Should They Pay Off the Mortgage?

[xrac]

Never forget that liquidity is king. Try borrowing money in this economy. It is not easy.

 

[billberry12]

Exactly part of my point. Cash is king. Debt is Slavery.

 

[degsey69]

Normally I would recommend paying off the mortgage, however at their age I believe that liquid assets are important for long term health care or unforseen medical costs such as the doughnut hole in the prescription plan.

Obviously there are other factors to consider so unless a financial planer did a full review non of us can offer the correct solution.

 

[xrac]

You miss my point. If I have money in the bank to pay off my mortgage I am in control and I have options. If I pay off my mortgage and need money fast how am I going to get it? Especially now that I am retired and have a fixed income. What happens if the value of the real estate drops by 50% which it did in some markets and all my cash is tied up in the real estate.

 

[senior-advisor-indiana]

If it were me, I would sell the house and donate all my money to help end world hunger....

 

[padthaiforlunch]

Yes. The house is NOT liquid. I know of a senior who paid off the mortgage, and could not get a heloc for two years.

Better to refi at a lower rate and get a fixed rate. None of the a.r.m. crap.

As to the tax benefit... By writing off the mortgage interest against income, you typically reduce the effective interest rate by additional tax savings. It is possible for someone with a 4.5% mortgage to have an effective mortgage interest rate of 3.9%.

Better to enjoy the additional income from savings, rather than pay off the house.

CASH IS KING. Don't pay off the mortgage.

 

[scagnt83]

I know. Problem is, where do you get 5% these days? And, if you can, and do what you suggest, you still have the risk factor involved if there is a mortgage on your house. To me, it's just not worth it. Just my opinion.

What risk factor is there if you have a guaranteed bucket of money thats earning income in excess of the monthly payment?

In short, there is none if its a fixed mortgage.

You have the payment readily available while keeping your assets liquid.

And you can get a 3.1% guaranteed 15y refi, and a 4% 10 year FA.

Thats 0.9% thats going in your pocket each year. You arent loosing money, you are gaining it.
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Also, liquidity is king in retirement. And real estate is one of the most illiquid assets you can have.


Even if interest arbitrage isnt possible, having those funds liquid while still earning enough to cover the mortgage is a much bigger asset than having the house paid off.

You cant replace $100k as easily as you can find a new place to live.


Throw in the various tax advantages of keeping the mortgage, and most people (once shown the hard numbers) opt to keep the mortgage.


Having $100k+ "not working" for my retirement anymore is not security in my mind, its a $5k+ pay-cut.


But of course in retirement everything is situation specific. It really depends on how much is left on the mortgage.

 

[DHK]

There are two camps of reasoning here:

1 is emotional (with a little logic). Pay off the house and pay the taxes.

1 is logical (with little emotion). Keep the money liquid and earn enough to help pay the mortgage payment.

Human beings are not vulcans. We aren't 100% logical creatures who can always be convinced against our personal convictions.

Right now, we are talking about preferences. If you want to get someone to ACT... we need to talk about fears and pain.

What are they most afraid of?

Why would THEY want to pay off their house? Is it JUST to free up their annual income and not have a house payment?

It's the emotional component that helps to make up a complete fact-finder... not "just the facts".

 

[billberry12]

"You cant replace $100k as easily as you can find a new place to live."

Point well taken.

 

[padthaiforlunch]

Very nice. Something many never learn.

There are two camps of reasoning here:

1 is emotional (with a little logic). Pay off the house and pay the taxes.

1 is logical (with little emotion). Keep the money liquid and earn enough to help pay the mortgage payment.

Human beings are not vulcans. We aren't 100% logical creatures who can always be convinced against our personal convictions.

Right now, we are talking about preferences. If you want to get someone to ACT... we need to talk about fears and pain.

What are they most afraid of?

Why would THEY want to pay off their house? Is it JUST to free up their annual income and not have a house payment?

It's the emotional component that helps to make up a complete fact-finder... not "just the facts".