Money in the bank vs paying down/off the mortgage (spouse, 2015)
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I paid off my house when I retired. I just felt that Id sleep better at night knowing I had a paid roof over my head, no matter what happened. I saved thousands in interest, and my monthly bills are so much lower. That being said, I had it to pay off with, and it didnt hurt my retirement savings that much.
This topic comes up again every few weeks on this forum. For the majority of us having a mortgage makes sense. I took one out after I retired. I refinanced a few months ago with a fresh 30 year mortgage. I could easily pay off my mortgage but would rather have the money. First if you tie up money in a house, getting it out if you need it can be slow and difficult. Second, the return on my invested money is way, way more than the cost of the loan. In less than 10 years, I am ahead by well over $100K on a $300K mortgage.
There are some reasons that a mortgage in retirement might not make sense. First some people just hate debt. I am not in that category and am happy to make money off my debt. Second, some people are irresponsible with money. If they have the cash in hand they will spend it even with the mortgage hanging over their head. Finally to come out ahead, the money that would have paid off the mortgage needs to be invested. At the minimum some of it needs to be at risk in the stock market.
It's funny; I was planning on dumping some funds into the mortgage but I like seeing it in the bank.
Anyone feel equity rich (home paid off) but cash poor? Do you wish you had kept some aside?
It's kind of like when you have a car payment; somehow, you always make it. But, when you do not have that payment, do you save it? Generally, no.
If you did pay it off, did you tap into the equity later?
You've received several good responses on people's personal experiences with the question you're asking about. Some people favor borrowing money on their house to invest elsewhere while some other people prefer not to do that. Each method can make sense depending on the individual and also depending on what the economy or investment choice does.
I won't bother with telling my personal experience, but instead I'll suggest a way for you to consider your options and decide what is best for you.
Here's how I see it. When a person borrows money against their home (or other asset) in order to invest it elsewhere, they're essentially taking a chance that their investment returns will be greater than their expense of borrowing (the interest rate they pay). This means that in order to "break even" in this situation, your investment return will have to at least match the rate of interest that you're paying on your loan.
Actually, for most people, they will have to do even better on their investment return than their interest rate due to the tax situation. For most people today, interest paid is just lost money because it doesn't pay them to itemize on their taxes. On the other hand, the money they earn on their investments is fully taxable. So, for example, they may need to earn 3.5% to 4.0% per year on their investments in order to break even on a mortgage loan of say 2.7% due to the taxes that have to be paid on the earnings.
For the past several years, this hasn't been a problem (unless you were forced to sell your investments last year when the market was way down). However, the market doesn't ALWAYS go up. Sometimes it goes down. And sometimes these down periods last a lot longer than several months. Sometimes they last for 8 to 10 years.
If your timing happens to be bad on your investment, your net worth can drop a lot faster during down times than it can rise during good times. So if you're borrowing money at say 2.7% annual interest and the market happens to be going down at the same time, then this just compounds your losses. You're losing money on the interest you're paying plus you're losing money on your investments at the same time.
I know quite a few people (investors and common folks alike) who lost nearly everything back during the financial crisis in 2008. People who had numerous properties which were mortgaged were losing money so fast that many had to declare bankruptcy and walk away with nothing. Many ordinary folks who had their life savings in the stock market through retirement funds or whatever, finally panicked after seeing their life savings go down, down, down month-after-month and eventually sold all their investments right at the bottom of the market. Most of them never recovered financially... or emotionally.
So, it's certainly possible to borrow money against your property or other assets and use that money to make even more money. Many people have done exactly that and are doing so right now. But is there any guarantee that this will continue in the future? Of course not. There are also numerous stories of people who lost everything doing what seemed like a sure bet at the time.
So, I suggest that you assess your situation. Where are you with regards to your earning capacity? Are your prime earning years behind you or ahead of you? Ask how your lifestyle would change if you make more money and how it would change if you lost considerable money on your investments. Weigh the potential gain against the potential loss and examine how each would affect your future lifestyle and decide accordingly.
Homes should be paid off while still generating W-2 income and not from amassed retirement funds. That way you can see all that money in the bank and still be out of debt.
Our primary home was paid off at age 47 and at 58 we took out a mortgage on our FL home. We decided to move full time to FL and sold the other house after five years.
We paid off this mortgage when we wanted to combine our property with an adjacent lot and the mortgage holder wouldn’t agree to it. Our county told us they could force the issue with the bank, but we didn’t want to get into a pissing match with the inevitable big bank delays.
It felt good to call for the final pay off amount and then do what we wanted without someone else’s approval.
Most of the answers in this thread have everything to do with the 'emotion' of borrowing versus weighing the financial effect of borrowing.
Perhaps the emotions would be different if adequate research was done to determine if having the mortgage resulted in a net financial gain or loss.
Is the mortgage fixed or variable? A variable mortgage is risky and inappropriate for the past 10 years.
If considering carrying a mortgage it should be a fixed 15/30yr allowing to determine whether your financial investments can cover the cost of borrowing the money.
The facts:
The average mortgage has been between 3-4% interest in the past 10yrs.
The typical average return of an ETF? The benchmark for market returns is the S&P 500. Typically, the S&P 500 has returned an annualized return of 10% since inception. Therefore, the typical average return of an ETF is around 10% (actually has been around 18% return for the last few years but 10% helps represent the worst case scenario).
Therefore, if you had the money to pay off the mortgage and chose to instead invest in a Vanguard or Fidelity ETF (just for an example) you would experience a 6-7% increase in your yearly income. Basically, you are using someone else's money to make a profit. If circumstances change and you need the money to make ends meet. Money can be withdrawn from the investment account at anytime.
If your mortgage interest rate is less than the S&P annualized return, generally it would never make financial sense to use your excess funds to pay off the mortgage versus parking it in an ETF account and forgetting about it and then splurging with the profit that you make every year on something you might not otherwise buy or do.
Not to say there are not other considerations. The above assumes you already have a mortgage. I didn't have a mortgage. When I bought my current house, I didn't take a mortgage. A mortgage is a commitment that you are going to be living in a home long enough for your investments to also cover the closing and other associated costs involved in a mortgage. At this point in my life, I don't foresee me staying in any one place for more than a few years. Also, offering a cash deal in today's market made a difference in my offer being accepted. And lastly, my house is an insignificant part of my portfolio. I already have 80% of my assets invested in equities. So, I keep the other 20% invested in real estate and treasury bills as a hedge against the remote possibility that there is a global financial collapse.
During my prime earning years, I borrowed whenever possible. My resultant savings is composed of 30% earnings and 70% profit on borrowings. PS: most of the time, I was not an 'active' investor. Using a diversified palette of Vanguard, Fidelity, or name your favorite institution's ETFs, allows you to park your money and forget it.
There is so much more to the benefits of borrowing. Such as building a great credit rating, which allows you to borrow more and more for less and less interest. Caveat: Borrowing ONLY makes sense to build wealth. IE: borrowing to invest in assets that are increasing in value: real estate, equities etc...
Sometimes circumstances require you borrow because you don't have the cash and you want or need something that is not going to build in value: a car, a refrigerator, etc... That type of borrowing results in a reduction of wealth, makes you lose sleep at night, and should be avoided when possible.
I carry a mortgage with a payment less than a local one bedroom apartment. I could easily pay it off but like having the savings. My income is pretty high for my needs so the payment is not a hardship. I will dump some money into the escrow account since the insurance goes up and they keep playing with the payment amount otherwise. I get a small tax benefit on the interest...not much. My mortgage company keeps tabs on the home's value and recently added 40k to the value which was interesting and raised my equity, at least in their eyes.
I am always amazed at the number of people who have no clue when it comes to investing. What makes this even worse is that pensions have been vanishing and a majority of workers have 401k funds to consider and invest. Those who have a modicum of knowledge in managing their money and investments are very like to accrue substantial wealth over the decades of work, saving and investing. Those who do not best look for a job with a pension because living on social security typically is going to result in an underfunded and highly restrictive retirement.
Investing money that could have been spent on paying off a mortgage is no different than investing one's other savings. Sure there are risks, especially over the short term, but long term the results will likely be a doubling of one's investments every 10 years or so.
I am always amazed at the number of people who have no clue when it comes to investing. What makes this even worse is that pensions have been vanishing and a majority of workers have 401k funds to consider and invest. Those who have a modicum of knowledge in managing their money and investments are very like to accrue substantial wealth over the decades of work, saving and investing. Those who do not best look for a job with a pension because living on social security typically is going to result in an underfunded and highly restrictive retirement.
Investing money that could have been spent on paying off a mortgage is no different than investing one's other savings. Sure there are risks, especially over the short term, but long term the results will likely be a doubling of one's investments every 10 years or so.
^^THIS! Oh my, said it better and so much more concise than I.
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