Author Topic: Post-FIRE Mortgage, Is Simplicity Better?  (Read 1898 times)

Acastus

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Post-FIRE Mortgage, Is Simplicity Better?
« on: June 22, 2018, 12:29:32 PM »
I am calling myself FIRE'd July 1, and I was originally planning to keep our mortgage. Mortgage details:  5/1 ARM at 2.38%, and it will adjust in 3.5 years. That is about the time I plan to relocate, so I can downsize, end the mortgage, and pay cash for the next house. If I miss the adjustment by a year, no big deal.

This plan is based on keeping ~ $100k available to pay off the mortgage in 4 years. Given the short investment period, is it reasonable to assume I can earn more than the mortgage interest through investment without risking the principal I will need? On paper, I should be able to net 5-7%, but it has been a while since a stock crash, and the next one could easily fall inside my investment horizon.

Is it worth the extra bookkeeping to keep the mortgage? I will be using ACA for health insurance, and having lower expenses would be a small advantage. "Hiding" the 100k by paying off the house may help my kid qualify for more college aid, to boot. I have the cash available today.

boarder42

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #1 on: June 22, 2018, 12:42:15 PM »
put pen to paper and do the math. - you cant really assume a crash if you do then yes pay off the mortgage nothing else will beat that.  but thats market timing.

FIRE@50

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #2 on: June 22, 2018, 12:53:48 PM »
Can you provide some more numbers? You mention downsizing, but also wanting to payoff your mortgage. So how much equity do you plan on having when you downsize and how much do you plan on paying for that new house? It sounds like you are saying the balance on your mortgage right now is $100k. I'm guessing that your downsized home would be greater than $100k less than the value of your current home...

What I'm trying to get to, is I would pay down my mortgage to the point that I thought I had enough equity to cover the purchase of my downsized house. Then, throw the rest of the money in the market.

Another idea would be to throw the $100k in the market now and see what happens. If it is a bad time to sell your investments, just hold them. Would it be terrible to have a mortgage on the new home for a few years? Win win?

Mother Fussbudget

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #3 on: June 22, 2018, 02:18:55 PM »
If I had a 2.38% mortgage, I would pay it off over time.  Pay the minimum, and let it go full-term.  Then pay the balance in 3.5 years.
In the interim, you only have to make > 3% return on your $100K to be profitable.  You're using other people's money at a very low cost - that's a great position to be in.

Acastus

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #4 on: June 22, 2018, 05:50:03 PM »
Fire@50,
I expect about 150 k equity in 3 years. Mortgage has 130 left, and I will pay a out 10k of that normally. I expect to pull about 50k out if we go from a 4 br in a primo school district to a 3 br where I don't care about the schools.

Boarder, choosing the right risk level for a given time horizon is not market timing in my book. It is conventional wisdom for short term investments. We don't talk about it much here, since retirement is long term.

boarder42

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #5 on: June 22, 2018, 09:37:14 PM »
Yep follow conventional wisdom bc we all have time machines and can predict the future. Conventional wisdom is dog shit. Sorry.

chasesfish

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #6 on: June 23, 2018, 05:34:47 AM »
I would not pay a dollar of that early until the rate reset period.  I just got a Bank CD for 2.7% for a not for profit I'm a treasurer of.  You can get a risk free 3 year return that exceeds your mortgage rate, likely more if you're willing to bring in some risk. 

Mr. Green

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #7 on: June 23, 2018, 10:54:19 AM »
I would not pay a dollar of that early until the rate reset period.  I just got a Bank CD for 2.7% for a not for profit I'm a treasurer of.  You can get a risk free 3 year return that exceeds your mortgage rate, likely more if you're willing to bring in some risk.
Sychrony Bank is now offering 2.45% on 14 month CDs. It's only going to go up as rates rise.

DreamFIRE

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #8 on: June 23, 2018, 11:47:47 AM »
I can get a 2.8% 2 year CD, but that's truly only about 2% if you subtract federal and state income tax on the interest based on my current marginal tax bracket.  Plus, it locks you in to both the investment and that rate for 2 years unless you're willing to pay a 6 mo. penalty.   I can get 3% yield in a fixed interest fund through a retirement account at work on pre-tax dollars and will be taxed at a lower marginal rate when I take distributions during retirement, so a net yield of about 2.6%.  Of course, since the OP is FIREing with a lower income, he would get to keep more of his interest in the CD.
« Last Edit: June 23, 2018, 11:52:02 AM by DreamFIRE »

Mother Fussbudget

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #9 on: June 23, 2018, 08:12:10 PM »
I would not pay a dollar of that early until the rate reset period.  I just got a Bank CD for 2.7% for a not for profit I'm a treasurer of.  You can get a risk free 3 year return that exceeds your mortgage rate, likely more if you're willing to bring in some risk.

Exactly this

CoffeeR

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #10 on: June 23, 2018, 08:24:18 PM »
Is it worth the extra bookkeeping to keep the mortgage? I will be using ACA for health insurance, and having lower expenses would be a small advantage. "Hiding" the 100k by paying off the house may help my kid qualify for more college aid, to boot. I have the cash available today.
To me it would not be worth it. I would pay off the mortgage. Be done with it. I am in the minority here. If you invest risk-free how much money do you net after taxes (hint: not much)? If you do bring in risk, well, any potentials gains are educated guesses.
« Last Edit: June 23, 2018, 08:27:22 PM by CoffeeR »

boarder42

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #11 on: June 24, 2018, 05:33:23 AM »
Is it worth the extra bookkeeping to keep the mortgage? I will be using ACA for health insurance, and having lower expenses would be a small advantage. "Hiding" the 100k by paying off the house may help my kid qualify for more college aid, to boot. I have the cash available today.
To me it would not be worth it. I would pay off the mortgage. Be done with it. I am in the minority here. If you invest risk-free how much money do you net after taxes (hint: not much)? If you do bring in risk, well, any potentials gains are educated guesses.

The entire premise of FIRE is based on this educated guess. If you feel that strongly about the risk being that high you'll need to work a very long time

CoffeeR

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #12 on: June 24, 2018, 06:33:15 AM »
Is it worth the extra bookkeeping to keep the mortgage? I will be using ACA for health insurance, and having lower expenses would be a small advantage. "Hiding" the 100k by paying off the house may help my kid qualify for more college aid, to boot. I have the cash available today.
To me it would not be worth it. I would pay off the mortgage. Be done with it. I am in the minority here. If you invest risk-free how much money do you net after taxes (hint: not much)? If you do bring in risk, well, any potentials gains are educated guesses.

The entire premise of FIRE is based on this educated guess. If you feel that strongly about the risk being that high you'll need to work a very long time
Over 97% of my liquid investable assets are in risk based assets. Most of that in stocks. Just to be clear I do not consider a paid off home to be part of this percentage even if I could take out a mortgage on it.
« Last Edit: June 24, 2018, 07:07:14 AM by CoffeeR »

frugaliknowit

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #13 on: June 24, 2018, 06:52:44 AM »
The risk/reward is NOT worth it. 

chasesfish

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #14 on: June 24, 2018, 07:01:13 AM »
I finally memorialized my thoughts on whether or not to take a mortgage into retirement and wrote a long post here.  To me it still comes down to your risk/reward tolerance and part of that risk/reward is what's the rental potential of the property you're buying.  I'm going to buy a 3 bedroom home in a pretty nice rental, so if I want to move again I view having the monthly obligation of a mortgage with offsetting rental income as less risky than tying up $300,000 of my liquid assets, which are pretty scare in our situation.

This is a risk/return decision and personal and unique to each person's situation




boarder42

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #15 on: June 24, 2018, 08:48:33 AM »
The risk/reward is NOT worth it.

Let's see here. Risk you run out of money in the same years you would have historically. You just run out 5-10 years sooner.

Reward your money survives in years it would not have previously. And it greatly extends the chance of your money lasting along time.

So the down size is I fail when I would have failed anyways. The upside is my money last longer and prevents some failures.

Goldielocks

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #16 on: June 25, 2018, 10:12:43 AM »
Monthly cash flow can be a very strong factor when you are FIRED, much moreso than when you have income coming in to cover expenses.

When you need to withdraw from your investments to cover monthly expenses (which is the plan), it can be very motivating to cut out some of those mandatory expenses, like a mortgage payment.

If the $$ difference between a mortgage and investment is somewhat close, such as when you have investments in CDs or Bonds as part of your portfolio, I think most people would be happier paying down the mortgage.

The other approach is to withdraw a year's worth of mortgage payments at one time and put it into a separate "mortgage payment" account.   Making one withdrawal decision a year from investments versus many is the key to being happier with the decisions, I find.

Lastly, some people may set up regular dividend payers, pensions, annuities to mimic the monthly cash income as well.

What do you plan to do?

jlcnuke

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Re: Post-FIRE Mortgage, Is Simplicity Better?
« Reply #17 on: June 25, 2018, 11:44:17 AM »
You have $100k earmarked for paying a debt in 3 years. Regardless of any other investments, etc, THIS money is what you're concerned with. If it was all you had I'd tell you that a high-risk investment for this money you plan on "needing" would generally be considered an unwise financial move. You don't risk money you need in the short term in high-risk investments because you could end up not having that money when you need it. Thus normally that money would be put into more conservative investment vehicles (such as CDs, bonds, etc).

However, money is fungible, and this is not presumably all of your money (or the majority of it even). As such I would expect that you could just keep it invested with the rest of your money and your overall risk profile should still be adequate to provide you a return while not risking so much that the money wouldn't still be available at that time.