@50: 15YR Mortgage v. IRA Saving and Paying Off Mortgage later? (financial advisor, move)

[cjawalt]

I need help trying to make a financial decision and thought input from retirees would be helpful.

I just moved to San Diego and I'm looking for a place to buy permanently for retirement. I'm 50 years old and find the idea of having a 15 year mortgage (payoff @ 65) appealing because I plan to live on my fixed retirement income by that time and it would be great to have my housing expenses low.

On the other hand, for a $250K home with a 30year mortgage I could save $1000/mo for 15 years ($180,000) and use my retirement funds to pay off the mortgage early at 65.

Am I being too conservative/concerned in wanting a 15 year mortgage?

Any thoughts on how to handle better?

[Jim Mac]

You will get differing opinions on this, even from "experts" such as financial advisors. I would get the 15 year mortgage, and still contribute as much as you can to your IRA.

[Ariadne22]

You can't use your IRA funds to pay off mortgage without paying taxes on the withdrawal, unless you are depositing after-tax dollars into a Roth IRA/Roth401k. If you're paying off $100k mortgage in one lump sum by withdrawing from Traditional IRA/401k, you are giving back at least $35k in taxes, depending on where you live. Nothing I would do.

I'm one of those who thinks save in a tax-deferred IRA/401k, reinvest the tax savings, and worry about your taxes later. Ideally, you have a good part of the mortgage paid when you retire and a sizable nest egg.

If you have a sizable nest egg and other retirement income, continue to pay the mortgage, prepaying part of it each year after retirement to the extent you do not have a serious tax consequence on your retirement fund withdrawals.

For now, take out a 30-year mortgage, max out your tax-deferred retirement vehicles, and make extra payments on mortgage principal when you can over the next 15 years. That's what I would do.

[cjawalt]

Originally Posted by Jim Mac

You will get differing opinions on this, even from "experts" such as financial advisors. I would get the 15 year mortgage, and still contribute as much as you can to your IRA.

That's why I'm asking you guys. I tend to believe a lot of those so called experts are real estate and wall street advocates.

Sounds like a Roth IRA would be a getter retirement plan vehicle to later pay off the mortgage.

I anticipate a drop in my monthly income when I start living on my fixed retirement income, and a $1500-$2000 monthly mortgage payment until I'm 80 sounds like expense should try to avoid if I can.

[Ariadne22]

Originally Posted by cjawalt

Sounds like a Roth IRA would be a getter retirement plan vehicle to later pay off the mortgage.

I anticipate a drop in my monthly income when I start living on my fixed retirement income, and a $1500-$2000 monthly mortgage payment until I'm 80 sounds like expense should try to avoid if I can.

$1500/$2000 mo. mortgage payment in retirement is a nonstarter for me. You can take out a 30-year loan and prepay it over the next 15 years without locking yourself into a 15-year amortization and higher mortgage payment. There is, of course, a difference in the interest rate. But, the tax savings if you use traditional retirement vehicles, could be reinvested along with a larger contribution to your retirement funds which, in the end, would find you further ahead in the net worth area than having the property paid off. The word is leverage. It's early days, yet. I wouldn't have dime one today if I hadn't used leverage and considered tax consequences of every move I made. I think you can do both.

But, in the end, perhaps your gut feeling is what you should follow.

[StealthRabbit]

Originally Posted by Ariadne22

$1500/$2000 mo. mortgage payment in retirement is a nonstarter for me. You can take out a 30-year loan and prepay it over the next 15 years without locking yourself into a 15-year amortization and higher mortgage payment. There is, of course, a difference in the interest rate. But, the tax savings if you use traditional retirement vehicles, could be reinvested along with a larger contribution to your retirement funds which, in the end, would find you further ahead in the net worth area than having the property paid off. The word is leverage. It's early days, yet. I wouldn't have dime one today if I hadn't used leverage and considered tax consequences of every move I made. I think you can do both.

But, in the end, perhaps your gut feeling is what you should follow.

^^^Me too... ^^^
I have made a lot more wealth from leveraging my low interest 30 yr mortgages than I ever have working. (Your-mileage-may-vary). Bout $2 million in leveraged earnings over the yrs, never more than $150k in loans ~ 20% LTV... $2m takes a long time when working for 'the man' AND paying wage related taxes / expenses.


I would go for the 30yr, and personally NEVER plan on paying off a 4% mortgage. (My mom just got yet another 30yr (<4%) refin and she is well over age 80. She is leveraging for another home that is more handicap friendly. Homes and loans are a bargain (if you have the expectation of higher inflation, lending, and income taxes). I could be wrong

I put my 4% $$ to work financing commercial income props that generate 10%. When I get too old to deal with the hassles, I will sell for 30% down and carry the paper. That; (several properties) will provide nice income for an ole timer and easily cover my <4% mortgage payment, by about 6x (especially if refi rates are ~10%, which is highly probable for investment properties).

Retirement savings 4 me, has always been; TAKE maximum Match, ALWAYS contribute fully to ROTH or Traditional IRA (depending on tax benefit of each particular yr). In yrs of low tax rate (<5%) roll Traditionals to ROTH.

Nothing beats the FREE $500k Capital Gains exclusion every 2 yrs on primary residence. I highly recommend living out of a suitcase and sticking a mailbox outside the door of your tee-pee or Travel-trailer (That you have placed on a property that is gonna turn into the next Walmart). Just do this a few times, and you will be in good shape (Tho it can become a bad habit).

[Keeper]

I have to agree with the 30 yo mtg and by paying just 1 extra payment a year towards your principal you will pay it off in 15-17 years. Take the money you will save and put it in a 401K, IRA or Roth IRA which ever one works for you.

It is always easier to make lower payments especially if you are retired. Besides who knows how things will go in the next 18 years with interest rates.

I am putting my money in a money mkt account with 3% interest right now of course it is limited amt but heck I will take that over .05%

[Ariadne22]

One extra payment a year reduces loan to a 24 year term, not 15-17 years, per my handy dandy real estate calculator, and substantiated by this:

How Can An Additional Payment Each Year Change Your Mortgage?

Interest rate is irrelevant. Principle applies whether loan is at 4% or 7%. Two extra payments a year reduces term by about 9 years.

Good Vanguard Fund VWINX returns without much risk in the area of 6.5% year. Much rather invest in that, especially with mortgage rates at 4% or thereabouts.

[MrRational]

There are two reasons to have a mortgage:
1) because it's the only way to afford a home (few have the cash)
2) because it's a terrific cash management tool (for those with the cash)

The key to choosing a debt obligation is about the reliability of your earned income.
If you can count on it being sufficient and secure... then leverage that.

[BayAreaHillbilly]

Originally Posted by cjawalt

That's why I'm asking you guys. I tend to believe a lot of those so called experts are real estate and wall street advocates.

A lot of them represent "the house" and those who listen to them are "gamblers. "

Yah mon, leverage to the hilt! Happy days are here again! Prosperity is just around the corner! If you have a positive attitude, no need to worry about being leveraged!