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Scenario: A couple is 55 with the goal of retiring in 10 years at 65. Currently paying $1,500 a month mortgage on a single family home with no HOA. Interest rate is 3.75% They have excess cash to work with each year. Should they:
1) Put that cash toward their mortgage with the goal of paying it off completely by the time they retire.
2) Put that cash in investment accounts while making the regular mortgage payments and then, the year they are planning to retire, refinance the balance of the mortgage back out to 30 years (assume the same or better interest rate), reducing their mortgage from $1500 a month to $500 a month.
3) Put that cash in investment accounts, leave their mortgage alone and continue paying $1,500 a month mortgage for the first 10 years of their retirement. The house would be paid off when they turn 75.
My husband likes #1. But I think there are tax benefits to #2, particularly if the excess cash we would have spent paying down the mortgage went into a Roth IRA.
Paying down your mortgage of 3.75% has the same effect as investing in a risk free bond at that rate. Any other investment account has additional risk.
So it just depends on how much risk do you want to take.
Though if I were receiving 3.75% return on a risk free bond, I'd be paying tax on that return. On a mortgage, I'm writing it off as a tax deduction, so I don't think the net return is exactly 3.75% We are in a 35% tax bracket, possibly higher with no write-offs.
Scenario: A couple is 55 with the goal of retiring in 10 years at 65.
1) Put that cash toward their mortgage
2) Put that cash in investment accounts
Thoughts?
They need to do both.
Keeping the mortgage is about EARNED income.
If income is adequate then it's best to keep paying the balance until that stops.
EXCESS beyond that number (and there needs to be excess) goes to investment accounts
This assumes the 401K/IRA etc and other unsecured debt are all well in hand.
Though if I were receiving 3.75% return on a risk free bond, I'd be paying tax on that return. On a mortgage, I'm writing it off as a tax deduction, so I don't think the net return is exactly 3.75% We are in a 35% tax bracket, possibly higher with no write-offs.
you may or may not be getting that mortgage deduction. depends if clear the standard deduction.
on the other hand lots of tax free muni's paying more.
difference is in an emergency cash and liquidity is nice. can't pay bills selling off the living room.
We took out a 30-year mortgage on our home in 2009 at 5%. Two years ago we refinanced for 30 years at 2.25%. That chopped over $200 a month from our already handily affordable (now 18% of net income) payments.
We have never supposed we'd own the home outright, nor do we care. With such low payments we're still very comfortable and to take on higher ones, at our ages, would only benefit out heirs and assigns. No thanks!
either paying off the house or having that low fixed rate will still give you a nice edge on holding down your inflation adjusting. typically renting will require more inflation ajusting but it isn't always the case.
as i said in another thread when we first bought homes in the 1970's in long island they were 35k. the mortgage was more than our rent of 209 a month at that time.
well today the fact you are not paying 256 bucks a month for the mortgage anymore since it was paid off and taxes and insurance are 20k plus makes little difference in your yearly nut . .
a renter who goes from a 3 bedroom apartment with all the kids and goes to a one bedroom when the kids are out may see much better cash flow then someone with a payed off mortgage ,heating and cooling a whole house with all the maint. and expenses.
hard to really generalize but one thing is certain , you will need cash flow to live and that may be for 30-40 years in some cases through long retirements.
i would work both ends , investing and paying off the mortgage at a normal pace.
We have never supposed we'd own the home outright, nor do we care. With such low payments we're still very comfortable and to take on higher ones, at our ages, would only benefit out heirs and assigns. No thanks!
See, this is sort of how I feel about it. Instead of putting excess cash toward a mortgage, we could just refi the balance out to 30 years right before we retire and cut our payment down to just a few hundred a month. To me, that's no different than someone paying HOA fees on a paid-for condo, or space fees on a mobile home, or rent on an apartment. And in the meantime, we aren't throwing all our excess cash at that mortgage.
As for equity, there will still be a ton of equity in the home even with a modest mortgage. My son's an only child. He'll be doing plenty well with our estate even after paying off the balance.
Impossible to answer I intelligently without more information.
What is wise for a couple with no savings and a fixed pension is not necessarely the wisest course of action for the couple with $2 mil in the bank and no pension.
i would work both ends , investing and paying off the mortgage at a normal pace.
So maybe a mix of #1 and #2? Throw a couple extra hundred at the mortgage each month, invest the rest, then refi out the small mortgage at retirement?
I guess this really goes back to the age old question of whether to pay off a house before retirement, or keep the mortgage. Though the spin is that the mortgage we keep would be a modest 25-30% of the value of the house. Very, very low loan to value so there would still be a ton of equity in the home.
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