Wednesday, January 30, 2008

Why We're Keeping Our Mortgage In Retirement - For Now

One of our retirement goals was to be debt free, including not having a mortgage. However, when I retired in my forties in October, 2007, we were still about 12 years away from paying off our mortgage. For now, we have decided to keep paying on our mortgage for at least the next few years. Here are our reasons for keeping the mortgage:


  1. Payoff size. Although our loan principal is about 45% of our home value, it would still require about 138 times our monthly payment to pay off the mortgage. In other words, we can pay our mortgage for 11.5 years with the money needed to payoff the loan. From a different perspective, the money required was 7.7% of our total savings. Overall, I thought it was less risky to continuing paying the mortgage than to reduce our savings by 7.7%


  2. Ability to use the deductions. Since our investments and converstions to Roth IRAs will create income, I can still use the mortgage deductions to reduce taxable income. If we didn't expect to have taxable income, the deductions would not be as useful.


  3. Low interest rate. We currently have a 5-3/8% fixed interest rate. By investing in the stock market, we hope to achieve 8-10% gains with the funds. Hopefully, the next couple years of stock market returns will be better than January, 2008:-)

Originally, we wanted to pay off our mortgage by retirement. Doing so would reduce our monthly expenses by 21%, which made the pay off option attractive. However, after doing the above analysis, we determined it would be advantageous to delay paying off the mortgage for at least a couple years. Keeping the mortgage will help us have more liquid savings, which can be a buffer against stock market fluctuations.

For more on The Practice of Personal Finance , check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

4 comments:

Anonymous said...

Did you know that even though you still have 12 years of payments left you can at least greatly lower your monthly mortgage payment right now?
Your monthly payment is based on the original loan amount you took out and thus the payment is the same regardless of how much principle you've paid.

Feel free to ask me questions by email as I won't be checking back on this blog thread.
toyoy80@yahoo.com

Jake said...

I see the logic of this, however, I am nervous about having a large mortgage in retirement. Currently my mortgage makes up roughly 1/3 of my spending, so if I was to eliminate it, I could eliminate 1/3 of my spending.

If you assume you need 25 times your spending to retire, if I spend $60K a year with my mortgage that means I need 1.5 million to retire. If I had no mortgage then I would need 1 million ($40K*25) to retire. However, my mortgage is only $350K.

Therefore if you go by the "have 25 times your spending" rule, you can retire faster if you payoff your mortgage prior to retirement.

Super Saver said...

@Anonymous,

Thanks for the tip. Refinancing the current principal (to a new 30 year mortgage) to reduce payments would also be another option to manage the mortgage. However, at this time, I am still targeting to be debt free and planning to payoff our mortgage in the next 5-10 years.

@ Jake,

Thanks for your comment and excellent point. I agree with your logic, which is the reason we wanted to pay off our mortgage by the time we retired. However, the current stock market volatility has caused us to be more conservative and to keep more funds in liquid investments (i.e. cash) than illiquid investments (i.e. house). If the market rebounded signficantly, I would lean toward paying off our house again. :-)

Rex said...

"Ability to use the deductions" - The math on this does not make sense. Let's say you fall in the 25% tax bracket. Right now you are sending (let's say) $4,000 in interest each year to the bank. Because you do this you get to deduct this amount and not pay $1,000 in taxes to the IRS. Why would you decide to pay $4,000 to the bank than $1,000 to the IRS? If you really want the same situation you can take the $4,000 and give it to charity, deduct that on your taxes and come out with the $1,000 in tax savings! Mortgage tax deductions are a myth if you are in a position to not send the bank any $.