Author Topic: Please convince me to keep my mortgage.  (Read 4179 times)

sol

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Please convince me to keep my mortgage.
« on: April 21, 2019, 10:29:21 AM »
I am planning to pay off my mortgage this year.  Please talk me out of it.

Background and Concessions:
I understand that the average returns of the stock market are better than mortgage interest rates, over the time span of a typical mortgage term.  This is why many of our best and brightest forum members typically argue against paying off your mortgage.  Over the long term, you'll usually make more money investing that extra money in the stock market than by applying it towards your mortgage.  And the mortgage payoff is an all-or-nothing proposition, because your house can get repossessed when you have 1% left to pay just as easily as when you have 90% left to pay.

Why I'm bucking this trend:
The ACA and the FAFSA, that's why.  Now that I'm FIREd and have no W-2 income, my only taxable income is whatever will be generated by Roth IRA rollovers each year.  The amount that I roll over is determined by my ongoing expenses, and my primary mortgage is a huge portion of my monthly expenses.  If I have to roll over an amount large enough to both fund my family's lifestyle AND pay my annual mortgage bills, the taxable income generated would preclude me from qualifying for health insurance subsides through the ACA or college financial aid for my kids, through the FAFSA.  I would appear rich on paper, even though I have no income.

How would this work?
We own a couple of rental properties.  With recent valuations soaring in the PNW, we suddenly have more than enough equity in one rental house to pay off our primary mortgage after selling costs.  So we could sell the rental this summer, and pocket a huge check.  That huge check could sit in our checking account and fund living expenses but it would count against us for FAFSA as a giant asset, ripe for colleges to plunder.  If I instead use it to pay off the mortgage on my primary residence, it basically disappears from both the FAFSA and the ACA calculations.  Clearing the mortgage would dramatically reduce our monthly expenses, and thus the amount of income we show on paper, qualifying us for cheaper health insurance and financial aid for college.  And all we'd have to do is transfer equity from one property (the rental) to another property (our home).  And, of course, give up the leverage on both of them.

What does the math look like?
The rental:  The rental property currently generates about $5k/year in cash after expenses, and $7k/year in equity pay-down by the renters.  The property tax deduction and depreciation are about another $7k together, but are basically worth nothing if we have no taxable income above the newly enlarged standard deduction anyway.  We can sell the property and pocket about $200k after costs.  It's been appreciating by tens of thousands of dollars per year recently.  So I summarize that the property makes us anywhere between $15k and $50k/year, depending on how you count it.  A reversal in local real estate could easily wipe out more value in a single season than the property generates as a rental for the year.
Our primary mortgage: We have approximately $200k left on our primary mortage, and pay about $500/month in interest.  If we cleared the mortgage, we would lower our expenses by approximately $23k/year, including saving $6k on interest that isn't deductible anymore.
The ACA subsidies:  My family of five would qualify for between $5k and $10k per year of ACA subsidy by reducing our annual income by $23k.
The FAFSA:  This one is is hard to estimate, but I have two high school aged kids who are potentially eligible for tens of thousands of dollars per year in financial aid if our family income stays below $50k/year so that we qualify for the Simplified Needs Test and they apply to schools that take the FAFSA.  I'll ballpark this at cumulatively $20k/year, +/- 100%.

So on the low end, selling the rental means qualifying for about $15k of cumulative benefits while giving up about $15k of income from the rental.  On the high end, selling the rental means we might give up $50k of annual rental property income (including appreciation) and receive about $50k of benefits including free insurance and nearly free college.  The worst case scenario is if we keep the rental and the local RE market tanks, we could easily lose $40k this year on the rental (including unrealized capital losses) and ALSO give up $50k of insurance and financial aid benefits, for a net loss of $90k.  The best case scenario if we keep the rental is that the local RE market continues to appreciate at >10% per year, and we make another $50k on the rental but give up a puny $10k in benefits, for a net gain of $40k. 

It's this asymmetric reward profile that leads me towards selling the rental.  Rather than risk going $90k in the hole if things go wrong after keeping the rental, I can sell it and pretty much guarantee an approximate wash on lost rental income vs gained ACA and FAFSA benefits.  Selling it looks like the conservative play.  I don't need to play the RE market and make another $50k in profits next year, that money would mean basically nothing to me because we don't need it.  Losing $50k would hurt a whole lot more than gaining another $50k would help, because we're already comfortably FI and don't need more money.  We just need to not lose a whole bunch of money, right after retirement.

So as of right now, I'm planning to sell a rental house this summer with the expectation that it will be a wash, financially, to clear my mortgage and thus lower my taxable income.  That's totally fine.  Keeping the mortgage AND the rental property is probably a better play, financially, if the RE market continues to perform so well, but it comes with the risk of terrible losses and my new financial plan is all about minimizing the chance of terrible losses because that's the only way I can still "fail" at retirement.  I don't need to maximize expected gains, I just needed to minimize those early-FIRE sequence of return risks.  In this case, I think that means reducing my rental property inventory by one, and paying off my primary mortgage.
« Last Edit: April 21, 2019, 10:39:51 AM by sol »

SwordGuy

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Re: Please convince me to keep my mortgage.
« Reply #1 on: April 21, 2019, 01:57:57 PM »
Makes sense to me.

waltworks

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Re: Please convince me to keep my mortgage.
« Reply #2 on: April 21, 2019, 02:03:58 PM »
My kids are 10 years behind yours, but I've been thinking about the same thing.

One part of me says, "For crying out loud, it's a 3.75% loan! That's free money!"
The other part says, "Yeah but you don't need to be a 10x millionaire when you die."

In my case, we're already well into ACA subsidy terrain even with the mortgage, though, so maybe I shouldn't worry about it.

In your shoes I'd sell the rental and pay off the mortgage, for sure.

-W

Paul der Krake

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Re: Please convince me to keep my mortgage.
« Reply #3 on: April 21, 2019, 02:39:23 PM »
Of those 50k of rental income, what's the amount of rent?

sol

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Re: Please convince me to keep my mortgage.
« Reply #4 on: April 21, 2019, 02:58:03 PM »
Of those 50k of rental income, what's the amount of rent?

It rents for about $28k/year and the mortgage/interest/insurance/maintenance are about $23k/year.  Taxes are roughly a wash.  But it has appreciated an average of $40k per year for the past five consecutive years since becoming a rental, in addition to the $7k/year in increased equity paid down by the renters, so the monthly cash flowing into my checking account is really a minority of the total return thus far.

I'm just thinking it's time to cash out some of that paper equity, even if I'm only going to apply the proceeds towards a different house's paper equity.  I'm thinking of it kind of like deliberately deleveraging.  If I do this, I'm significantly more protected from another 2009 style dual downturn.  Right now, that sort of scenario is still a potential threat to my financial well being.

So far I've had two votes for "yea, go ahead and sell it."

BicycleB

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Re: Please convince me to keep my mortgage.
« Reply #5 on: April 21, 2019, 03:08:36 PM »
Sell the rental, pay off the mortgage, be ready for the FAFSA. Two thumbs up!

Every single factor in the equation is subject to change, but I think the odds are better in the pay-off-the-mortgage scenario. Anyway, your plan sounds really logical for your situation. I have a mortgage, but in your situation, I'd get rid of it too.

Paul der Krake

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Re: Please convince me to keep my mortgage.
« Reply #6 on: April 21, 2019, 03:16:47 PM »
Yeah, another vote for joining the ranks of hard working, struggling Americans. Take the W and deleverage. Resist the temptation to check on your ex-property's value regularly.

Another Reader

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Re: Please convince me to keep my mortgage.
« Reply #7 on: April 21, 2019, 03:22:57 PM »
You are on the right track.  Have a look at the Root of Good blog, https://rootofgood.com/.  Justin has three kids and manages the household income to qualify for the most benefits with the least compromise in lifestyle.  He and his wife both retired in their 30's.  At their income level in North Carolina, they qualify for subsidized internet as well as very low cost health insurance.  The family takes vacations all over the world when the kids are not in school.  Net worth is over $2 million, but Justin figured out most of the subsidies available are income-based, not asset-based.  With the kids now starting junior high, he is also looking at the FAFSA.

secondcor521

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Re: Please convince me to keep my mortgage.
« Reply #8 on: April 21, 2019, 03:31:19 PM »
I agree it makes sense.  I came to a similar conclusion, although in my case it was between paying off the mortgage or padding my taxable account, not selling a rental as in your case.

Did you account for the capital gains / depreciation recapture in calculating the $200K in proceeds?  I'd guess so.  Still probably makes sense to do it.

CanuckExpat

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Re: Please convince me to keep my mortgage.
« Reply #9 on: April 21, 2019, 03:48:35 PM »
I concur with last comment, everything you argue makes sense and I'd strongly opt for selling with one caveat: what are the tax consequences in the year you sell?

Ideally you would have a lot of years of carry forward capital losses to offset the capital gains.

Slow2FIRE

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Re: Please convince me to keep my mortgage.
« Reply #10 on: April 21, 2019, 04:38:52 PM »
The conservative move is the smart move in my opinion.  You are FIREd, no need to gamble on longshots -> just take the easy win and simplify your portfolio at the same time.

lhamo

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Re: Please convince me to keep my mortgage.
« Reply #11 on: April 21, 2019, 06:00:07 PM »
Another reason to sell:  local laws and rental regulations are only going to move further in the direction of favoring the renter over the landlord.  This and the ridiculous local prices are keeping me out of the rental market, along with ACA and FAFSA issues.

If you have a middle schooler you can also try to time your income so that they qualify for the WA College Bound scholarship.  I just sent in the paperwork for DD this week. Have to submit the initial application in a low-income year while they are in middle school, so likely your older kids won't qualify.  Pretty easy to manage income for the younger one, though.

Telecaster

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Re: Please convince me to keep my mortgage.
« Reply #12 on: April 21, 2019, 06:40:47 PM »
Another reason to sell:  local laws and rental regulations are only going to move further in the direction of favoring the renter over the landlord.

I hate to crap on Sol's thread (Sorry Sol!) but all these rental regulations are meant to protect tenants from getting screwed by rising rents, or otherwise being frozen out of the housing market.   That's a noble cause, but by making landlording unattractive, that means fewer units will be on the market.  And because of the unattractive nature, landlords will naturally require higher rents to compensate for the increased business risk. 

In short, I don't think these new laws will do what they are supposed to do and are likely going to backfire. 

Buffalo Chip

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Re: Please convince me to keep my mortgage.
« Reply #13 on: April 21, 2019, 06:45:19 PM »
I’m another “yeah” even without the ACA and FAFSA implications. We’re looking at a real bubbly asset environment IMHO and I do believe cash and paying off debt are some of the better investment choices right now. But I do claim to be pretty dumb, so YMMV.

Which should lead you to ask: are you making extra payments on your mortgage BC? Hypocrisy and all? The answer is NO, because while I personally think it is one of the better investments right now, it’s not the best one. 529s in VA have a very generous state tax deduction and we’re better off maxing that out first for the instant 5.75% payback. With mortgage payoff lower down the list if we have $$ to do it.

Brother Esau

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Re: Please convince me to keep my mortgage.
« Reply #14 on: April 21, 2019, 06:47:03 PM »
The conservative move is the smart move in my opinion.  You are FIREd, no need to gamble on longshots -> just take the easy win and simplify your portfolio at the same time.

word

less4success

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Re: Please convince me to keep my mortgage.
« Reply #15 on: April 21, 2019, 07:11:47 PM »
This is the opposite of what you asked for, but: lower monthly expenses and less concentration in a single real estate market seem good for mitigating the financial impact of a bad sequence of returns or a Pacific Northwest earthquake (or volcanic eruption).

I think it’s better to focus on things that could actually derail your plan, rather than choices that just lead to you having slightly less (unnecessary) money.
« Last Edit: April 21, 2019, 07:16:33 PM by less4success »

seattlecyclone

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Re: Please convince me to keep my mortgage.
« Reply #16 on: April 21, 2019, 08:41:14 PM »
I've been wrestling with basically the same question. I am quite convinced that maintaining a low-rate mortgage is the right move while working, but during FIRE it's less clear.

We're a dozen years off from needing to hide assets for the FAFSA, but the ACA is definitely a pretty big consideration. In our case we would need to sell taxable index funds to pay off the house rather than selling a rental property.  I think even with the mortgage we'll be able to keep our income low enough for some pretty sweet ACA cost sharing subsidies (<200% FPL) for quite a few years by selling higher-basis taxable shares and withdrawing existing Roth basis to pay our bills. We could probably sustain that income pretty much indefinitely without a mortgage (at least until the kids move out and reduce our poverty level) because that's right about where our non-mortgage spending currently is, but with the mortgage that income level is much less sustainable.

I haven't made a decision on this yet, but leaning slightly toward paying it off to keep things a bit simpler and limit downside risk a bit.

ChpBstrd

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Re: Please convince me to keep my mortgage.
« Reply #17 on: April 21, 2019, 09:23:07 PM »
Question:
Is there an opportunity to plow a bunch of money INTO the rental (lowering income from the rental over a span of, say, the next 2 years because, gosh, maintenance has been a bitch) to trick it out so that you could sell it for $300k instead of $200k?

Long term, I’d be concerned having that much money invested in real estate bubble land, but I was tasked with talking you out of selling.

the_fixer

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Re: Please convince me to keep my mortgage.
« Reply #18 on: April 21, 2019, 10:04:51 PM »
Same reason I am planning to pay off our house right around the time we FIRE.

Another yes vote from me

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sol

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Re: Please convince me to keep my mortgage.
« Reply #19 on: April 21, 2019, 11:24:47 PM »
Question:
Is there an opportunity to plow a bunch of money INTO the rental (lowering income from the rental over a span of, say, the next 2 years because, gosh, maintenance has been a bitch) to trick it out so that you could sell it for $300k instead of $200k?

Sure, but what would that accomplish?  I could maybe show paper losses temporarily by keeping the rental and the mortgage, but probably not enough to offset my primary mortgage costs and there'd be no guaranteed of getting that money back out upon sale.  Seems like a risky move, for a short delay that doesn't really help me much if I just have to sell it then anyway.

Quote
Long term, I’d be concerned having that much money invested in real estate bubble land, but I was tasked with talking you out of selling.

Yes, part of my motivation to sell is to get out while the getting is still good.  Lock in those gains.  Reduce leverage for the future, in both directions.  Clearing the mortgage and thus lowering our taxable income is kind of a convenient side effect.

Same reason I am planning to pay off our house right around the time we FIRE.

As a general rule, it seems like a better idea to sell the house after you retire, rather than before, so that you don't have other taxable income in the same year that you have all those capital gains.  But I know that for a lot of people, it takes a big leap of faith to quit their jobs while they still have the ongoing expense of multiple mortgages.

Paul der Krake

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Re: Please convince me to keep my mortgage.
« Reply #20 on: April 21, 2019, 11:38:40 PM »
As a general rule, it seems like a better idea to sell the house after you retire, rather than before, so that you don't have other taxable income in the same year that you have all those capital gains.  But I know that for a lot of people, it takes a big leap of faith to quit their jobs while they still have the ongoing expense of multiple mortgages.
Isn't that a moot point unless the house appreciation is over 500k for a married couple? That's one heck of a capital gain.

Little Aussie Battler

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Re: Please convince me to keep my mortgage.
« Reply #21 on: April 22, 2019, 01:13:10 AM »
If you woke up tomorrow with no mortgage, and someone offered you a $200k loan on the exact same terms (rate, duration, etc) as your current mortgage, would you take it?

Loren Ver

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Re: Please convince me to keep my mortgage.
« Reply #22 on: April 22, 2019, 06:30:20 AM »
With the risks pointed out, I would sell, but I know very little about real estate.  Especially since you don't need the money. 

Since the subject was to convince you to keep your mortgage, I will ask about refinancing your primary house.  If you could get a good rate and lengthen the time, it might be enough to pull down your taxable income while still having cheap money.  This will cost some, but might be worth it.  Sounds like work to me though.

My dad got trapped similarly.  He Retired at 40, then his two kids (of which I was one) got trapped by FAFSA during the 2000ish bubble pop (when our college funds also tanked- badly).  He had a lot of money in taxable investments, so his expected contribution to my college was more than his yearly income, same for my brother.  It was not pretty.  Student loans to the rescue. 

Loren

mbl

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Re: Please convince me to keep my mortgage.
« Reply #23 on: April 22, 2019, 06:38:15 AM »
Do you absolutely know what the bottom line impact  that your FAFSA application would be when demonstrating zero income?
Is there some college that you might use as a test subject?

Is it worth it to remove that income stream?

How much invested, cash, real estate, and any other assets or income is enough?
1 mil?
2 mil?
5 mil?
10 mil?
75 mil?

YttriumNitrate

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Re: Please convince me to keep my mortgage.
« Reply #24 on: April 22, 2019, 06:46:48 AM »
Are you sure your little one(s) are going to schools that only require a FAFSA and not the CSS?

Peachtea

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Re: Please convince me to keep my mortgage.
« Reply #25 on: April 22, 2019, 06:48:51 AM »
I would look at it only from the ACA saving, not potential FAFSA because that’s a crap shoot. Maybe it’s changed a lot in the last 10 years, but my parents made about 40k then (maybe a little less) and I got zero scholarships, need based or otherwise, from my state school. (I had a 3.998 out of 4.0 gpa, was 2nd in my class, Class President, extra curriculars blah blah blah.) Now my school is offering free tuition for families who make under 40k. But unless your state schools have some special program advertised, getting under the 50k mark will mean more federal loans being available not free money.

In hindsight, I probably would have been better off looking at small private schools where I might have gotten a full tuition scholarship. I was first gen college and assumed state school would be cheapest. I would have your kids look at private schools where their grades/test scores are at the top of the admittance chart. (With the understanding that absent large/full scholarships it shouldn’t be considered a viable “dream school.”)

Also another warning, your kids income will also matter even if you lower yours. It wasn’t until second semester that I learned I had disqualified myself from pell grants due to my part-time (34 hours) near minimum wage cashier job senior year. That summer I strategically took classes so I qualified for work study, which isn’t counted in FAFSA. But those jobs are minimum wage and cap your hours. I did 20 hrs work study + 20-30 hours combined at two other non-work study jobs, and qualified for a little 300 a semester pell grant. Woo!
« Last Edit: April 22, 2019, 06:52:50 AM by Peachtea »

Laura33

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Re: Please convince me to keep my mortgage.
« Reply #26 on: April 22, 2019, 07:58:17 AM »
Pay off the mortgage and sell the rental.  Success requires both maximizing gains and minimizing risk of loss.  Once you already have enough, your focus shifts from the former to the latter.

BUT don't count on your kid getting a bunch of grants.  Most "financial aid" nowadays is focused on loans, not grants.  Most state schools are very tight-fisted with grants as well; private schools can be much freer with the cash offers, but they also tend to be the ones who consider your whole financial picture, not just your income.  Not that that means you shouldn't do it -- just that you shouldn't expect this to solve the college funding issue entirely and so should have a backup plan to cover what you're going to need to pay.  You don't want to discover at the last minute that you need to pull more $$ out of the Roth than expected and have that extra income disqualify you from ACA subsidies and hurt the next year's financial aid offer.

Also, the FAFSA is based on your income during your kid's junior year, so consider that in the timing.

the_fixer

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Re: Please convince me to keep my mortgage.
« Reply #27 on: April 22, 2019, 08:00:46 AM »
Question:
Is there an opportunity to plow a bunch of money INTO the rental (lowering income from the rental over a span of, say, the next 2 years because, gosh, maintenance has been a bitch) to trick it out so that you could sell it for $300k instead of $200k?

Sure, but what would that accomplish?  I could maybe show paper losses temporarily by keeping the rental and the mortgage, but probably not enough to offset my primary mortgage costs and there'd be no guaranteed of getting that money back out upon sale.  Seems like a risky move, for a short delay that doesn't really help me much if I just have to sell it then anyway.

Quote
Long term, I’d be concerned having that much money invested in real estate bubble land, but I was tasked with talking you out of selling.
Same reason I am planning to pay off our house right around the time we FIRE.

As a general rule, it seems like a better idea to sell the house after you retire, rather than before, so that you don't have other taxable income in the same year that you have all those capital gains.  But I know that for a lot of people, it takes a big leap of faith to quit their jobs while they still have the ongoing expense of multiple mortgages.
Sorry for the confusion was in a rush and thought I quoted your post talking about paying off the mortgage to allow controlling your income at the level necessary to qualify for better healthcare and other stuff.

I was just saying that I am planning to pay off our house right around FIRE so we have a greater ability to control our income and keep it lower if necessary. Not paying off our house would result in having to withdraw an additional 16k per year and could mess with our income.

Pay off the house if it will give you the ability to keep your income where needed.

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« Last Edit: April 22, 2019, 10:39:08 AM by the_fixer »

seattlecyclone

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Re: Please convince me to keep my mortgage.
« Reply #28 on: April 22, 2019, 08:19:29 AM »
As a general rule, it seems like a better idea to sell the house after you retire, rather than before, so that you don't have other taxable income in the same year that you have all those capital gains.  But I know that for a lot of people, it takes a big leap of faith to quit their jobs while they still have the ongoing expense of multiple mortgages.
Isn't that a moot point unless the house appreciation is over 500k for a married couple? That's one heck of a capital gain.

The $500k capital gains exclusion only counts for your primary residence, not rental properties.

Along those lines, any chance you'd be willing to move into one of the rentals and sell your current house instead?

appleshampooid

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Re: Please convince me to keep my mortgage.
« Reply #29 on: April 22, 2019, 08:57:40 AM »
Help me boarder42, you're my only hope...

Seriously, I have no input but watching closely as I will be in this boat (hopefully) in about 14-15 years...no plans for rental properties, but I may look at dumping a lot of investment money into a mortgage for the same ACA and FAFSA reasons. For now, staying the course on no extra payments for all the standard reasons (my rate is 4.125%).

Montecarlo

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Re: Please convince me to keep my mortgage.
« Reply #30 on: April 22, 2019, 09:40:16 AM »
Well my days of being a small-government libertarian have certainly come to a middle.

doggyfizzle

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Re: Please convince me to keep my mortgage.
« Reply #31 on: April 22, 2019, 09:46:22 AM »
Sol do you own the rental outright?  If so, would you consider a cash-out refi on the rental and plow the proceeds towards your primary mortgage?  I believe cash-out refis on rentals still qualify for favorable tax status under TCJA, and the 20% QBI plus the "loss" on rental income that you might now show due to increased rental mortgage might actually be valuable in lowering income for FAFSA.  Plus, you'd still be able to participate in long-term property appreciation with the tenant continuing to pay down principal for you.

FINate

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Re: Please convince me to keep my mortgage.
« Reply #32 on: April 22, 2019, 10:07:10 AM »
I don't see a problem with the plan, seems reasonable. Taxes and benefits are part of the equation, though it's a good idea to make sure you aren't letting the tail wag the dog in these areas. Doesn't seem to be the case in this instance.

All else being equal, I prefer a small financial signal: Keep it simple while reducing expenses and thereby lowering necessary income. This reduces the potential places politicians can insert taxes and fees, and it makes it less likely that you'll get lumped into the "wealthy" bucket which according to popular political opinion means you never pay your fair share. Plus, I just don't like dealing with lots of moving parts at tax time.

As we approached FIRE some years ago we paid off our mortgage even though we know and understand the math that says you shouldn't do this. No regrets. The ACA subsidy wasn't the main motivation, but this alone as made it more than worthwhile.

thd7t

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Re: Please convince me to keep my mortgage.
« Reply #33 on: April 22, 2019, 10:10:28 AM »
Do you have enough money?  Are you still retired?  Was keeping you mortgages integral to your retirement plan?

If your answers were "Yes", "Yes", "No", then feel free to pay off the mortgages.  Investing and getting too much money is a warm feeling, but you can probably be confident enough in your math to know that at best it will just result in you having too much money and at worst, it will tempt you to overconsume.

Enough is enough!

FINate

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Re: Please convince me to keep my mortgage.
« Reply #34 on: April 22, 2019, 10:13:01 AM »
Another reason to sell:  local laws and rental regulations are only going to move further in the direction of favoring the renter over the landlord.

I hate to crap on Sol's thread (Sorry Sol!) but all these rental regulations are meant to protect tenants from getting screwed by rising rents, or otherwise being frozen out of the housing market.   That's a noble cause, but by making landlording unattractive, that means fewer units will be on the market.  And because of the unattractive nature, landlords will naturally require higher rents to compensate for the increased business risk. 

In short, I don't think these new laws will do what they are supposed to do and are likely going to backfire.

Agree! Our properties appreciated quite a bit, so when looking at our return on equity I was already on the fence about being a landlord. The emerging hostile regulatory environment has tipped the scales against being in the business. Even after fees and taxes, the equity is put to better use elsewhere, with the added benefit of less risk and less hassle. Doing some rehab on our last property at the moment, hope to have it sold this summer.
« Last Edit: April 22, 2019, 10:22:17 AM by FINate »

Full_Beard

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Re: Please convince me to keep my mortgage.
« Reply #35 on: April 22, 2019, 03:26:45 PM »
As noted above, the sale of the rental property is a taxable event. How does that fit into the equation? You're going to pay the taxes for that year and probably take a hit on the ACA subsidy thing (I'm insured through work, so I have little working knowledge on that). Those should be factored against the difference in ACA subsidy with/without withdrawing from IRA to pay mortgage over the next 20 years (and of course, who knows how the national health care system will be in 1, 5, and 10 years).

I have only young kids, but I understand that the FAFSA focuses on income. However, the rental properties and your non-retirement assets matter too. So, as others have said, I'd be careful on how much weight you place on reduced tuition because you're not withdrawing $20K per year or no longer have one of two rental properties on your books.

secondcor521

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Re: Please convince me to keep my mortgage.
« Reply #36 on: April 22, 2019, 03:51:42 PM »
I have only young kids, but I understand that the FAFSA focuses on income. However, the rental properties and your non-retirement assets matter too. So, as others have said, I'd be careful on how much weight you place on reduced tuition because you're not withdrawing $20K per year or no longer have one of two rental properties on your books.

Unless one qualifies for a couple of exceptions, FAFSA considers the parents' assets, parents' income, student's assets, and student's income.  Each of these four is essentially taxed at different rates after an initial protected amount.

Rental property equity is considered a "taxable" parent asset.  Primary home equity and retirement accounts are not.

NorCal

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Re: Please convince me to keep my mortgage.
« Reply #37 on: April 22, 2019, 08:54:13 PM »
Simple >= Complex.  Almost always
Lowering risk has value, although it's harder to quantify. 

Get rid of the mortgage.  I would.

feelingroovy

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Re: Please convince me to keep my mortgage.
« Reply #38 on: April 22, 2019, 09:00:59 PM »
I agree with Laura33.

My nephew just got his financial aid letters. Despite being a strong student blah blah AND having an EFC of 0 all his financial aid packages included $15-20k in student loans. At private schools - the one state school was less but still had loans. It was the same at all of them.

I have no idea what your philosophy is about helping avoid student loans but don't count on grant aid.

tralfamadorian

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Re: Please convince me to keep my mortgage.
« Reply #39 on: April 23, 2019, 02:02:28 PM »
I'm as much a fan of keeping fixed low interest debt as anyone but it appears that the ACA subsidies alone are a good reason to sell the rental. As you summarized since your cash flow is decided by fixed and relatively stable variables, your buy/sell decision is determined by FAFSA and the appreciation or depreciation of your rental's market.

Also, as mentioned above, it's not unfeasible for the PNW will see some volatility in the rental real estate market around rent controls and much stronger tenant friendly laws. Without the benefit of 20/20 hindsight, it appears to be the good time to cash in some appreciation gains.

wbarnett

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Re: Please convince me to keep my mortgage.
« Reply #40 on: April 25, 2019, 11:04:22 AM »
Sounds like selling the rental and dumping the equity into your primary home is the best option, as you're probably more risk-averse at this point than you were in the accumulation years.

I don't want to hijack the thread, but I would be interested in hearing about your withdrawal strategy at some point. From what I pieced together, we might have similar ideas. My plan is to accumulate 4-5 years of cash in taxable accounts over the next 12 years, and max out our 401k and Roth IRA accounts. For a few years, we'll live on the taxable accounts and slowly rollover the 401k to the Roth IRA. Without any additional income, the tax burden should be low. We have three young kids and between the newly enlarged standard deduction and the increased Child Tax Credit, the rollovers might even end up being tax-free.

Cassie

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Re: Please convince me to keep my mortgage.
« Reply #41 on: April 25, 2019, 11:25:28 AM »
Sell

Enigma

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Re: Please convince me to keep my mortgage.
« Reply #42 on: April 25, 2019, 11:34:24 AM »
I am planning to pay off my mortgage this year.  Please talk me out of it.

The rental:  The rental property currently generates about $5k/year in cash after expenses...[/b]
Our primary mortgage: We have approximately $200k left on our primary mortage, and pay about $500/month in interest.  If we cleared the mortgage, we would lower our expenses by approximately $23k/year, including saving $6k on interest that isn't deductible anymore.
Keep RENTAL Mortgage but Remove Primary Mortgage.  For one you are right with the $6k in interest for your primary home not being deductible anymore.  HOWEVER, the interest against your rental IS deductible; plus, losses  can help your ROTH conversion & lower your income.  Even if they are only actually losses on paper.

My recommendation is take as large of a loan against the equity in your investment as you can and use that to pay off your mortgage.  You will start showing less everywhere.

Enigma

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Re: Please convince me to keep my mortgage.
« Reply #43 on: April 25, 2019, 11:38:14 AM »
Also with rental properties, I do not worry about how much it was worth 5 years ago or how much it is worth in 5 years.  I worry about how much residual income that it brings in for me today.

Prairie Stash

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Re: Please convince me to keep my mortgage.
« Reply #44 on: April 25, 2019, 12:10:12 PM »
As Laura points out, the math and arguments change after you retire. If you're focused on maximizing your money in retirement, you retired too early. If you're focused on lowering risk, then you retired just right.

Sol, you entered the Canadian dilemna. We've never had interest deductions and our mortgage rates change at 5 year intervals. Because of our local rules, we're geared towards analyzing mortgages over a 5 year span, the whole concept of long term mortgages is foreign. I also pay capital gains if I earn too much in retirement, none of that gains free BS. Its harder to make rentals profitable once you start paying tax on all your income and lose your deductions; on the plus side it also tends to cool housing markets and avoid housing bubbles (personally it sucks, as a country we have so far sidestepped the housing crash y'all had, micro vs. macro policy).

Since you pay your mortgage in after tax dollars now, you can attribute all that tax towards your rental. You can attribute all that ACA premium as well. Basically, because of everything, you're currently subsidizing the rental and banking on Real Estate gains. The rental is losing you money in your case, unless it appreciates. trying to pretend its making you $5000 but then paying more in ACA as a result is a trick you're doing to make it seem better than it is.

Sell it. Redo the math and subtract every last additional cost from the rent that keeping the rental causes. Attribute everything.

Enigma

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Re: Please convince me to keep my mortgage.
« Reply #45 on: April 25, 2019, 12:52:55 PM »
What does the math look like?
The rental:  The rental property currently generates about $5k/year in cash after expenses + $7k/year in equity pay-down by the renters.  The property tax deduction and depreciation + $7k together.... So I summarize that the property makes us anywhere between $15k and $50k/year, depending on how you count it

Originally I had the concept that you only made $5k/yr.  Taking $200k now or having a steady $15-50k for as long as you own the property are what is ultimately in question.  Again I would just make it look like a terrible investment on paper and everything else paid off.

Boofinator

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Re: Please convince me to keep my mortgage.
« Reply #46 on: April 25, 2019, 02:06:47 PM »
I ran some scenarios through cFIREsim awhile back asking a similar question to yours (particularly in regards to sequence of return risk and holding the mortgage during retirement). I didn't see you mention it, but a big aspect of reducing sequence of returns risk involves the consideration of the remaining duration on your mortgage.

https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg2181733/#msg2181733

I would probably cash out in your situation.*

*Will you be avoiding tax on the capital gains? That would push me into the definitely sell camp.

Acastus

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Re: Please convince me to keep my mortgage.
« Reply #47 on: April 25, 2019, 02:09:41 PM »
Sol, I am right on the fence with you. My kid starts college this fall, and we inherited a chunk of change that is sitting in our taxable accounts. My kid is attending a state school, so FAFSA is all we have to consider. If we pay off the mortgage, it will reduce our taxable accounts by roughly 25%. It may not be enough to make a difference. Paying it off would also allow us to spend more on travel without losing ACA subsidies, so that is a small consideration for me.

If your kids choose a private school, the CSS financial questionaire many of them use does include primary residence as an asset.

brooklynguy

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Re: Please convince me to keep my mortgage.
« Reply #48 on: April 26, 2019, 02:16:10 PM »
The ACA subsidies:  My family of five would qualify for between $5k and $10k per year of ACA subsidy by reducing our annual income by $23k.

Sol, you and I have been through this several times over the years, but I feel compelled to once again point out that, contrary to a popular mistaken belief on these boards (and perhaps an implication of your OP?), retaining your mortgage loan does not necessarily require you to show additional income in an amount equal to the required loan payments on a dollar-for-dollar basis.

Your OP says that paying off your primary mortgage loan will, for purposes of calculating ACA subsidies, reduce your annual income by $23k (the full amount of the total annual required loan payments on your primary mortgage).  That would be true if you stuck with Roth IRA rollovers as your sole source of paper income and your sole source of cashflow for meeting expenses.  If, instead, you invested the mortgage-payoff-funds (in your case, the proceeds of the sale of your rental property) in the stock market in a taxable account (which is, after all, the investment vehicle ordinarily under consideration in this forum's perennial "to leveraged-invest-via-mortgage or not to leveraged-invest-via-mortgage" debate) and used that account to service your loan payments, then retaining your primary mortgage loan would come at the cost of an increased income level that is drastically less than $23k (at least initially; over time, it would gradually drift up as your basis in the taxable investment account drifts down).

My mortgage loan's remaining principal balance is more than twice as large as yours, and my family of four easily qualifies for maximum ACA benefits while holding the corresponding extra taxable stock investments.  That said, from the numbers outlined in your OP, it appears that your primary mortgage loan is relatively close to maturity, which takes away one of the primary features that makes leveraged-investing-via-mortgage such an attractive proposition in the US (the 30-year time span).  Given that, and given the FAFSA considerations, in your shoes I'd probably also be inclined to pay off the primary mortgage loan if I were to sell the rental property.  (My own loan was refinanced in 2016, meaning that it still has a remaining life-to-maturity of 27 years, and even in retirement I value the protection leveraged-investing-via-mortgage provides against a specific suite of risks (which includes inflation risk, one of history's greatest perils for early retirees) more than I fear the exposure it provides to other specific risks.)

seattlecyclone

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Re: Please convince me to keep my mortgage.
« Reply #49 on: April 26, 2019, 10:10:24 PM »
The ACA subsidies:  My family of five would qualify for between $5k and $10k per year of ACA subsidy by reducing our annual income by $23k.

Sol, you and I have been through this several times over the years, but I feel compelled to once again point out that, contrary to a popular mistaken belief on these boards (and perhaps an implication of your OP?), retaining your mortgage loan does not necessarily require you to show additional income in an amount equal to the required loan payments on a dollar-for-dollar basis.

The additional subsidy is also cash that they wouldn't have to withdraw anymore. Reducing your yearly cashflow by $28k-$33k while also reducing your yearly income by $23k sounds like a pretty believable scenario to me.