Author Topic: Mortgage in FI  (Read 1431 times)

nottoolatetostart

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Mortgage in FI
« on: January 24, 2017, 04:26:04 AM »
Ok, we are not going to be paying down our mortgage before retirement. We have a 15 yr at fixed 2.875% and about 13 years to go. I really would love to pay it off but every one of my calculations show we would be more financially ahead if we just work the amortization table, so we are going to listen to our heads, not our hearts. I take comfort in knowing that if we were to sell a few investments today, we could pay the thing off tomorrow, so that keeps me warm at night.

For those that are in the same boat and not paying it off prior to retirement, do you just mentally set aside your unpaid principal balance to use to pay down mortgage? So for example, I read Mr. 1500 on his blog said he wanted to hit his expenses plus an additional amount for his unpaid principal balance.

In our case, if our expenses (excluding mortgage) are $30k per year. Our investable assets are $759k today (so we exceeded that $30K at 4% swr). Our mortgage is ~$1500 (just principle and interest, we do not escrow), so $18k per year. Unpaid principle balance is $199k today. Pretty certain this is our forvever house. We love it to pieces and love our neighborhood, school district, and town.

Would you just keep saving to cover the $199k (or will be $175K by the time my husband realistically quits with about 11-12 years to go) or do a function of $18k annual payment times 20/ 25 (4-5% swr)? Keep it in cash? In index fund?

We keep very little cash now (may change once retirement is imminent) and in VTI/VTSAX pretty heavily.

How are you planning for your mortgage payment, especially on a "short" horizon of under 15 years? Thanks!


yachi

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Re: Mortgage in FI
« Reply #1 on: January 24, 2017, 05:35:56 AM »
You found the odd math of mortgage repayment:
1) You can generally do better in the markets than the interest rate you are paying, but
2) It takes less 'Stache to pay off the mortgage than to generate a SWR that pays the monthly mortgage bill

This is partially due to the timeline: The SWR is intended to last 30 years, but your mortgage will be fully repaid in 13 years.

If you're looking at  a 4-5% swr to repay the mortgage, you need to invest the 'Stache that supports the repayments in your typical stock and bond investments.  The good news is you'll have a 'Stache left that supports another $1500/ year repayment after your mortgage is paid off.

My advice: Invest now while your working instead of paying mortgage.  Pay off the mortgage when you retire.  However, if you find yourself investing large sums at fixed interest rates well below 2.875%, consider paying on the mortgage instead.

Retire-Canada

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Re: Mortgage in FI
« Reply #2 on: January 24, 2017, 07:08:37 AM »
OP I am in that position. Due to the size/amortization of my mortgage the difference between saving 4% isn't huge so I am just planning on having enough FIRE $$ annually for my full cost of living including mortgage payments.

If my mortgage was smaller/shorter time left I would just save annual cost of mortgage x years left as a separate chunk of my FIRE $$ in addition to my cost of living [less mortgage] needs. I would pay the mortgage off using the full amortization and let all my money work for me to the max.
« Last Edit: January 24, 2017, 07:52:47 AM by Retire-Canada »

nereo

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Re: Mortgage in FI
« Reply #3 on: January 24, 2017, 07:18:42 AM »
FWIW my parents are recently retired and still hold a mortgage.

What they did was create a 'sinking fund' for the mortgage to make the mental accounting easier. The fund is a simple Vanguard index (a balanced fund - i think it is 60/40) and their target was 80% of the remaining mortgage balance. Their reasoning was that at 80% most historical scenarios have no problem covering the mortgage, and they had enough fat with their normal retirement income where htey would be able to cover the mortgage should the market be much worse than expected.

In reality they suffered from OMY syndrome, wound up with well over 100% in their 'sinking fund', retired in 2011 and now they pay the mortgage with just the dividends from that fund. Now they talk of their sinking fund as their 'charitable gift' once the mortgage is gone.

ChpBstrd

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Re: Mortgage in FI
« Reply #4 on: January 24, 2017, 01:14:02 PM »
Think of it this way. Housing is a form of consumption. It costs a certain amount given the luxury/location, period. No free lunches.

You can pay that certain amount in upfront cash, but then have less earning potential (how much less? About a mortgage payment per month if invested at the same risk tolerance, e.g. treasuries)

Or you can make payments at a given interest rate and keep the money invested.

These options are mathematically equal, except...

1) with a mortgage, you retain the option to allow foreclosure in the event the value drops precipitously. Good idea if you live in bubbleville.
2) with a mortgage and a wad of cash, you are better prepared for certain contingencies, like cancer or fleeing Trump's America.
3) with a mortgage and a wad of cash, you can arbitrage, by investing in riskier assets like corporate bonds, or even stocks, while borrowing at a safe/subsidized interest rate. E.g borrow at 2.7% and earn a ROI of 5%.
4) Your mortgage is a good thing to have in a high-inflation scenario. E.g. if your interest rate is 2.7% and inflation is 6%, you are essentially earning purchasing power by paying back a loan with less valuable dollars each year. Meanwhile, the companies you own hike their prices and preserve the purchasing power of your returns.