Monday, May 18, 2009

Saying Bye Bye to our Mortgage

Our original plan was to pay off our mortgage when we retired in order to have zero debt. However, shortly after taking early retirement, I convinced my spouse to keep our 5.375% 30 year fixed mortgage, instead of paying it off. I thought that having the funds invested in the stock market was a better option than paying off the house. As it turns out, choosing to keep the mortgage was a poor investment decision, given the decline of the stock market.

In the last couple weeks, we've reconsidered the decision to keep the mortgage. Now, we're going to follow the original plan and pay off the mortgage. Here are our main reasons for doing so:
  • A higher guaranteed return. Who would have ever though I'd settle for only a 5.375% return for paying off our mortgage. While it's unlikely the stock market will decline significantly as it did in 2008 and early 2009, I can't risk similar losses going forward. Nowadays even the positive return from a mortgage payoff seems much better than the recent negative stock market returns.

    In addition, short term CDs are only paying 1-2%, and do not offer a better return that paying off the mortgage.

  • A 24% reduction in monthly expenses. This significantly reduces our withdrawal rate from savings. Since we sold stock to raise money for the payoff, our remaining funds in cash, CDs, and bonds can cover an additional 19 months of living expenses, taking us from 5 years and 2 months to 6 years and 10 months.

  • Shift stock market exposure to IRA and retirement accounts. Since our taxable accounts will be used for living expenses for the next ten years (hopefully:-), I wanted to limit the exposure of these funds to market volatility. Hopefully, we won't need the funds in our IRAs and retirement accounts for more than 10 years, allowing them to recover from the recent stock market decline.

  • Eliminate foreclosure as a financial risk. Almost. With the mortgage paid off, the risk of foreclosure is very low. We only need to pay property taxes to ensure that we will able to keep our house.
  • Currently, we are targeting to pay off the mortgage by the end of May, 2009. If all goes as expected, we will have paid off a 30 year mortgage in 6 years.

    Update: We paid off our mortgage on May 20, 2009.

    For more on Strategies and Plans, check back every Monday for a new segment.

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

    Copyright © 2009 Achievement Catalyst, LLC


    L. Marie Joseph said...

    Good choice, if you plan to stay in the house forver, get rid of the mortage debt- consider you have all other factors in place

    Anonymous said...

    I don't disagree that paying off your mortgage is a good thing, it is. However, I would say that right now is the worst time to make such a choice. The stock market has most likely already taken most of the plunge. I am assuming that like most people, most of your investments have been hit hard by the downturn. If this is the case, you would be selling at lows, and really at this point, the stock market should see some gains over the next few years. Also, mortgage rates are at their lowest, so there is no real incentive to pay them off right now, when higher gains should be attainable in the stock market. In your case, your mortgage rate is fairly high at 5.375%, so I would be looking at ways out of that mortgage, and in to something cheaper with todays great rates you should be well below 4%. I think a long term mortgage like you have is the worst thing anyone can do, as you always pay a hefty premium for that safety. Over the last 10 years if you had gone shorter term, or even variable you would never have come close to 5.375% on average.

    Michael @ The Life Insurance Insider said...

    When you are investing your own money in the stock market then the risk to reward ratio makes sense. If you still have your mortgage then you have more risk and less reward all of a sudden it doesn't seem to make sense.

    Glad you are back on track.