of the 12% tax bracket one will be paying 15% tax on capital gains and dividends that can be worth a few hundred more depending on how one's assets are arranged. That additional $10k expense can be easily worth $2500 per year guaranteed which is far better than what the market will give you investing that money.

Now, I don't know your tax brackets or your personal situation but it may be a good idea to look at the whole picture and not just the low interest rate as should everyone else choosing to make this decision.
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

vanbogle59 wrote: Fri Oct 15, 2021 10:42 am
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month.
Why can't you convince your daughter to follow your advice?
Now, now. Let's be fair. My daughter is gainfully employed as is her husband, and they're fiscally responsible. They weren't looking to buy, just to rent a place in our HCOL area that could have accommodated their big, crazy, but lovable dog, and they were having trouble getting a landlord who would sign on. My wife suggested a win-win solution -- to me, not to them, and without any prompting from them -- that we invest in a place in the same neighborhood that they were looking (which is a good one) and rent it to them and their crazy dog for fair market value. I agreed because it's a good investment for us and at the same time will help them. I mean, if they're going to pay rent, isn't it better that the rent be paid to us instead of a stranger?
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Re: Paying Down the House Before Retirement

Post by vanbogle59 »

BigLaw Survivor wrote: Fri Oct 15, 2021 5:41 pm
vanbogle59 wrote: Fri Oct 15, 2021 10:42 am
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month.
Why can't you convince your daughter to follow your advice?
Now, now. Let's be fair. My daughter is gainfully employed as is her husband, and they're fiscally responsible. They weren't looking to buy, just to rent a place in our HCOL area that could have accommodated their big, crazy, but lovable dog, and they were having trouble getting a landlord who would sign on. My wife suggested a win-win solution -- to me, not to them, and without any prompting from them -- that we invest in a place in the same neighborhood that they were looking (which is a good one) and rent it to them and their crazy dog for fair market value. I agreed because it's a good investment for us and at the same time will help them. I mean, if they're going to pay rent, isn't it better that the rent be paid to us instead of a stranger?
I applaud you and your daughter. I've done similar for mine and don't regret a minute of it. Best of times!

My objection is with this:
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am ...the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational ....
you need to let your money work for you -- not the other way around. A smart money manager looks for ways to healthily leverage. That applies to mortgages as well.
Not true for your daughter, right? She is not taking on leverage to provide a home.
Why do you assume it would be true for someone else?
You acknowledge her situation is different from yours.
Why can't you acknowledge that possibility when it comes to others?

It's not just a question of being "a smart money manager". It's more about matching the risk profile of the individual to the entire investment portfolio.
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Re: Paying Down the House Before Retirement

Post by Vulcan »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am My question is when does it ever make sense to pay off your mortgage early.
When your kid is applying to one of the "full need" schools that ignore home equity in their finaid calculations. :moneybag

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