Anyone else not planning on paying off their house before retirement?

[totoro]

Our home is a triplex.  Our mortgage interest counts as a deduction against rental income.  The income from two of the suites pays for our mortgage and related costs of ownership.  Rates are pretty low right now and we have 10 years locked-in.

If your primary residence is a zero cost with rental income, it seem to me that it is similar to having a paid-off home in the retirement readiness analysis.  Mortgages are time-limited anyway and will be paid off eventually.  Buying the right place might reduce the amount you need for retirement substantially - especially if you are in a high-cost market like I am.

It's an alternative to cashing out and moving to a cheaper housing market.

[Beaker]

I think the crux is the relationship between your mortgage interest rate and the returns you can get elsewhere. If you can invest the money elsewhere and get a better risk-adjusted rate of return, then leave the mortgage alone and invest the money. If you can't get a better risk-adjusted rate elsewhere (the returns are too low, or the risk is too high) then pay down the mortgage. I've been battling myself on this one lately. I really want to pay down the mortgage, but the interest rates are so damn low that I don't think it makes financial sense to do so.

The "10 years locked-in" comment makes me think that you might have an ARM. In that case you should also consider where rates might be in 10 years. If your loan adjusts to a much higher rate, which seems likely, then the math suddenly changes. So you might want to let the mortgage ride for now, but be prepared to pay off the remaining balance at the end of your lock-in.

As an aside, having income to pay your mortgage is not the same as having no mortgage. If you didn't have the mortgage, then the rental income could be used for other things.

[AJ]

It's an alternative to cashing out and moving to a cheaper housing market.

Is it? Couldn't you still rent your third of the place and move to a lower cost area? (Not that you should do that, but if moving to a cheaper area was on the table for you, it doesn't seem like the triplex would be a reason to remove it.)

We likely won't have paid off our home before we retire. We will rent out the extra rooms, though.

[Johnny Aloha]

We're in a similar situation.  We're in the process of refinancing a large loan to 3.25% 30 yr fixed.  At that rate, we aren't in a rush to payoff.  We built a studio apartment that will offset a large portion of the mortgage. 

We live in a high cost area too, and aren't really interested in cashing out & moving in order to reach FI (although it's very tempting!).   

[jrhampt]

I don't know yet; it depends on what happens with interest rates in the next 5-10 years.  At our current repayment rate, the balance of our 15-year loan will be paid off in about 9 years.  We should hit baseline FI in about 3.5 years.  Not sure if one or both of us will continue working full-time at that point, if we'll switch to part-time jobs, downsize to a smaller house, or some other option.  We will have the money to pay off the house immediately if we choose to, but I don't think we will since our interest rate is 2.875 and I would hope that even CDs would start returning more than that before our loan term is up.  If we downsized in 4 years or so, I suppose that would have the effect of paying off the house, though.

[totoro]

I think we can get more on our money invested elsewhere than our mortgage rate over the next 10 years.  We have 10 years because we are in Canada and that is the maximum term at a low-rate that is available to us.  You have way better options in the US.

AJ - housing is the major cost where I live (Median $550 000).  Everything else is similar across BC, and some things are cheaper where I live ie. heating.  It doesn't make sense to move for cheaper cost of living except when it comes to housing.  If we rented out the third unit we could move somewhere and pay lower rent with the funds, but that would be the only advantage. 

I see an advantage for people who have a paid-off high cost housing moving to lower cost housing are and investing the difference and living off it for early retirement. 

I guess the real point is that having a paid off house mind not be needed for retirement if you have rental income that covers your shelter costs and the mortgage is being paid down as you go. 

[Zaga]

Our house will be paid off in 2 months.  So yes!

But we also have a huge student loan, we're increasing the payments to that to a 5 year payoff rate, $1,220 a month.  That's it, we'll be debt free well before retirement unless things change a lot between now and then.

[Joet]

I've always avoided the notion of paying off my primary residence (trulia/zillow est just over 1m), I managed to pay off enough to get it to a conforming loan recently (sub 417k) and have no desire to wrap up even more $$ in primary residence home equity. Simply too risky, imo.
"retirement" or FI will hopefully involve multiple rent/lease/nomadic adventures all over the world. Not interested in wrapping up ~1m into a property in an area I don't particularly want to be during FI/retirement especially considering rent/buy ratios--wouldnt work as a rental property--not even close. Your mileage may vary. perhaps if the house were sub 500k I'd sing a different tune.

[kkbmustang]

We plan on selling our house this summer and downsizing. Which leaves us with two questions:

1.  How much do we put down on the smaller place? If we net what we think we could and buy at the price we are targeting we could put about 60% down.
2.  Do we do a 15, 20 or 30 year mortgage?

[pbkmaine]

If the rates are the same for all time periods, I like the flexibility of a 30 year. For example, there was a 16 month period 10 years ago when Hubs and I had one income and two kids in college. Until that point we had always paid extra on the mortgage to bring the term down to 15 years. But for those 16 months we just paid the normal P+I. Once I got another job, we went back to the extra payment.

[MrsPete]

I paid off my house a few months before turning 40. 

Even if it wasn't the best choice in terms of savings vs. investing (and we're talking small differences regardless), it was well worth it to me.  I grew up without financial security, and that has shaped much of my adult life.  Knowing that my house is MINE, MINE, MINE is worth a great deal to me.  With my house paid off, I can live on very little.  Right now we're able to save fairly large amounts, but IF we were to experience a financial set-back, we might tighten our belts to avoid dipping into our savings, but we would be in NO DANGER of losing our home. 

We are planning to build a small-but-nice retirement house just for the two of us when the kids are out the door in a few years, and the #1 goal is that it'll be an all-cash build.  By selling this house and building on the land we've already purchased, we should be able to do it for very little money. 

[tomsang]

Yes. We feel we can beat 3% with our investments. 

[jamccain]

The question isn't really "do you think you can do better than 3% investing".  The real question is "do you think you can get a higher rate of return for the term of your loan taking into consideration the interest tax deduction and inflation". 

There are three parts to the question:
1. If my loan term is 30 years and my interest rate is 3.5% can I make more than 3.5% in actual rate of returns (not averaged rate of returns) for the 30 year period when I also account for....
2. The mortgage interest tax deduction which lowers the interest rate (theoretically) to something more like 2.5-3% and
3. Accounts for the future compounding effects of inflation (or perhaps deflation) on future mortgage payments during the 30 year term

This is considerably more complicated, but the answer is still very likely a resounding "YES!"

Mathematically, it is hard to justify paying off a 30 yr fixed sub-4% mortgage right now.  However, MrsPete makes an excellent point in that sometimes it's just a weight off the shoulders and math be damned. 

As if this thread didn't have enough commentary, here is a really sound discussion on the subject http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

[totoro]

In Canada we don't have a mortgage interest tax deduction for primary residences - only rentals.  If you have a suite that you rent out you can deduct mortgage interest and all expense based on percentage of floor space used by the rental.  This means that your rental income becomes tax free. When I look at this, it does not make sense to pay off the mortgage at today's interest rates.

[sherr]

As if this thread didn't have enough commentary, here is a really sound discussion on the subject http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

That is an excellent article on the subject, thanks for posting.

[footenote]

Financial Mentor article was very helpful - thanks!

I am leaning toward selling our current paid-for house that is occupying an outsize part of our portfolio, buying a retirement-size house (for cash) and investing / diversifying the difference. But I have debated that question a ton and value reading everyone's observations.

[Herr Handlebar]

Pay off a house before FI? Ha! I might not even buy a house before FI. The price to rent ratio is not so favorable for the areas in which I work. The wife's career prospects might dictate moving, and soon. Flexibility and affordability are going to help Frau Handlebar and I reach FI.

(That said I might own rental property soon in another area and I'm not too concerned about how quickly that mortgage gets paid off since it cash flows.)

[jamccain]

I am leaning toward selling our current paid-for house that is occupying an outsize part of our portfolio, buying a retirement-size house (for cash) and investing / diversifying the difference.

That sounds like a great idea and hits at the essence of this site...  Be more efficient.  You have identified an inefficiency, you are correcting it.  Nice work! 

[Ottawa]

We have been mortgage free on our 300K house now for 2.5 years.  We had it paid off when we were 38.  For the last 2.5 years we have been saving (65%) to create our FI 'stash.  We have saved 210K in the last 2.5 years (as at today).  We project FI in 4.5 years (Age = 46th birthday) with a total 'stash of 800K spitting out a conservative, but luxurious 35K (our need is just under 30K)...the 'extra' 5K will enable airline ticket purchasing...which is where our house comes in. 

A large part of our travel strategy at FI is to participate in home exchanges.  In this way, our travel costs will be significantly reduced (to airfare).  One should always run the numbers on own vs rent strategy...but here is the benefit for us:  I

t costs us approximately 6K per year to own our house.  The same house rents for $1500/month plus utilities ($2000).  Thus, it would cost 20K to 'rent' in the same house as the one we own.  We therefore save 14K per year by owning our house AND we can 'swap' it for accommodation in any country we feel like travelling to.  (Of course, there is always capital appreciation of house...hopefully).  Ours has appreciated around 14K per year for the last 7 years. 

[sherr]

It costs us approximately 6K per year to own our house.  The same house rents for $1500/month plus utilities ($2000).  Thus, it would cost 20K to 'rent' in the same house as the one we own.  We therefore save 14K per year by owning our house AND we can 'swap' it for accommodation in any country we feel like travelling to.  (Of course, there is always capital appreciation of house...hopefully).  Ours has appreciated around 14K per year for the last 7 years.

But of course the same would be true if you still had a mortgage whitch you were paying for out of the interest on a stash that was $300k larger. This is a benefit of owning vs. renting, but not of owning-paid-off vs. owning-with-mortgage, which is actually what this thread is about, right?

Edit:
I take it back, I guess the conversation here has shifted more towards owning vs. renting. Carry on...

[Ottawa]

But of course the same would be true if you still had a mortgage whitch you were paying for out of the interest on a stash that was $300k larger. This is a benefit of owning vs. renting, but not of owning-paid-off vs. owning-with-mortgage, which is actually what this thread is about, right?

Edit:
I take it back, I guess the conversation here has shifted more towards owning vs. renting. Carry on...

No worries...I guess that owning-paid-off vs. owning-with-mortgage is a bigger topic really...seems to me that owning paid off is always better...subject to current conditions.  Under current conditions I would be working my tail off to pay the mortgage off...because people are currently getting a free ride with rates so low.  This WILL NOT last!  So, I wouldn't necessarily take the strategy that you make more in investing money now...and you can just make minimum mortgage payments.  Cause that is going to hurt when rates go up 25, 50, 100%.  In this event you will be giving away your hard earned after tax dollars in interest payments to the bank...unless you you can unleash your investment onto your principal when rates rise. 

I think renters are a great way to provide income...though I would also be inclined to knock of that mortgage with my own additional payments too...again because of uncertainty in how high rates will go short term (next 2-5 years).  I would rather be mortgage free on a rental and sit back vacuuming up rent to pay for my early FI....down the road.

[dragoncar]

Under current conditions I would be working my tail off to pay the mortgage off...because people are currently getting a free ride with rates so low.  This WILL NOT last!  So, I wouldn't necessarily take the strategy that you make more in investing money now...and you can just make minimum mortgage payments.  Cause that is going to hurt when rates go up 25, 50, 100%.  In this event you will be giving away your hard earned after tax dollars in interest payments to the bank...unless you you can unleash your investment onto your principal when rates rise. 

Don't they have fixed rate mortgages in Canada?  Once rates rise, wouldn't you rather earn 5% in a checking account than pay off your 3.x% mortgage?

[Ottawa]

Fixed rate we have...which is why I suggest what you say...but when it opens...to "unleash" your invested money before too much high rate exposure! 

[davisgang90]

Pay off a house before FI? Ha! I might not even buy a house before FI. The price to rent ratio is not so favorable for the areas in which I work. The wife's career prospects might dictate moving, and soon. Flexibility and affordability are going to help Frau Handlebar and I reach FI.

(That said I might own rental property soon in another area and I'm not too concerned about how quickly that mortgage gets paid off since it cash flows.)

This is my situation as well.  Still active duty Navy in the DC area.  No desire to live here long term, so I rent.

[Herr Handlebar]

I think renters are a great way to provide income...though I would also be inclined to knock of that mortgage with my own additional payments too...again because of uncertainty in how high rates will go short term (next 2-5 years).

In this current period of low rates leverage is an important part of the making rentals pay equation. My understanding of the 50% rule is that you should evaluate the profitability of a property as if it were 100% financed. The idea being any capital you force into a property is capital you could be putting to work in other, more profitable, concerns.

Leverage is nerve racking though and has been the ruin of some investors. I can understand the appeal of paid off rental properties. You just want to do some math to make sure you are getting a proper return on investment and could not be making the same or more money with less effort (in, say, various types of investment funds).

[totoro]

Fixed rate we have...which is why I suggest what you say...but when it opens...to "unleash" your invested money before too much high rate exposure!

I'm in Canada.  I have a ten year fixed rate.  This is about the max we can go and have it be a reasonable rate. 

I don't plan to pay off my mortgage before ten years.  No point given the deductions for rental income.  I do plan to be in a position to pay it off at that time if the math points to paying it off.  I'll do the caculations then.  In the meantime, my principal is being paid down and I live subsidized by my tenants.

[seanquixote]

As if this thread didn't have enough commentary, here is a really sound discussion on the subject http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

Thank you for the link to this article....great stuff.  And a site that I haven't seen before..

One of the things that complicates this issue for me is the value of being able to tell an employer FU.  You cannot easily put a monetary value on being able to do that...it may fall under the "priceless" category.  I think if my mortgage was paid off...I could go in tomorrow and tell them to Fuck Off!! (or more likely...I will work 20 hours and no more for you wankers..take it or I'm leaving)....then pursue MY goals without the heavy burden of the monthly house payment.

Great discussion...

[Undecided]

The question isn't really "do you think you can do better than 3% investing".  The real question is "do you think you can get a higher rate of return for the term of your loan taking into consideration the interest tax deduction and inflation". 

But be sure you still expect to itemize deductions after FI if you're factoring in the MI deduction after FI. In high-tax states, the post-FI elimination of state income taxes (assuming large reduction in state-taxable income) may be significant.

[sherr]

One of the things that complicates this issue for me is the value of being able to tell an employer FU.  You cannot easily put a monetary value on being able to do that...it may fall under the "priceless" category.  I think if my mortgage was paid off...I could go in tomorrow and tell them to Fuck Off!! (or more likely...I will work 20 hours and no more for you wankers..take it or I'm leaving)....then pursue MY goals without the heavy burden of the monthly house payment.

But kinda the point of this whole discussion is that that logic doesn't make a lot of sense. If you have the money to pay off your mortgage, then you could instead put it in a higher-interest-rate investment and have it generate enough interest for you to pay your mortgage plus some extra. So you can tell your employer to FO either way.

You get a little bit of extra peace-of-mind by having the mortgage paid off and knowing that regardless of stock market crashes or anything else you still won't have to pay a mortgage payment, but you'll get more money the other way. So the question is how much are you willing to pay for that extra peace of mind?

[twinge]

1.  How much do we put down on the smaller place? If we net what we think we could and buy at the price we are targeting we could put about 60% down.
2.  Do we do a 15, 20 or 30 year mortgage?

kb, if you wanted responses on this, here's what I would do:

1. Put down 20% to avoid PMI
2. Lock in low rates for a 30 year fixed.

Take the excess and put it into investments.

I'm firmly of the "do not put much money into your house, leverage at these amazing rates the most you can (without paying PMI), and invest as much as possible" camp.  I actually think of this as both the more financially lucrative AND the lower risk approach as if something goes horribly wrong in your new town or in your life you have the most liquid/flexible assets available to deal (and dealing could be using your investments to continue paying off the house, getting rid of the house, or whatever else makes sense).  If you have kids approaching college age, qualify for financial aid and have maxed out your retirement accounts, there could be an argument for putting more money in your house as it is considered by many colleges as not part of the financial aid equation, but this is an unusual situation and even then it doesn't always make sense IMO.

[Tyler]

One new wrinkle to the argument is Obamacare (I imagine an attractive source of healthcare for ERs). Because the subsidies are calculated based on income, it's in your best financial interest to minimize cash flow. If the investment income required to make your mortgage payment pushes you above a certain threshold, your medical costs will skyrocket. Who knows how the final implementation will shake out, and YMMV depending on your situatuon, but be careful out there.

[mattgti]

The risk free rate (T-bills) is practically zero. Paying my mortgage early is a much better risk free rate. Some go so far as to make this their "bond" portion. I have in the past been near 100% stocks with my retirement accounts while still aggressively paying down the mortgage. The mortgage returns reduce overall volatility of my portfolio. How many folks chase higher return with the money you could be paying the mortgage with, only to have low yielding assets in a diversified portfolio!?

[leaderscorp]

A good option is to lock your rate to 30 year if you are planning to retire since today's rate is low. However, if you are capable enough to pay the mortgage early, then I recommend you to do it in order to avoid PMI.