Author Topic: Retirement and carrying a Mortgage?  (Read 12477 times)

albireo13

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Retirement and carrying a Mortgage?
« on: April 19, 2016, 06:02:09 AM »
What's the current feeling about the need to pay off mortgage before retirement?
Our situation:
me:  60yo
wife: 56 yo
Current mortgage:  $298K at 3.625%
House value:       $450K

Current 'stash = $1.2M
Based on our burn rate we are ok retiring with the 4% rule.

However, I want to retire in 2-3 years.  We are downsizing this year and hope to get into a smaller house, with a smaller mortgage.
Still, looking at real estate prices I think realistically we'll end up with another mortgage ... probably about $200K.

I just don't like the idea of retiring into a fixed income with that much debt over our head.  Unfortunately, I don't see a way to pay it down before we retire.

   Should I try to pay off as much of it as possible over the next few years or, instead, focus on maxing out retirement savings?
I am already maxing out my 401K savings this year.

Long term numbers favor maxing out savings but, the emotional component of carrying large debt bugs me.  Also, paying it down is like a fixed 3.625% return.   I am assuming a similar mortgage rate once we downsize.

Thoughts?

Thx,
Rob




Fishindude

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Re: Retirement and carrying a Mortgage?
« Reply #1 on: April 19, 2016, 06:29:40 AM »
Given that you still owe nearly $300K, you probably have no other choice but to carry a mortgage, unless you can sell and find something in the $100-150,000 range that you can pay cash for.

Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

albireo13

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Re: Retirement and carrying a Mortgage?
« Reply #2 on: April 19, 2016, 06:41:43 AM »
I realize a whole list of "shoulda's" in my life plus, some bad breaks but, here I am. 
Once we downsize, to a smaller mortgage, I could spend the next few years vigorously attacking the mortgage.
Maybe that's the best thing to do at this point. 



nereo

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Re: Retirement and carrying a Mortgage?
« Reply #3 on: April 19, 2016, 06:45:13 AM »
What's the current feeling about the need to pay off mortgage before retirement?

I have no problems carrying a mortgage into retirement.  My parents have done exactly this.

however...

However, I want to retire in 2-3 years.  We are downsizing this year and hope to get into a smaller house, ...

I just don't like the idea of retiring into a fixed income with that much debt over our head. 

   Should I try to pay off as much of it as possible over the next few years or, instead, focus on maxing out retirement savings?

Realize that this is a choice between having more savings and a mortgage, or less savings and no mortgage.  Personally, I'd feel a whole lot better having another $200k in my investment accounts and a $200k mortgage at ~3.7%.
If the debt affecting your mental health, then do what you need to do to get rid of it.

And absolutely downsize in your situation. If you are a DIY person find something a bit run-down that you can renovate.
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thd7t

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Re: Retirement and carrying a Mortgage?
« Reply #4 on: April 19, 2016, 07:44:06 AM »
Given that interest rates are still quite low, a mortgage during retirement doesn't sound bad. If rates go down significantly (seems unlikely, but what do I know), you refinance, but for the time being, you improve your return on what's already invested.

going2ER

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Re: Retirement and carrying a Mortgage?
« Reply #5 on: April 19, 2016, 08:01:49 AM »
I personally would feel uncomfortable not having my mortgage paid off before retirement, but it is a personal decision. When you are calculating what you need your nest egg to be, as long as you include those mortgage payments in your expenses it should be okay. Do you have mortgage insurance so that if anything happens to either of you it will be paid?

Is it also possible when you are downsizing to also move to a LCOL area? If you are no longer working you can live in just about any area. If you want to remain close to family and/or friends there may still be a neighborhood that is less costly then what you are currently in.

tipster350

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Re: Retirement and carrying a Mortgage?
« Reply #6 on: April 19, 2016, 08:22:24 AM »


Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

Prize awarded for most unhelpful comments.

What is the point of that comments since he cannot go back and re-do his life starting in his 20s?
---------------------

I am 55, I am going to purchase a small house and carry a mortgage into my retirement. As I cannot do over my life, and am left with making pragmatic decisions based on where I am now, this is what I am going to do. I think carrying the funds into retirement for needed expenses is more important than paying off a mortgage and having little cash to work with. The idea is to cover your needs indefinitely with your savings. As long as you have the funds to do that, paying a mortgage or not is a moot point. Psychologically it is nicer to have a paid off mortgage, sure.


Definitely downsize and give yourself more funds to work with, and less house to maintain/heat/cool/pay taxes on.
« Last Edit: April 19, 2016, 08:25:28 AM by tipster350 »

Dmy0013

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Re: Retirement and carrying a Mortgage?
« Reply #7 on: April 19, 2016, 08:37:54 AM »
What happens if you took 200,000 from your "stash" and paid off your house with it, can you live off the remaining 1 Million with the 4% Rule?  Don't forget you no longer have a mortgage so that part of your annual budget should shrink drastically, of course still leaving some money in for maintenance and what not...

THIS IS NOT A SUGGESTION!!!! I am just curious what happens to the numbers!
This is just my personal thoughts! DONT TAKE THIS AS ADVICE!!!

nereo

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Re: Retirement and carrying a Mortgage?
« Reply #8 on: April 19, 2016, 08:51:34 AM »
What happens if you took 200,000 from your "stash" and paid off your house with it, can you live off the remaining 1 Million with the 4% Rule?  Don't forget you no longer have a mortgage so that part of your annual budget should shrink drastically, of course still leaving some money in for maintenance and what not...

THIS IS NOT A SUGGESTION!!!! I am just curious what happens to the numbers!
...
Simple enough to run two scenarios here:
(note: we're assuming equal closing costs here)

Scenario 1: Downside to home valued at $200k - pay for it in cash
Investments:$1MM
Budget (based on 4%): $40,000/year

Scenario 2: Downsize to home valued at $200k - get a 30y mortgage at 3.7% (prime is currently 3.59%)
Investments: $1.2MM
Mortgage payments: $11,046
Principle paid (yr 1): $3,660
Budget (based on 4%): $48,000
Qualify for mortgage deduction: Yes, in full for first 9 years.
Net difference: -$3,046 ($8,000 - $11,046)

Quick conclusions: Paying for the house in cash gives you about $3k more in spending per year.  However, even in year 1 that spending is offset by payment of principle and (if applicable) the mortgage interest deduction. This will improve each year  There's no 'right' answer.  Scenario 1 gives higher initial cash flow while Scenario 2 yields far more money over the 30 year timeframe.

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Giro

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Re: Retirement and carrying a Mortgage?
« Reply #9 on: April 19, 2016, 09:01:14 AM »
I'm surprised no one has asked about his monthly expenses.  Is your stash all of the money you will have until social security kicks in? 

If you can provide those details, we will be able to find out how risky this may or may not be. 

zolotiyeruki

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Re: Retirement and carrying a Mortgage?
« Reply #10 on: April 19, 2016, 09:36:40 AM »
Social security will kick in between 62-67 years, probably.  Take the retirement benefit early, and the withdrawal rate on retirement savings drops significantly.  Take the benefit late, and the initial withdrawal rate stays the same for the first several years, then drops even more.

nereo, did you include the equity gained from the current home upon its sale?

Trudie

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Re: Retirement and carrying a Mortgage?
« Reply #11 on: April 19, 2016, 10:24:06 AM »
This is not such a crazy scenario and a particularly common dilemma for people whose over net worth is decent, but who have it tied up in existing home equity and plan to relocate/downsize. 

I have a similar dilemma.  Home equity of $250,000.  Net worth of $1.3 million, which is largely tied up in qualified investment accounts and we have 3-5 years until we can tap them.  (Thus ROTH pipeline doesn't make much sense.)  We're currently contemplating how we will prioritize tapping our investments.  Assuming a mortgage for $100-$150K for a short term of 3-5 years would help our cash flow until we can raid the accounts to pay off the mortgage and are into our retirement lifestyle.

My follow-up question is:  How easy is it to get a mortgage without W-2 income?

patchyfacialhair

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Re: Retirement and carrying a Mortgage?
« Reply #12 on: April 19, 2016, 10:47:09 AM »
What happens if you took 200,000 from your "stash" and paid off your house with it, can you live off the remaining 1 Million with the 4% Rule?  Don't forget you no longer have a mortgage so that part of your annual budget should shrink drastically, of course still leaving some money in for maintenance and what not...

THIS IS NOT A SUGGESTION!!!! I am just curious what happens to the numbers!
This is just my personal thoughts! DONT TAKE THIS AS ADVICE!!!

This is an idea to consider, however (and we don't know this yet), if a bunch of the existing non-home-equity stash is in tax advantaged retirement accounts, OP may have a large tax bill to withdraw such a large chunk of money.

nereo

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Re: Retirement and carrying a Mortgage?
« Reply #13 on: April 19, 2016, 11:36:13 AM »

nereo, did you include the equity gained from the current home upon its sale?

No, because in both scenarios the OP would sell his/her home and buy a less expensive one.  ERgo, it doesn't change anything - I used the $1.2MM in 'assets' stated in the original post, but you could easily redo this (with very similar) if the sale of the original home was enough to buy a new home in cash; the OP could stll take out a mortgage.
Put another way - it would just be looking at $1.4MM with a mortgage vs. $1.2MM without a mortgage.
 
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Drifterrider

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Re: Retirement and carrying a Mortgage?
« Reply #14 on: April 19, 2016, 11:41:04 AM »
Given that you still owe nearly $300K, you probably have no other choice but to carry a mortgage, unless you can sell and find something in the $100-150,000 range that you can pay cash for.

Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

I disagree.  I'm refinancing my residence (I'm 53) to lower my monthly payment.  The difference is enough to cover the mortgage and interest on my next rental buy.  My 30 years start over.  I don't intend to remain here after retirement and my current mortgage is lower than rent (and will soon be even lower).  My residence is an expense; just like my car.  (except that I do get some tax breaks for the house).

My mother refinanced (again) at 77 to get a lower interest rate and payment (like me).  Cash flow and leverage.  There is a greater likelihood that both of us will die before paying the mortgage but then; we are gonna' die anyway.  Let the bank take the risk :)

Anyone with $1.2M in secured holdings is in a great position.  Cash flow.  As long as more comes in than goes out one should be fine.

YMMV

Drifterrider

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Re: Retirement and carrying a Mortgage?
« Reply #15 on: April 19, 2016, 11:44:27 AM »
My follow-up question is:  How easy is it to get a mortgage without W-2 income?

Pretty easy in the US.  Banks want to know how much you got and if they can get to it if you default.  By W-2 income do you mean "working at a job" or "includes retirement income that is taxable"?

Trudie

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Re: Retirement and carrying a Mortgage?
« Reply #16 on: April 19, 2016, 01:00:07 PM »
Working at a job.  We would have assets they could easily get to in default and most likely would have enough unqualified investments.  It would mostly be a cash flow issue to "buy our freedom" while we wait to be eligible to dip into our qualified accounts.

ooeei

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Re: Retirement and carrying a Mortgage?
« Reply #17 on: April 19, 2016, 01:23:00 PM »
Given that you still owe nearly $300K, you probably have no other choice but to carry a mortgage, unless you can sell and find something in the $100-150,000 range that you can pay cash for.

Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

There's no difference between having a paid off house or having the money to pay off your house in an investment account.  There's a very reasonable argument to be made for keeping a mortgage indefinitely as far as the numbers go.  Even if he paid off his house completely, if he moved he'd still have to decide whether to keep/invest the proceeds and mortgage the house, or buy a new house straight up.

He can owe $200,000 on the new house, or have $200,000 extra in his investments.  Depending on how you think investments will perform relative to the interest rate, you can make an argument in either direction.


Mtngrl

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Re: Retirement and carrying a Mortgage?
« Reply #18 on: April 19, 2016, 01:27:27 PM »
We have a mortgage -- just under $200,000 owed on a house valued at $450,000. Interest rate of right at 3%. We have enough in our stash to pay it off, but the low interest rate (and interest deduction on our income taxes) make us feel comfortable keeping the mortgage.

HipGnosis

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Re: Retirement and carrying a Mortgage?
« Reply #19 on: April 19, 2016, 01:59:15 PM »
Given that you still owe nearly $300K, you probably have no other choice but to carry a mortgage, unless you can sell and find something in the $100-150,000 range that you can pay cash for.

Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

There's no difference between having a paid off house or having the money to pay off your house in an investment account.  There's a very reasonable argument to be made for keeping a mortgage indefinitely as far as the numbers go.  Even if he paid off his house completely, if he moved he'd still have to decide whether to keep/invest the proceeds and mortgage the house, or buy a new house straight up.

He can owe $200,000 on the new house, or have $200,000 extra in his investments.  Depending on how you think investments will perform relative to the interest rate, you can make an argument in either direction.
Ohhh, no.  Really, no.
A paid off house is equity that can only appreciate at the rate of the local real estate market.
Having the money to pay it off is having money that can be invested in whichever market is having (or expecting) the greatest gains.
He HAS to owe in order to have the money to invest.
If mortgage interest rate is near or greater than the historical investment returns, it's very hard to argue in favor of investing.  But that is not the current situation at all, so it's hard to argue in favor of paying off the mortg.

Gunny

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Re: Retirement and carrying a Mortgage?
« Reply #20 on: April 19, 2016, 02:09:42 PM »
I'm 53, retired last August at 52 then bought a 200k house with a 30 year mortgage.  Qualified for the loan with just my FERS pension estimate as proof of future income.  My pension covers all living expenses including monthly mortgage/escrow.  I just felt more comfortable not touching my 700k stache to buy a home outright when I could get a mortgage for 3.75%.  My stache goes untouched and growing.  I may payoff remaining balance once stache hits 1mm, or not. I can always sell later and down size if I need to. 

HipGnosis

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Re: Retirement and carrying a Mortgage?
« Reply #21 on: April 19, 2016, 02:11:54 PM »
Social security will kick in between 62-67 years, probably.  Take the retirement benefit early, and the withdrawal rate on retirement savings drops significantly.  Take the benefit late, and the initial withdrawal rate stays the same for the first several years, then drops even more.
Some clarifications:
Social Security benefits do not 'kick in' - you have to apply for them.
You can begin SS from 62 to 70.   I HATE that they call 66 "full retirement age". THIS IS A LIE!!!   70 is the age that you get the MOST (ie FULL) benefits!  The benefits at 70 are THIRTY percent MORE than at 66!!! 

zolotiyeruki

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Re: Retirement and carrying a Mortgage?
« Reply #22 on: April 19, 2016, 02:48:07 PM »
Social security will kick in between 62-67 years, probably.  Take the retirement benefit early, and the withdrawal rate on retirement savings drops significantly.  Take the benefit late, and the initial withdrawal rate stays the same for the first several years, then drops even more.
Some clarifications:
Social Security benefits do not 'kick in' - you have to apply for them.
You can begin SS from 62 to 70.   I HATE that they call 66 "full retirement age". THIS IS A LIE!!!   70 is the age that you get the MOST (ie FULL) benefits!  The benefits at 70 are THIRTY percent MORE than at 66!!!
"Kick in" vs "apply for" is semantic--I'm assuming that anyone eligible is going to apply for (and receive) the retirement benefit. :)

nereo

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Re: Retirement and carrying a Mortgage?
« Reply #23 on: April 19, 2016, 03:02:31 PM »
Social security will kick in between 62-67 years, probably.  Take the retirement benefit early, and the withdrawal rate on retirement savings drops significantly.  Take the benefit late, and the initial withdrawal rate stays the same for the first several years, then drops even more.
Some clarifications:
Social Security benefits do not 'kick in' - you have to apply for them.
You can begin SS from 62 to 70.   I HATE that they call 66 "full retirement age". THIS IS A LIE!!!   70 is the age that you get the MOST (ie FULL) benefits!  The benefits at 70 are THIRTY percent MORE than at 66!!!

I guess it's all symantics.  You could consider 66 "full retirement" and then decide that waiting til 70 is "full retirement + bonus" and 62 "retirement with penalty". 
Or something like that. 
Are there really people out there that are so uninformed that they don't realize their payments will be higher if they wait?  I mean... it's printed on my SS statement every single year, and it seems very straightforward; if I wait until 70 I get this amount, if I start taking distributions at 62 I only get this amount.
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Altons Bobs

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Re: Retirement and carrying a Mortgage?
« Reply #24 on: April 19, 2016, 04:08:29 PM »
You have to be ok cutting your expenses so you can pay your mortgage if the market goes down.  There is no guarantee that the market will keep going up.  So that's the risk you have to take if you keep the mortgage.  If you pay it off, you will have less money in the market to invest.  It's all about which way you feel more comfortable with. I don't think there is a right or wrong answer.

nereo

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Re: Retirement and carrying a Mortgage?
« Reply #25 on: April 19, 2016, 05:54:44 PM »
You have to be ok cutting your expenses so you can pay your mortgage if the market goes down.  There is no guarantee that the market will keep going up.  So that's the risk you have to take if you keep the mortgage.  If you pay it off, you will have less money in the market to invest.  It's all about which way you feel more comfortable with. I don't think there is a right or wrong answer.
Why??
Or more simply - why would you cut your expenses if you had a mortgage, but NOT cut your expenses if you didn't have a mortgage.  In both scenarios you are living off a WR of your choice.  The danger (running out of money because of a really crappy market) are the same for both.

For those planning on using a 4% WR - the inherent premise is that you DON'T have to cut expenses everytime the market goes down, because there's already a very high level of safety.
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chasesfish

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Re: Retirement and carrying a Mortgage?
« Reply #26 on: April 19, 2016, 06:15:27 PM »
I'm on the side of putting the 20% down and carry an 80% mortgage on a 15 term.  That should be around 3% and your earnings will outpace the interest expense.

Its ultimately a personal decision, at these rates its tough to go wrong if you already have the cash to retire the debt.  I think I read in a post your stash is already $1.2mil. 

I'd call it strategic debt and not a mortgage at this point
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albireo13

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Re: Retirement and carrying a Mortgage?
« Reply #27 on: April 19, 2016, 08:24:06 PM »
The $1.2M stash is the total of our 401ks, 403bs,IRAs, and a lump sum pension.
Not very liquid.
I also have a $1850/mo pension plus any SS.  I'd rather not start SS until after 66 yo.
So I guess my monthly pension would all go towards the mortgage.



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Re: Retirement and carrying a Mortgage?
« Reply #28 on: April 19, 2016, 09:07:03 PM »
With interest rates on mortgages so low I don't think it matters much financially.  I would do whatever will make you feel more secure.

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Re: Retirement and carrying a Mortgage?
« Reply #29 on: April 20, 2016, 05:34:59 AM »
The $1.2M stash is the total of our 401ks, 403bs,IRAs, and a lump sum pension.
Not very liquid.
not very liquid?  Well it's a lot more liquid than if most of your net worth were tied to a home and a private business.  You can convert from those to cash fairly easily.

Quote
I also have a $1850/mo pension plus any SS.  I'd rather not start SS until after 66 yo.
So I guess my monthly pension would all go towards the mortgage.
Your monthly pension will be quite a bit more than the mortgage on a $200k house. 
15 year at 2.9% = $1,371
30 year at 3.7% = $920

So - you're good.  Buy the new home with cash if you like, or take out a mortgage if you want a good inflation hedge (I'd certainly favor taking out the mortgage at today's rates). We haven't really mentioned inflation yet but it should not be understated, and is the best reason IMO to keep a mortgage at today's stupidly-low rates.
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ooeei

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Re: Retirement and carrying a Mortgage?
« Reply #30 on: April 20, 2016, 11:36:49 AM »
Given that you still owe nearly $300K, you probably have no other choice but to carry a mortgage, unless you can sell and find something in the $100-150,000 range that you can pay cash for.

Houses should be purchased and paid for during your working years, so you have a place to live cheaply when you don't have income from a job coming in anymore.  A 30 year mortgage is pretty ridiculous for anyone over mid 20's to take on.   By retirement age you should have everything paid for, and a big fat nest egg to enjoy the rest of your life on.

There's no difference between having a paid off house or having the money to pay off your house in an investment account.  There's a very reasonable argument to be made for keeping a mortgage indefinitely as far as the numbers go.  Even if he paid off his house completely, if he moved he'd still have to decide whether to keep/invest the proceeds and mortgage the house, or buy a new house straight up.

He can owe $200,000 on the new house, or have $200,000 extra in his investments.  Depending on how you think investments will perform relative to the interest rate, you can make an argument in either direction.
Ohhh, no.  Really, no.
A paid off house is equity that can only appreciate at the rate of the local real estate market.
Having the money to pay it off is having money that can be invested in whichever market is having (or expecting) the greatest gains.
He HAS to owe in order to have the money to invest.
If mortgage interest rate is near or greater than the historical investment returns, it's very hard to argue in favor of investing.  But that is not the current situation at all, so it's hard to argue in favor of paying off the mortg.

Not sure what the disagreement is.  I was simply trying to point out that there's nothing magical about having a paid off mortgage, it just means you've invested a chunk of money in your local real estate market (local as in, a single house) at whatever interest rate your loan is.  If you think your investments won't beat the loan rate, then go ahead and put a bunch of money in your house.

For OP it probably doesn't matter either way.  They're about to downsize their house, and are still going to work for 2-3 more years even though they already have 25x their expenses invested.  Whichever one helps them sleep at night is probably the best option.