Author Topic: Ok to get a mortgage with the intention of never paying it off in 'old age'?  (Read 4117 times)

EconDiva

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What I mean is, let's say:


You're 58 years old and get a 30 year mortgage as opposed to say a 10 year one although you don't expect to live long enough to pay it off.  But your goal is to have more money freed up to travel to see grandkids, explore hobbies during retirement while you're still healthy enough to get out the house and drive on your own, just enjoy life....


In your opinion, is it morally wrong to do this for any reason?


If you think there's nothing wrong with doing the above, then I have a second question for you:


Which choice below is a better move in the hypothetical situation of a person grossing $100k a year (single, no kids, 40 years old, 100K total in retirement funds, with their most important current financial goal being to play the retirement 'catch up' game):


(1) Buying a $300,000 house for a monthly mortgage of $1,500 (term: 30 years)


(2) Buying a $150,000 house with a monthly mortgage of $1,500 (term: 10 years)

Why?
« Last Edit: January 04, 2015, 03:05:33 PM by EconDiva »

rubybeth

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Which choice below is a better move in the hypothetical situation of a person grossing $100k a year (single, no kids, 40 years old, 100K total in retirement funds, with their most important current financial goal being to play the retirement 'catch up' game):
(1) Buying a $300,000 house for a monthly mortgage of $1,500 (term: 30 years)

(2) Buying a $150,000 house with a monthly mortgage of $1,500 (term: 10 years)

I don't have a problem with someone that old taking out a 30 year mortgage. I know quite a few 80 and 90 year olds, so it's possible that a 58 year old could live to pay off their mortgage, and any amount owed on the mortgage upon death would up to the heirs to decide how to handle (pay it off with inheritance funds or their own money, sell, let the bank take it, etc.).

It's the second part I want to comment on. I would buy the cheaper house but with a longer mortgage term, so it would be this:

(3) Buy a $150,000 house (or even less) with a monthly mortgage payment of less than $1,000 (term: 30 years).

And then I'd throw as much into those retirement accounts (and even taxable accounts) as possible, because $100,000 in investments at age 58 is nothing to sneeze at for the average person, but for a MMM reader, it's kind of sad. Not to make you feel bad, because I'm sure there are many factors that lead to this stash amount, but I'm 33 and have a bigger net worth than that.

Also, if you have heirs, I'd try to leave them enough to pay off the mortgage after your death, if you think that's likely to happen. Many of us planning for early retirement need to think about funding 40+ years of life after retirement, but if you think, due to family history, that you definitely won't live that long, you could attempt to leave them a stash that would cover the remaining debt on the house.

Another Reader

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The more reasonable answer is (3) Buy a $150,000 house and take out a 30 year mortgage with a much lower payment.  The payment difference is then invested in the catch-up retirement accounts.

I have 28 years left on a 30 year mortgage and I likely won't be around for the mortgage burning party based on family history.  I'm sure the estate will be able to deal with that, if and when it is necessary.

FeynmanFan

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As Milton Friedman said, there is nothing wrong with operating based on self-interest: https://www.youtube.com/watch?v=RWsx1X8PV_A.

Self interest is inherent in the human psyche. As long as you are not violating law or contract, conduct yourself based on self interest and all of society collectively will benefit.

If your debt is unpaid at your demise, the lender will take it from your estate (or, more precisely, the securitized collateral) via established legal principles and procedures. Banks are fine-tuned to collect their loans. Unless you are making fraudulent representations on your loan application, which will justifiably earn you time in your local prison, you are fine. The bank will be aware of your age, the value of your property, and other pertinent details.

As to your Options (1) and (2), you did not provide enough information to enable a thoughtful analysis. Some considerations:

(1) It sounds like you want to take money out of a mortgage for other purposes (travel, etc.). That's a bad idea. You are putting your lodging at risk to visit Hawaii and explore a potential retirement career in cooking, basket-weaving, aviation, scuba diving or the like? Even if a bank would lend on those facts, I'd never use a mortgage for anything other than paying down the debt on the house.

(2) Homes are a place to live in, not an investment (caveat: I recognize exceptions apply).

(3) Never buy a house unless you intend to live in it for five years or more.

(4) Never take out a HELOC for trivial matters (see (1) above).

(5) Select the housing option that best meets your needs. To evaluate this, you need to provide information such as interest rates, rental rates in your area, etc.

(6) You provided scant information regarding your financial situation. The default rule is to shed indebtedness heading into retirement. If I were 58, no way in heck would I ever take on more debt, but everybody's situation is different.

EconDiva

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Which choice below is a better move in the hypothetical situation of a person grossing $100k a year (single, no kids, 40 years old, 100K total in retirement funds, with their most important current financial goal being to play the retirement 'catch up' game):
(1) Buying a $300,000 house for a monthly mortgage of $1,500 (term: 30 years)

(2) Buying a $150,000 house with a monthly mortgage of $1,500 (term: 10 years)

I don't have a problem with someone that old taking out a 30 year mortgage. I know quite a few 80 and 90 year olds, so it's possible that a 58 year old could live to pay off their mortgage, and any amount owed on the mortgage upon death would up to the heirs to decide how to handle (pay it off with inheritance funds or their own money, sell, let the bank take it, etc.).

It's the second part I want to comment on. I would buy the cheaper house but with a longer mortgage term, so it would be this:

(3) Buy a $150,000 house (or even less) with a monthly mortgage payment of less than $1,000 (term: 30 years).

And then I'd throw as much into those retirement accounts (and even taxable accounts) as possible, because $100,000 in investments at age 58 is nothing to sneeze at for the average person, but for a MMM reader, it's kind of sad. Not to make you feel bad, because I'm sure there are many factors that lead to this stash amount, but I'm 33 and have a bigger net worth than that.

Also, if you have heirs, I'd try to leave them enough to pay off the mortgage after your death, if you think that's likely to happen. Many of us planning for early retirement need to think about funding 40+ years of life after retirement, but if you think, due to family history, that you definitely won't live that long, you could attempt to leave them a stash that would cover the remaining debt on the house.

FYI, none of these scenarios is me (I'm 35).....

rubybeth

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FYI, none of these scenarios is me (I'm 35).....

Good. :)

bugbaby

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Nothing morally wrong, but don't be dumb either: Debt is risk... make sure your healthcare is amply funded eg with a maxed HSA... A leading cause of bankruptcy is health bills, and just imagine losing the house at age 68 or something due to poor planning.

Same with taxes and maintenance, make sure you have a good emergency fund for these...

Bob W

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The correct answer is buy a 100k  house using an interest only 30/year fixed rate loan. You all in monthly payment, PITI,  will be around 450.

FeynmanFan

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A caveat:

If your intent is to truly take out a loan and never repay it, that likely constitutes fraud. This may wash out in the risk analysis that the bank does based on your age, value of the collateral, etc. But if I were a bank officer, and somebody walked in and said "hey, I want a loan but don't intend to pay it back," I'd never make the loan.

And if you failed to disclose that intent but implicitly possessed it at the time of the loan -- and you defaulted -- I'd refer this matter to my well-compensated outside counsel with the expectation they would chase you and your descendants down to the gates of hell.

Messing with banks is a non-trivial matter and a surefire way to get acquainted with your local incarcerated population.

Cassie

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Banks can't discriminate on giving loans based on your age.  Many people take out mortgages later in life & die before paying them off. If the heirs don't pay off the loan the house is sold & the bank gets their $ so nothing unethical about it at all.  Only risk would be if a person will be able to pay the mortgage for as long as they want to live there.  It would suck to be old & have to move when you didn't want to.  Personally our house is paid for & I would not borrow on it for "things" or "travel."   although, I would consider further downsizing to a small condo if at some point I thought I wanted some of the $ out of it. 

chuckaluck

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The more reasonable answer is (3) Buy a $150,000 house and take out a 30 year mortgage with a much lower payment.  The payment difference is then invested in the catch-up retirement accounts.

I have 28 years left on a 30 year mortgage and I likely won't be around for the mortgage burning party based on family history.  I'm sure the estate will be able to deal with that, if and when it is necessary.

This is similar to what my wife and I are doing. We are both 60 years old and taking out a 30 year on remaining balance at a lower interest rate to lower our monthly payment.  We both have pensions, large 401k balances, taxable accounts, and will be eligible for SS. If my wife and I work, it is because we want to and not because we have to.   Our pensions and passive income easily pay for all of our expenses, including the mortgage.  If need be, we could pay off our mortgage.  For many years, we deliberately did not put more towards paying off the mortgage.  Our goal was to get to a "critical mass" that would create enough passive income that would pay all our bills.  We reached that goal years ago. Since I enjoy investing and feel I could continue to earn more with the funds not put into the mortgage, we simply choose not to pay it off.  Please note: we have no intention of "stiffing anyone" if we should die while still having a mortgage.  We have enough life insurance to pay off the note if we die before 65 years old (when the life insurance lapses); after that, our savings will easily pay off the mortgage.  Alternatively, since our mortgage is only about 40% of the market price, our kids could sell it easily at a very reduced price and still have funds left over.   

Hotstreak

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A caveat:

If your intent is to truly take out a loan and never repay it, that likely constitutes fraud. This may wash out in the risk analysis that the bank does based on your age, value of the collateral, etc. But if I were a bank officer, and somebody walked in and said "hey, I want a loan but don't intend to pay it back," I'd never make the loan.

And if you failed to disclose that intent but implicitly possessed it at the time of the loan -- and you defaulted -- I'd refer this matter to my well-compensated outside counsel with the expectation they would chase you and your descendants down to the gates of hell.

Messing with banks is a non-trivial matter and a surefire way to get acquainted with your local incarcerated population.


This is basically wrong in every way (except for opinions, which the writer is entitled to).  No actual banker acts this way in the scenario OP describes.  People take out 30 year loans all the time in their 80s, 90s, and beyond.  Banks fully recognize they will die prior to full repayment and are okay with that.  Now if a person says they won't make any PAYMENTS (which is different than not paying it off), that might be grounds for denying an application.

TerriM

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There's nothing wrong with it as long as you intend to continue the payments until you die.  Your kids will either continue the payments after you or sell your house, and the bank will get it's money back.