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Decided to payoff my mortgage.
Sooo AMC.. who’s in?
😂
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Subject Expert
If your goal is to retire at 50 then taking a 15 year mortgage seems like a nice fit.
While you might lose in market returns, you gain a guaranteed high return on your mortgage paydown.
6.5% mortgage rate is better than any risk free bond.
Coach
What mortgage rates are you getting quoted? Have you explored a buydown of the rate?
Personally, I don’t think it’s worth focusing the extra $1,250 per month on the mortgage principal over funding the brokerage. I also don’t think there’s much of a mental relief when the house is paid off since you’ll still have property taxes, insurance, utilities, and other bills related to the house, so you’re never really living there for “free”. Plus all that equity gets trapped unless you refinance or sell, and with appreciation only at a few percentage points per year, the same amount of “equity” often grows significantly faster in the market (and is much more liquid).
I haven’t looked into buying down yet but getting around 6.5-6.7%
Pay it off fast. House is an expense not an asset. Pay it off and then you can live.
…on less money.
Im already retired, and have 20 years remaining on my mortgage with a $2.25%APY rate.
I have no intention of paying down my mortgage early since it would guarantee a lower lifetime yield and negatively impact both my current / future withdrawals as well as the inheritance I intend on passing to my children.
My situation is in contrast to GSK1s recommendation to pay off the mortgage before retiring despite having a low (2.25%) rate.
I factored my mortgage payments into my SWR and FIRE calculations and made sure I had sufficient buffer before retiring.
Assuming a 4% annual withdrawal rate, I have enough invested to fund household expenses, the mortgage, property taxes, and still have ~$10k surplus at the end of the year.
Id rather keep the ~$400k (payoff amount) invested and growing since even below average market returns will significantly outweigh the 2.25% Id save in interest.
If retiring at 50 is the real priority, don’t let the paid-off-house goal starve the investable portfolio. I’d probably use a 30-year mortgage, invest more, and reassess payoff later unless the mortgage rate is high enough that the guaranteed return is worth the liquidity tradeoff.
Yeah that’s the question. At 6.5% could be a wash. At 8% it might make more sense to pay the mortgage aggressively
Subject Expert
What is your asset allocation in your retirement portfolio? What is your intended glide path? Do your projections show you are on track to retire at 50?
Subject Expert
Surprisingly...yes. It's counterintuitive but true.
A 2.5% mortgage with 25 years left leaves you paying 5.4% of the balance per year in principal and interest. So if you pay it off, you reduce your residual expense by 5.4% of the amount you use, which is more than the safe withdrawals that amount could have sustained. Your WR and the chance of portfolio failure are reduced, even though the average terminal wealth is reduced and even though it was below market rate.
Now, it must suck to pay good money to pay off a low rate loan when even safe assets are paying more, right? Yes. That would suck. But it gets even better. You don't have to. You can "pay it off" at a discount by buying an offsetting bond ladder whose coupon and principal payments are equal to the mortgage payments every year. And with today's bond rates, in the case of a 2.5% mortgage for 25 years, you can do it at a discount of almost 20% to the balance of the mortgage.
It's the best of both worlds. You benefit from the low rate by "paying off" at a discount, and you get it off the books of your portfolio/expenses, lowering your SWR and increasing your chance of success.
Other than for the case of a very risk-seeking person, or someone whose portfolio is so grossly in excess of their needs that it doesn't matter, this option will usually be best relative to keeping the mortgage in retirement and paying it from the portfolio, and always worth considering.
What about compromise? Do a buy down, finance for a longer term. And just… pay it off at your own speed, every two weeks. Then if there are months you can’t, it’s fine.