Well, well, well, boys and girls. We’re digging deep today. Diving headfirst into the rushing waters of enlightenment and fording currents bled from the whispers of legends.
What is the epic question that tantalizes my inner being and thrums my ear drums like palm fronds in a summer breeze?
It’s the mortgage – that lifelong chain of financial servitude that has existed all the way back to the days of our colonial founding fathers.
Oh yeah. Finally, you’ll get some sizzling FI Fajitas on the frying pan as food for thought rather than all that deep and emotional shit I can Lolly gag for eons.
Hahahaha. J/K.
But I do I live to indulge.
Yet today we’re tackling a hot topic as if Tom Sawyer were fending off vixens in a sorority pillow fight (Where the fuck do I get this shit? What does that even mean?).
Dun, Dun, Dunn….
Yes, I said it. What will I do with my mortgage upon early retirement?
The fate of nations, rise and fall of empires and the demarcation of space age boundaries while fending off foreign alien powers have been known to be determined by what secret wisdom may be hidden on this blog.
So don’t fret dear reader, we shall prevail.
Although this modern age financial conundrum has chewed up and spit out better men than I, here I sit. Steadfast and longing. Ready to impede the glibness of naysayers with all the gusto of an impresario fanning curtain calls.
Because like spiders crawling out from the deep and dark corners of the internet, the keyboard warriors are on their way. Clipping nails, ordering hand massages, prepping for the virtual battleground that they have claimed as their own online woke stratosphere.
Alright. I know. I went a little overboard.
But hey, can’t a creative soul have a little fun here and there?
Ah ha! Back to the topic at hand…
I’ve been tinkering with numbers lately, playing around to see if I can come up with a scenario in which it might make sense to pay off my mortgage come early retirement.
And… honestly, I couldn’t find one.
I think it’s safe to say that most of my readers are homeowners. So, I’d like to ask you, dear reader and FI wizards, what financial magic do you plan for your mortgage when you reach FI? Or if you have already FIRE’ed, did you leave your job with the mortgage still intact, or cast a few number spells and paid it off prior?
We can all agree there is no right or wrong answer, and this post has nothing to do with what you should do.
I’m more curious what your answer is and why: security, financial, flexibility, lifestyle, etc?
As for me, most of you already know my story – I did not buy my first home until the age of 39.
Yep, damn bro, you were late the party.
Why so late?
Well, there were a few reasons.
First, I live in a high cost of living area (although, this almost seems like everyone nowadays the rate home appreciation is going). I also had a great renting situation, and the numbers made more sense to keep renting and investing my savings rather than purchasing an expensive house. (Yes, I was one of those rare unicorns who diligently invested the difference.)
Second, I didn’t have to move for any lifestyle changes, so I was lucky in this sense. Not having kids allowed me to stay in a low-cost renting situation longer than most.
Third, my philosophy was to build up my investments in pretax accounts prior to buying a home. This would allow me to accumulate an investing nest egg that would be self-sustaining through compound interest prior to taking the plunge into home ownership and locking in my housing costs.
The theory goes… now that my pretax accounts are at an acceptable level and I’ve locked in a mortgage at less than 3%, the next few years will be spent bolstering my after-tax accounts in order to bridge the gap until I sail away on a sea of Roth IRA conversion ladders.
That’s the plan for now. Well, relative plan. No chiseling stone around here in Q-FI-land. And it’s also a very loose timeline. Things tend to change rapidly in the Q-FI household, so I’m no stranger to flexibility nor adapting.
But if things go really well, I might not even need to do a Roth conversion ladder (because raging bull markets never end, right?). And if things go terrible, I simply remain flexible, which I’ve always excelled at and would most likely entail working longer or cutting costs – neither choice being optimal for a bloated ego such as mine, yet both being easily achievable.
Now, home ownership and real estate itself, has proven a great asset class to build wealth for many people. I think the more common route than mine is to buy as early as you can and figure out the rest later. Usually this tends to work out often if you have a decent holding period.
However, here’s the thing that gets me with paying off the mortgage early. I favor liquid investments. What I mean by that, is most of my wealth is in paper assets. If I want, I can liquidate those holdings in a day to a few days at most, with zero transaction costs (only talking after tax accounts here).
A house, not so much.
Hence, why I treat my house as an expense. I don’t include my house or any equity in my net worth calculations, because it is an illiquid asset and it’s not real money to me (only my personal psychological view). If I ever sell my house, and reap any gains in the transaction, then I’ll add those gains to my net worth if the time ever comes. But until that point, my house is solely an expense.
Therefore, I don’t see value in paying any additional principle toward my mortgage. I’d be putting liquid capital into an illiquid asset at an inferior rate of return (at least that’s my take w/ a mortgage below 3%).
Plus, when I leave my job to retire early, I won’t have a W-2 income anymore. Meaning, most likely I won’t be able to qualify for a mortgage in early retirement if I decide I want to get one. So why pay it off early, if I won’t’ be able to quality for one in the future?
Of course, the counterargument would be, why the fuck would I need to get a mortgage in retirement? Hahaha. Didn’t I fucking plan this shit out? Isn’t that the point of paying off the mortgage in the first place? So you don’t have one?
Yes, yes and yes. However, life has taught me, never say never and always have a backup plan for the unexpected… haha.
Now, I do understand the emotional part of it. If having that debt scares you, or you can’t sleep at night, I get it. But besides that, what am I missing from a number’s standpoint?
On another sidenote, I’d further say that real estate has also been a little baffling to me. In the little under six months I have owned my home, it has already appreciated 20%. Yeah, that’s not a typo. This makes absolutely no sense to me. Then again, buying my home at the price I paid didn’t make a whole lot of sense to me either… hahaha. And this has nothing to do with me being smart, but 110% simply dumb luck, which scares me even more.
But regardless, it’s very sobering realizing that if I began my home search today, I wouldn’t be able to afford the neighborhood I’m currently living in. Well, afford probably isn’t the right word. I simply wouldn’t want to pay the current price that my house is valued at.
Which seems even more ludicrous to me. That waiting a 4-6 month timeframe to house shop can price you out of entire markets. But so goes this crazy journey we call life.
Is this still a COVID effect?
I really don’t know. I’d like to say that it is, but the people I was competing against were just as strong buyers as myself. Significant assets, 20% down, over 800 credit scores. Or cash offers coming in over the top. I feel for the first-time homebuyer right now, or any homebuyer for that matter. It’s one fucked up market.
Anyway, I’m digressing.
This isn’t a home buying post, it’s a what’s your mortgage plan post. So, if you’re lucking enough to have a mortgage today (which sounds like a contradiction, but obviously I’m implying you bought within your means and have a low rate), I’d like to hear your thoughts on this topic.
I’m sure you have your own plan to tackle your mortgage or have already paid it off and are reaping the rewards. I’d also ask for anyone who has paid off their mortgage, any regrets? With interest rates so low would you ever tap into that home equity and allocate that capital somewhere else?
Fun stuff today and can’t wait to see these comments buzz with some titillating answers!
If you think you have some mortgage mojo that needs to be vented, this is your chance!
Enlighten me.
-Q-FI
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As much fun as this topic is to banter back and forth about. I’m going to be on vacation this week (yea for me) and very remote with no internet access. So, replies will most likely not be forthcoming until next week. But just maybe, I might find a hook up somewhere. So, be forewarned, you have a whole week to light my shit up with no supervision… hahaha. But the question remains, what will you do with your mortgage and why?
greetings from smidlap-con 2021, q. we’re in our own mountain cabin but rich with internet this week. i hope you’re enjoying your well earned time off. we were in a different position when we decided to pay off our mortgage about 5-6 years ago. i think our rate was 7+% from a loan originating around 2001. but…we were down to our last 40k or so and it didn’t make sense to refinance with associated costs. i took that 7% bird in the hand and didn’t look back. we did open a heloc a few years ago and never touched that (of course). i’m sure we qualified for a lot more but our lives are relatively cheap. i will say there was something different psychologically once we were paid in full. it’s a good feeling and probably worth something.
we were also extremely lucky in that our house value is probably 4x or 5x the cheap price we paid before our city bounced back economically. it was pure luck as we were just buying a place to live. every now and then i get the itch to cash out all that tax-free dough and buy a different place for half the price and turn it into an asset as you mention.
Ahhhh… someday I’m going to have to attend Smidlap-con. I love that shit. Utterly hilarious!
Vaca was good. Hopefully yours was as well! It’s amazing how short an entire week can feel. I probably need a to do a good two-weeker soon. But I’ll have a post eventually on how it felt to be isolated without technology for an entire week. It took me longer to settle down than I had anticipated.
Makes sense what you did w/ the mortgage. The heloc is something I’ve always been aware of, but never looked into personally. Got a lot of comments on that one, so I’ll be taking a harder look at it in the future.
I agree there is a psychological factor for just being free and clear of those financial chains. I’m not a fan of debt, but with rates so low, I’ll be letting it ride for now.
Interesting thought exercise there Q-FI.
For mine, there are two aspects.
The emotional one, where any debt represents a psychological anchor around the homeowner’s neck, inflicting externally induced stressors and pressures whether real or imagined. Plaguing the insecure or those prone to worry with endless self-doubt about the uncertainties that the future may bring.
And the financial one. Where debt secured via a home loan potentially offers the opportunity to invest otherwise trapped equity at negative real interest rates and without the risk of margin calls. A flexible arrangement like a HELOC or offset mortgage can work wonders here, supercharging the homeowner’s portfolio growth at the potential cost of a bit more risk and having to service the debt when interest rates do eventually revert to the mean.
There are no “right” answers, though from a pure numbers perspective certainly several quantifiably wrong ones.
Providing the homeowner can sleep well at night, their choice is ultimately one of lifestyle.
If it were me, I’d be lining up a long term HELOC style loan just before I escaped the workforce, as it is unlikely such a financing facility would be accessible afterwards.
Hey Indeedably.
I agree on your two big parts of the mortgage: the emotional/psychological and the financial. As you point out, it really comes down to lifestyle.
It’s been interesting to see what people do or have done for their own personal situation. No right or wrong answer, simply preference. I feel the what-to-do-with-your-mortgage topic is only second to the rent vs buy debate. Everyone has a take since we all have to live somewhere.
The heloc is something I’ve peripherally kept in mind but never actually considered yet. I’ll be doing more homework on that one since my equity has been increasing by dumb luck.
Good stuff bud and thanks for chiming in.
I’m from an entirely different era and have owned my one and only house for 42 years. So even if we hadn’t paid it off early the 30 year loan would have been paid off 12 years ago. We refinanced our original 8.75% low interest loan (believe it or not that was bargain basement low back then!) to 6% when we refinanced and paid for a major expansion of the house many years ago. We paid that loan off in ten years and were mortgage free since. We didn’t ever throw a lump sum at the mortgage, we just threw extra money at it most months, my wife actually handled that so I never really followed the progress. It did feel nice once we owned it, but also our 3,000 square foot house is only worth a couple of hundred thousand, its not a meaningful part of our net worth. So being paid for or not paid for would still be petty cash to us and probably wouldn’t represent much of a mental burden or boost. Our net worth changes that much in a single day sometimes when the stock market is rocking and rolling up or down. I imagine if feels different when you are earlier in your accumulation phase or when you’ve got a million dollar HCOL house.
You have some interesting points here that I think are worth highlighting Steveark. There’s the falling interest rates. Even in my short timespan, when I graduated college you could get a guaranteed 5% return on a savings account. Cheap debt creates an interesting situation.
Second, the price of your home. I think the higher the cost of living and home prices to enter the market, the more paying off that mortgage might diminish future returns. Having a $200K mortgage vs a +$500K mortgage makes a big difference in which strategy you choose to implement, as well as the psychological factor of feeling okay.
Third, once you get to a certain point with compound interest, as you have, the mortgage becomes so minuscule it might not even matter. It seems paying off early might give you the expenses flexibility while holding onto it might give you the superior returns flexibility. Both choices depending on lifestyle and risk profile.
Thanks for sharing your experience and choices Steveark!
I’m sure you’ve read my position before, but I strongly view mortgage payoff as part of your asset allocation . Money invested in a mortgage has a guarentee return. So I paid my mortgage off as I went in lieu of bond purchase portion of my contributions, at least after the liquid emergency account existed. Ultimately I paid off last year.
Always a solid choice as well. Treating that guaranteed return like a bond. Safe and predictable which might allow you to take some more risk in other areas of the portfolio.
Congrats on paying it off, must feel good.
Going this route would be al little tougher for me since the So Cal housing market is much more expensive, hence a larger chunk than I would like would be going to that guaranteed but lower return.
My thoughts here were less about the payoff and more about percent contribution. Imagine I had 100k to invest for 2021. I want an 80 /20 portfolio. So I’m this model I would ensure I paid 20k on principal a year and 80k to stocks…
Gotcha. Makes sense.
When I purchased my house, my first mortgage was at 11% and the second mortgage (to make up for not having a 20% down payment) was at 13%. I was SUPER motivated to pay that off pronto. Mortgages work differently in Canada in that the most common term is 5 years after which you have to re-finance again. Of course they still amortize the debt over 25 years,….. Anyhow, starting with rates that high, there was only one place for them to go – and that’s down. But my psyche was scarred at that point, so I kept my ‘pay it off as fast as you can’ philosophy and paid the mortgage off early by keeping my monthly payment amount the same while the interest rate kept going down – gotta love those variable rate mortgages.
Paying off that mortgage was golden. My annual living expenses were nothing! The money piled up faster than I could spend it (I’m not a big spender) and it was that surplus that kicked me in the pants to finally learn about investing. Fast forward a few years and I’m FI.
When I sold the house (it appreciated in value quite nicely after 28 years) I set aside a portion of the money to purchase my next place. When putting in an offer on my current flat, I toyed with the idea of borrowing money (instead of using mine) but alas, without an income the bank would have nothing to do with me. I could have borrowed against my portfolio, but the borrowing rate was not favourable (less than 2% for a traditional mortgage versus greater than 4% for a loan against my portfolio). Besides, I like things simple. This way I don’t have to sweat any market downturns. My living costs are stable and absurdly low. And I’m not paying those evil bankers a single penny more than I have to.
Hey Veronica. Screw those evil bankers! Hahaha.
I mean fuck, 13%, 11%, even 8%. Those are high rates to be chipping away at, so I think you made the right choice in tackling that first. No guarantee you’d get a better return in the market otherwise.
That’s interesting how Canadian mortgages work. Thanks for sharing that.
Seems like it worked out well, with you selling the home and buying with cash. It’s all about finding that right fit for you, which it sounds like you’ve done.
Thanks for dropping me a line and I appreciate the insight.
I have not yet taken the housing plunge for the same reason you delayed–HCOL area and hammering VTSAX in pre-tax and taxable accounts instead. It seems a lot of folks are approaching their mortgage in a similar fashion with rates as low as they are. It’s free money, especially in this market, to borrow at 3 percent or less. That could change, but even assuming 7% returns (which we’ve well exceeded this decade), it makes more sense to continue investing instead of rushing to pay off the home. I do have some debt allergies and paid off some student loans that, in hindsight, I probably could have kept hanging around. I definitely get the emotional aspect, but I think at this point I’d be comfortable keeping that mortgage for a long time.
Dude. It’s SF. You can’t get more brutal in the housing market. Your neck of the woods puts mine to shame. Haha. Might as well be buying real estate on Jupiter. I’d be curious to know in what scenario it actually would make sense buying… that would have to be a hefty salary. I read financial samurai sometimes and his numbers just seem like funny money to me. That tech city is a different world.
If you have a good renting situation, do what you’re doing. With real estate as nuts as it is right now, it makes people have FOMO. But it will cool down and I’m still a believer that long term the market will edge out real estate (only my worthless opinion, many argue the contrary). Plus, I think people tend to forget real estate needs to be more of a long term play because of transaction costs. if you’re younger and single, that flexibility in renting and being able to change cities easily has a high value.
I think the older you get, the less that renting flexibility tends to matter. At least if you’re planning on putting down roots somewhere or starting a family. The travel nomads would argue otherwise.
Yet either way, both are great options to consider and mull over.
If Tom Sawyer was alive today, he’d absolutely find himself fending off vixens in a sorority! Lol! Or finding some trouble there!
I refinanced my house last year and started out paying extra every month. My plan was to pay extra until the market tanks, then stop the extra payments and redirect it to investments. Well, I stopped that extra money August 1 and have been investing the difference, even though I think the market is overpriced, especially for non-retirement assets. With an HVAC system to replaced in the next few weeks, I might redirect another month or two to that expense.
Either way, I’m with you that it’s sort of silly to pay extra on such cheap money. If the government is going to inflate the shit out of our money, may as well invest and try to have more even if it’s worth less.
How’s homeownership going anyway?
Why hello there miss Katie. Nothing like a random Sawyer reference to keep the readers honest. Ha!
Like you, I find it hard to allocate any additional funds to the principal with capital so cheap. But as FTF mentioned, that safer guaranteed return can pay psychological dividends for some, or be used creatively as a bond offset. Beauty in the eyes of the beholder, right?
However, once I’m looking at a real FI date, maybe my mindset will change. I don’t think so, but you never know.
Homeownership has been good. Knocked out a lot of little projects over the past six months. My entire front yard is torn up right now, replacing water hungry plants with succulents to better fit the climate. However, I’ve placed that on hold with the summer heat. Once fall hits and the temps drop, I should be able to at least finish the front yard this year. Backyard will have to be tackled next year.
Things are progressing, but slowly. We have a huge fence project that I’m hoping will hit this month, (ripping out bad rusted chainlink fencing [although nothing against Freddy’s fence] and re-fencing the entire back yard). Problem was we were on a four month wait list because all the companies have been so backlogged. Biggest challenge has just been finding people that can do the work.
But overall, in regards to neighborhood, space, yard and finally having central air/heat, it’s been worth the high price tag. Doggies love running around (at least the one that can still run… haha).
Hope you’re having fun on vacay and I love the Tom Sawyer/Vixen kind. Genius stuff even if I’ve no idea what it means! 😁
Like you, I never included my house with mortgage in my net worth, nor do include my current fully paid new home for the same reasons you mention above.
I did have a mortgage when I stopped working, but I did have a transition plan. That was to pay cash to build Fate Estate up here and then sell the CA place when the new one was ready. There was about an 18-month overlap. So, my plan was not to have a mortgage in retirement. That said, in my 18 years on my former mortgage I always threw down more thank the monthly payment.
Vacay was good. A quick week trip up to your neck in the woods. When COVID finally settles down I’d love to plan a meet up. Someday I want a tour of the Fate Estate!
Yeah, I had thought you’d paid everything off. Interesting how you did it with the transition and always doing extra principal payments. I’m curious, was that due to a higher interest rate, or preference?
It will be intriguing to see what happens when interest rates rise. I think it’s easier to lean on a mortgage while money is cheap. But if we have several flat years in the market, it might make many of us think again.
Thanks for sharing your thought process and strategy Mr. Fate!
I don’t plan to pay off my mortgage ever. I’m the same as you as I don’t count my home as an investment, and my loan is under 3%. I feel that as long as I can make 3% in the market on an annual basis, I’m better served plowing my money into index funds, hence my refinancing two years in a row to better serve cash flow not pay down. Once I pull the plug, the plan is to rent the home out and travel. I can easily make double my mortgage payment in rent and I’d hire a manager. I don’t have this potential rental income included in my FI income plan, so it will be a nice bonus and emergency (college?) fund and I see it as a nice diversification from the market.
Not sure what the “later on” plans will be for the home, I’m talking like in 20 years. I don’t see myself ever buying another SFH again. There’s just too much hidden money cost involved in home ownership for me to deal with on a fixed income…at least with bay area cost of living prices. Condo? Maybe. My wife would like to move back in when our travels are done. Really can’t beat a $1630 monthly mortgage, especially in a decade or two. I’d prefer to live out of state…but I’ll have to cross that bridge when I get there.
Like IF, I don’t know how you SF guys do it. Getting in the market while you could, was a great play.
Can’t wait to see how your travels pan out and that is a smoking deal of a mortgage for the Bay area! Hahaha. That will help you sleep at night.
Travel, rent it, and see where life takes you. Who knows what your young ones will decide to do as they grow up. 20 years is almost another lifetime for you and I.
Either way, it looks like you’re well along the path to owning your own time and having flexibility with your family. All great and commendable accomplishments.
Keep it up bud. More options are cresting that distant horizon soon.
For me and my wife, the math said “keep the mortgage” while the desire to pare the household down to one income said “kill the mortgage”.
We decided we’d gun for the latter. One move from San Gabriel CA cross-continent to Georgia (so we could buy a house outright) and we could not be happier. That was fifteen years ago, and we’re still happy about that choice — yes, there was some good luck in the mix, we know and are thankful for.
Hey Joseph, that is awesome to hear! Fortuitous timing can only happen by setting yourself up to be in the right place at the right time.
I’ve just done a very minor geo-arbitrage like you in March. Let’s just say I moved from a City that neighbors San Gabriel to a new City that neighbors LA County. So moving out of your old neck of the woods to a little more affordable area in the suburbs.
Glad you guys made the right choice for you and everything worked out!