We paid off our mortgage right before dot.com bust. In that case, we made money paying off. It is dangerous to compare how much money you make by investing instead of paying off. The cost of risk is rarely factored in.
^ Yes you could win OR lose either way. There’s no way to know because there’s no crystal ball. The last few yrs you would have made a ton by not paying off and investing. In '07 / '08 you would have lost a ton and still owed the debt. Two primary factors that should influence that decision are your actual financial resources and your comfort / discomfort with risk.
That’s why I consider financial planning / advisory to really be the crossroad between math and the human element. Combining science and art. And like art, it’s in the eye of the beholder.
I think these conversations become fruitless to some point. It all depends on how you plan to live and where. Also health comes into play.
Indeed. To compare win or loss, we need to quantify risk cost. Only then, we can compare directly, monetary gain - risk cost vs. mortgage expense, not straight gain vs expense.
And the cost/benefit of financial flexibility. If one has $200k in the bank (or CD’s, ST bond fund/MMF), and a $200k low interest mortgage, one should be nearly indifferent as personal wealth is the same. Sure, paying off the mortgage ahead of a market downturn appears (w/20:20 hindsight) to be a good strategy, but the market came back rather quickly, and the loss was mostly only an accounting loss – mark to market. OTOH, should one guess wrong, paying down a mortgage ahead of a bump in inflation is the wrong thing to do.
But about flexibility: having $200k of easily available cash to pay, say $1500/mo. mortgage, vs. having no cash in the bank and no payment due. One can always take the money out of the bank and pay off the mortgage any day any time. But should a catastrophe occur, requiring say, $50k to restore a storm damaged house, or help the kids, one still has that flexibility to be able to do so if the cash is in the bank.
If one has a fully paid off home, one may be able to get a no-cost home equity line of credit on their home — HELOC (we have one). There were absolutely NO charges to us ever associated with obtaining it or keeping it available to us. It’s for up to $250K, which is more than our mortgage had been. Charges will only start IF we ever draw on it. We’ve had it for 8+ years so far.
Agree that having some cash in the bank allows us to sleep well at night. Also, not all stock markets or investments rebound well—Japan’s hasn’t.
For us, being able to retire comfortably required us to compare probable expenses to projected streams of income. Once we determined we were likely to be able to continue living below our projected retirement streams of income, we were happy. Never had and still don’t have “a number.”
Behind the uncertainty of healthcare costs and circumstances, property taxes feel like a wild card to me. Ours come to more per month than mortgage was, which is fine. When we budget, though, we round up the estimates by a few thousand a year. Current annual $7,000.00 or so. It’s more controllable than medical expenses though. We can sell the house and have an out that way.
Someone mentioned health. That’s a big one and I find many (most) folks uninformed or misinformed as to what is/isn’t covered through medicare and gap coverage. I Know things vary by state so no bold statements here, but in general, assisted living and nursing home is NOT covered. Here in FL, home health care is not covered either. Of course some rehab associated with hospital stays is covered but for a limited amount of time. My mother just experienced this as she needed in home physical therapy after an event and medicare only covered a certain number of days. After that she was on her own. Let’s just put these expenses in a bucket called “Senior Health Care”. If you’re not protected, it could kill your retirement funds so plan accordingly.
Someone on here is bound to suggest just taking the money that would be used to mitigate the risk and investing it and self insure. That way if you don’t need it, you have the money. Sounds nice but lots has to go your way for that to work (i.e. actual costs, duration of investment time prior to care need - like who knows that - ah nobody, market performance, etc.) Or you can just buy a policy and guarantee certain benefits. I suggest talking to your local agent. Way too many folks exposed. Nursing home costs 80k/yr around here.
We paid off our mortgage and it was just the right move for us. We didn’t had only 5 years left and it was really nice to not make monthly payments. We have lots of money invested so this was a way to get a guaranteed rate
What maya said. We are paying down and will be paying off our mortgage instead of putting the money into a CD or another type of a guaranteed return investment. The money we have in mutual funds and stocks remains… in those vehicles. It is a diversification of sorts.
Agree completely with those who have said that the only way to even guess at forecasting is to have a good understanding of current and projected expenses. As far as I can go with that, including throwing in sums for unanticipated ‘lumpy’ expenses such as big ticket home repair, car replacement, and child’s wedding, the cost of health care is still the huge unknown, especially for anyone who wishes to retire before Medicare eligibility age.
I have shepherded both of my parents through the LTC approved claim level, with death shortly thereafter, so that neither received anywhere near the amount in benefits that they paid in premiums. I will not be purchasing LTC insurance for myself. That is a personal decision for each household, with outcome based on many variables.
This article from yesterday’s paper explains the premium and out-of-pocket costs of Medicare. My parents had phenomenal retiree & survivor medical insurance, so I had not realized how much Medicare does not cover.
https://www.nytimes.com/2019/07/31/health/medicare-insurance.html
@rickle1 mentioned nursing home care costs of $80K/year. I am guessing this is a relatively LCOL area. National average is $100K, and Boston & NY metro suburban areas are $150K+/year. I do not know the #, but a very small percentage of people end up needing nursing home care. A Vanguard study showed that 48% of retirees incurred no LTC costs, however, 15% incurred more than $250K.
So as @rickle1 said above, pad that budget with some unknown figure for senior health care.
We had a 15 year mortgage…and reached the 15 year mark. So our house is all paid for. It gives us some extra money to do some of the updates we want to do. We didn’t take money out of any other accounts…we just paid the mortgage for 15 years.
Some folks have suggested we refinance…but that seems silly to us. If we decide to buy a home elsewhere, we can use the equity in this one either to buy another house, or to make a substantial down payment.
I just got an $80 a month COLA on my pension. It’s a nice little bonus!
If one’s house is paid off do you put the deed in a safety deposit box? I have kept open a $0 HELOC just because I don’t want to have to deal with the deed being in my personal safe. I’m too cheap to pay for a safety deposit box at a bank.
We have a HELOC also…but we got that after paying the last payment on our house. I’m sorry, but I don’t see the relationship between having a HELOC and putting your deed in a safety deposit box. Maybe I’m missing something.
Is that an issue? My deed is in the Hall of Records, too.
I have no idea where our deed is. I just made sure the title to the home is the way we wanted it. The HELOC was in response to a post above who argued for not paying off your mortgage and having no cash on hand. Having a HELOC is a compromise so you could get cash if you ever wanted it needed to. We’ve never used it and don’t intend to, but it IS available if ever needed.
Yes, deeds are recorded at the courthouse and you can always get a copy of yours, or anyone’s should you so desire. When we bought ours, I traced back all the back deeds to the time it was built in 1910. (Note: Doing such things is part of my job and I work next door, so it wasn’t hard)
“but the market came back rather quickly, and the loss was mostly only an accounting loss – mark to market.”
I never understand when people say it is only an accounting loss (and I’m a career investment professional). Any movement is a loss or a gain. You have more money or less money. “Mark to market” means settling daily to reflect the true value of your account factoring in the fluctuations in the value of your investments.
As far as deciding whether to pay off a mortgage or not depends on individual factors - one’s risk tolerance, one’s mortgage rate, one’s amount of assets to name a few.
We have a small mortgage remaining. I’m fine with it. I can invest in CDs (safe, little to no risk) if I wanted and still come out ahead given my very low mortgage rate.
Unless your mortgage rate is lower than 2.5%, you are not coming ahead by investing in a CD (assuming you pay no taxes on your earnings from CDs). And the Fed’s recent moves do not bode well for CD savers.
You can get CDs above 2.5% depending on the term. And if you had locked in a CD, that’s actually a good thing in an environment where the fed funds rate is going down. How would that not bode well? For the record, I prefer other investments but just providing an example of how one can invest in extremely safe instruments, minimal risk. Many of us probably have sub 3% mortgages and some of us even have sub 2.75% mortgages.
As far as taxes go, if you are retired, there are ways to manage one’s income to minimize one’s tax rate.