We were typing simultaneously. I added similar comments in my follow-up response.
P.S. Editing to add that I had forgotten about phase out of SS taxation. There are some tax benefits one forgets about when they do not apply to your own situation. I helped a friend review her elderly father’s taxes this year, and I had to plug the numbers into TurboTax myself to see how his effective tax rate ended up as low as it did.
No, you did not. It has nothing to do with the process and everything to do with our age and the time it will take to earn back the cost of the conversion - just not worth it when husband retires end of year.
With a low interest rate on a home mortgage, it makes financial sense to keep paying on the mortgage in retirement IF one is comfortable with that. Some people SWAN with ‘no debt’ and pay off their home mortgage before they retire - the ‘risk’ of having a mortgage can be psychological but the extra security is individual preference.
We have had our home since 1992 – we built it so had a construction loan that went to a home loan, then had better interest rates over the years with refinancing the 15-year mortgage. Then a lower rate with 10-year mortgage at 2.5% interest; when that was close to concluding, we took out another 10-year 2.5% interest rate mortgage (early 2022 the day before interest rates went up – I had trouble getting through to credit union mortgage loan officer and spoke with the chief mortgage loan officer and got locked in). DH retired 11/2020 and I retired 10/2021. We took out a mortgage amount that kept monthly payments low ($1405/month). Our credit union did the underwriting of their own mortgages, so we met their requirements, which did entail us providing some net worth information (401k balance), and our strong credit score. I don’t even think we provided our annuity information – previously purchased from retirement funds, we have 5 annuities with 4 of them providing about $4,300 cash flow/month. One annuity aged out and we replaced it this year, so we draw off non-penalty monthly cash next year.
When we sell this home to move near our daughter/SIL/grandkids, that is when the mortgage will get paid off. I don’t believe we will have a mortgage with another home purchase.
“Another way to look at it, is to question whether you’d margin your home to play the market?”
We don’t consider us playing the market with margin on our home because we can pay off the home mortgage. Financially we are fine with this debt.
Some people do not have enough of a nest egg. Some people may have had some hard financial times during their life - for example in youth food insecurity or family financial struggles.
It addition to a low nominal rate, it’s also relevant to how low it is compared to alternative investments. If the mortgage rate is lower than other guaranteed fixed income products (after tax considerations), then that’s similar to an arbitrage situation. Hypothetically, if you have the option to borrow at a 2.5% rate, you can make an infinite amount of money by borrowing at 2.5% and reinvesting that borrowed money in a guaranteed fixed income product paying 4-5%. Or similarly holding the money you would have used to pay off the 2.5% rate mortgage early in a 4-5% rate fixed income product always yields a higher financial return (after adjusting rates for tax considerations).
However, I agree that there is also a psychological consideration beyond just crunching numbers, as well as other considerations like financial liquidity and exposure, such as considerations when accepting out of area job.
When my husband was laid off at age 56, he faced health issues and never returned to a higher paying job. We had 1 graduating college and 2 more to go. Yes, I was very happy I paid off the mortgage early.
There is also the question of the value of liquidity for that person. The $2k a year difference in net reduction of interest payments, excluding tax effects, comes at the cost of $100k in reduced liquidity, assuming that the mortgage payoff/paydown is coming from some liquid source. While you could try to borrow more against your property later, you will be subject to interest rate and loan approval risk, as well as closing costs. It’s a different call for someone with say $2mm in liquid assets vs someone with $500k or less.
A friend made sure her DH was still employed to purchase their 2nd home - to avoid any problems getting the property. They have healthy retirement funds but were aware of issues (either from others or when she acquired family farm property that some of her siblings wanted to sell - was generational from the early 1800’s, and she kept substantial amount and rents out the land).
Years ago we had a Schwab FA consultation, freebie benefit from employer. He explained that it often makes sense to NOT pay off mortgage. Then he said, “having said that… I will add that my top 10 net worth clients have all opted to pay off their mortgages”. Sometimes it just feels good to do so, when affordable.
“years ago” mortgage interest was fully deductible. And now with increased standard deductions, ~10% itemize.
Economists have a term for that: psychic income.
Our actual mortgage is about 35% of our mortgage payment. The remaining 65% is taxes and insurance (hello HCOL area). That 65% is only ever going to increase…so the math doesn’t work to pay off our 2.625% loan early.
At this point, we look at our mortgage payment as a locked in, relatively low cost rent payment.
Works for us… though it probably could be troublesome if spouses disagreed on most comfortable approach. We paid our morgage off about 2 years early. For us it was justa good way to head into retirement with level housing expenses (taxes,insurance, utilities; no principal/interest).
We also paid ours off before retiring, and we had a pretty good rate.
It helps me sleep at night to know our must pay expenses are pretty low.
We spend a fair amount, buy what we (really) want, take pretty nice vacations, etc. BUT, if it’s a bad financial year, we can easily cut expenses.
Yep, that psychic income is extremely valuable to me. I bank as much of it as I can.
The last years we paid on our mortgage, we were paying mostly principal, so that would not have been tax deductible. We actually finished that mortgage just as our kids were starting college…which gave us that amount to divert to college costs for seven years.
We have a lot of equity in our home…and if we wanted to, we could use refinance and use the money for something. And that has been a thought periodically.
BUT, many couldn’t refinance for the great rates that were offered some time ago.
I’m not planning to refinance. I’m just saying I could.
And our home is a nice asset to have. We might need to sell it at some point to move elsewhere, or whatever.
There’s another term for that too, “imputed rent”.
In economics, when you own a home free and clear, you are effectively acting as both a landlord and a tenant. Because you don’t pay rent to someone else, you are “paying” that market rent to yourself.
Even though no cash physically changes hands, economists and tax policy experts view this non-cash benefit as a real stream of economic income.
Why It Matters in Economic Analysis
GDP Calculations: To keep Gross Domestic Product accurate, the government estimates and includes the total value of imputed rent for all owner-occupied housing. If they didn’t, GDP would artificially drop every time someone bought a house instead of renting it.
True Return on Investment (ROI): When calculating the real financial yield of a paid-off property, economists add the imputed rent (what you save by not renting a comparable home) to your net worth calculations, minus property taxes, insurance, and maintenance.
Essentially, it’s the hidden, tax-free dividend you receive every month just by living in an asset you own outright.
It’s much holder to get a mortgage or equity loan after retirement because lenders like to see steady monthly income, even if you have a lot of assets.
I agree that the math is unlikely to work out for paying off 2.6% loan early, but I’m not sure I follow the reasoning with relationship to taxes and insurance. When you pay down mortgage earlier, the early payment goes to principle on loan. It does not impact property taxes or home insurance expense. You still have to pay the same taxes + insurance both with mortgage and without mortgage. You should have the option to do an escrow waiver if you’d prefer to move taxes + insurance payment out of your mortgage to give more control of finance timing (pay taxes + insurance when due, rather than monthly). Similarly you should be able to change your home insurance provider if you find a better value option, both with and without it being lumped in to your mortgage payment.
This is just a matter of personal comfort. The economics on a 2.625% mortgage is really clear. I pay at that rate and I can lock in a 4.86% Treasury bond. Essentially, a risk free arbitrage. And, once I am are retired, it will be much harder to borrow. Oddly, even when I bought the house, it took a lot of work to get the mortgage because they were not keen on lending to people who owned their own companies, even though my income was way higher than they would need to grant the loan if I worked for a company. [To be fair, they didn’t love the asset protection trust that protects most of our assets].
@sherpa, are you saying that when evaluating the choice to keep or pay off the mortgage, I need to compare the profits from the risk free arbitrage (the benefit of keeping the mortgage) with the imputed rent? Does not seem quite right to me. If I keep the mortgage, I get to live in the property and should benefit from the imputed rent. If I pay it down, I also get to live in the property and benefit from the imputed rent. So, wouldn’t imputed rent be on both branches of the decision tree? If so, it would be irrelvant to the decision. Risk aversion could cause the no mortgage branch be better than the mortgage branch of the decsion tree – although the arbitrage is virtually risk-free. If you will easily have the assets to pay down the mortgage at any point, wouldn’t the mortgage branch always be more attractive?
But, if it makes people more comfortable to pay the mortgage off and have no feeling of risk, they should do that as it will make them happier.
@Data10, my experience is that one should shop home insurers (and auto) ever three years roughly. Rates creep up faster on loyal customers.