Mortage Pay-off

[salmichaels]

May I solicit some advise? I am helping my elderly dad decide what to do with his finances. He has a 30-year mortgage at 4.125% which is only in its 6th year, so interest is quite high, and with principal it eats up 380/mo in cash. He has the cash to get rid of the mortgage, has the payoff, per diems, everything, good til middle of next month. But before pulling the trigger he's asked me my advise. Here is his financial info


ASSETS:
Cash 85k
House 120k
TOTAL 205K
---------------
LIABILITIES:
Mortgage 69k
HELOC 7k
TOTAL 76K
---------------
EQUITY
Cash 85k
House 44k
TOTAL 129k

---------------
INCOME: Retirement 2k/mo
EXPENSES: ~1.7k/mo
NET: ~300$/mo


I think it depends on his plans. He's 80, health is shaky, but he's doing okay and wants to stay in the house for now. But we have thought about having him move closer to us and getting a house together. But that's only in the discussions stages. Is there anyting to lose by paying off the mortgage now? Even if suddenly, for whatever reason, in a few months he sells the house, why not p/o the mort? There is also the emotional aspect of it--he just really wants to do it, and so do I, emotionally. But rationally?


I welcome your thoughts!

[FLBiker]

I defer to folks who have more experience with situations in that age bracket, but my initial thinking is I'd pay it off.  I don't know what investment I would recommend for someone in their 80's that would yield 4.125%  Plus, he doesn't seem to need the cash since his income is already over his expenses (and will be even moreso once the house is paid off).  He'd might want to build the cash up a bit more for repairs, but he could always get a HELOC if need be.

I haven't done a lot of thinking about finances at that age, though, so there may be other considerations that I'm not seeing.

[yachi]

I'm a fan of letting 80-year-olds do whatever the heck they want with their money.  Here are a few thoughts:

1.  You can model this in FireCALC:
Use your expenses minus mortgage on the first page.  Under the "Other Income/Spending" page put your yearly P&I Payment as "Off Chart Spending" starting this year, and uncheck the inflation adjustment box.
In the next line select "Pension Income" and put in your yearly P&I Payment, with a starting date of the year you pay off your mortgage, and uncheck the inflation adjustment box.

2.  He sounds unlikely to live to his mortgage payoff age of 104 years old.

3.  With his income and asset level, it's quite likely he would end up on Medicaid if he required long term care.  In which case his house would be sold and the proceeds used for his care until he's below the asset limits. I think I would prefer to see him with cash for any immediate needs and a mortgage on the house in this case.

4.  Interest just *looks* higher in the beginning of a 30-year mortgage repayment.  It's roughly 4.125% of the balance, and the balance is decreasing as you pay off the mortgage.

5.  You lose some flexibility putting the cash into the house.  With cash you could put a large downpayment on a house before selling the house you currently own, or maybe pay cash for a fixer upper.  I wouldn't count on being able to get another mortgage or carry a HELOC after age 80/85, so you really want to have a source of funds for any required home repairs or emergencies.  Depending on your dad's source of retirement income, it could count as the emergency reserve he should carry.

[SwordGuy]

Aside for the good reasons not to that were already listed, he may want to save it for a new HVAC or roof or vehicle, etc.   

Paying off the house wouldn't leave him much in the way of cash savings for any major repairs or other bills.

If the interest rate is too high, look at refinancing to a lower rate.

Paying it off would give him more wiggle room in his budget, which would be nice.    Does he have the discipline to replenish his savings somewhat?    Are you willing to cough up a chunk of cash for a new roof that he otherwise could have paid for himself?

[salmichaels]

FLBiker:

Thank you for your reply. He has a HELOC of 30k now, of which 7k is already been used for some household improvements. The LINE was taken in 2018 when the house was probably worth less. It could be expanded (if need be) if there was no mortgage on the house. His credit is quite good.

yachi:

I will check out the calculator you mentioned. Regarding your third point, if he were to end up on medicaid wouldn't it be better to have the money in the house rather than liquid cash the state could easily eat up? If he needed cash quick he does have the HELOC.

Regarding your fourth point, the interest is quite high though. PYMT is $380/mo, of which $240 is interest right now, over 60% of the payment, and not going down quickly at his age.

Your fifth point about a down payment on another house or fixer-upper, this is an excellent point. The bank has told me they are not allowed to discriminate based on age, but then who knows. I do know that if he was going to a new house, my husband and I would be going with him to live there, so we'd have to get a house together.

SwordGuy:

He won't be needing a vehicle, he doesn't drive anymore. But he does need a new roof in a year or two, and a new HVAC is prob in the cards in the next 5-10 years or so. But then... he has the HELOC that could be used for all of that.

[marty998]

Curious to know which bank gives a 75 year old a 30 year mortgage....

[MrThatsDifferent]

Curious to know which bank gives a 75 year old a 30 year mortgage....

Lol, my exact question as well

[slappy]

Curious to know which bank gives a 75 year old a 30 year mortgage....

My mother in law is 72 and she got a mortgage a couple of years ago where the payment is 60% of her income. Her only income is social security and a small annuity payment. She is now seven months behind in payments...

[nick663]

I assume the $380/month is just principal and interest?  Just making sure because some people miss the escrow portion that doesn't go away with mortgage payoff.

You could refi the mortgage down to the low 3's easily but with only a $380 P&I it's not going to have a huge impact (~$40/month).

The only thing I don't like with paying off the house is the small amount of cash remaining.  That being said, you did mention the HELOC as an option and that does seem like it could cover it.  Considering the cash is likely earning 0.5% at best, it probably wouldn't be the worst thing to payoff the mortgage.  This situation is so outside of what I'm used to thinking about it is challenging though. :)

[Dicey]

Keep the mortgage. There's no harm in letting it ride. $380 a month relief isn't worth giving up most of his nest egg. It would absolutely suck to be cash-poor in old age.

[iluvzbeach]

I’m a big fan of paying of mortgages, but I don’t really see the benefit in doing so in his case. Keeping that nest egg of cash is more important in my opinion. If he needed to go to a nursing home or other care facility (or had a large house-related expense), that cash could come in really handy - who really wants to place their parent in a Medicaid covered facility if they don’t have to? I probably would consider refinancing for a better rate, as long as the return on refi costs was pretty quick, and I’d also payoff the HELOC to reduce monthly expenses.

[salmichaels]

Thanks everyone for the replies.

I omitted one piece of info that now I see is relevant. The 85k in cash? Most of that is net proceeds from a piece of land he sold last month. Neither he nor I ever had any intention of putting the land to use, and, it's value doubled in the last three years. So he wanted to liquidate it, and get rid of mortgage.

So his fairly liquid status is new. For most of his retired life he's been cash-light. That's not to say he should go back to that, as many here have pointed out.

Yes, banks do give mortgage to 74 year olds in the US, or at least they did in 2015. They did 80% of appraisal w/o PMI.  I think it's a good bet for the banks. The retirement income is stable, and the house backs the loan.