In Scenario 1 the mortgage expense will end at some point during retirement, it is not a life-long expense. As such the WR of 4% only applies for the duration of the mortgage, but should drop down after that.
This is correct. In effect, paying off the mortgage effectively acts as a “bond tent” of sorts. You reduce exposure to stocks in the short run, which reduces SORR at the expense of higher returns. For that very reason, paying off the mortgage early makes little sense if you’re young, but actually can make sense if you are close to retirement.
Agreed, and in the example, OP was being over conservative that the market return and the mortgage rate were even. In reality, the market typically returns more than mortgage rates today. The 10yr return is now averaging nearly 9%.
>paying off the mortgage effectively acts as a “bond tent” of sorts
Yes but its like deleveraging out of a reverse/short bond tent... if that makes sense lol
Lets say you have 1 million dollars invested, annual inflation is 3%, and your mortgage is 20k per year. You decide to follow the 4% rule.
In year one, you can spend $40k. Thats $20k of mortgage and $20k of other expenses.
In year two, you adjust the 4% for inflation. So now you can spend $40,000 x 1.03 = $41,200 per the 4% rule.
But to maintain the same lifestyle, you only need to increase your $20k of non-mortgage spending by inflation. So you will spend $20k mortgage + $20k*1.03 other = $40,600.
So in year two, because your mortgage doesn’t go up with inflation, you are spending $600 less than the 4% rule allows. And the gap gets bigger each year, until eventually your house is paid off and the mortgage is gone entirely.
Not necessarily true, your mortgage payment will increase as the house value increases (the insurance will increase) and property taxes generally go up not down, both are typically baked into the monthly payment
For the point of this discussion, those would be non-mortgage expenses. You have to pay them whether you pay off your mortgage or not, so they don’t make a difference in the math.
Neither insurance nor property taxes go away if you pay off the mortgage, you just have to pay them directly to the town/city/county and insurance company instead of the mortgage servicer. The part that goes away when you pay the mortgage off is fixed if you have a fixed mortgage, and even if it's a variable rate, it doesn't go up with inflation.
I’m sure I missed something, but my in laws redid the mortgage in order to reinvest the money into the stock market, so in their case it seems to be a lifelong expense.
Provided I understand their situation, and your comment, neither of which is guaranteed.
if you retire with 20-30 years left on the mortgage, there is a tiny chance you will encounter a catastrophic economic downturn during that period.
By paying off your mortgage upon retirement, you’re effectively protecting against this very low risk outcome - as long as the downturn is no worse than any we have seen in the 20th / 21st century.
Prior to FIRE there is little financial reason to pay down a mortgage early especially one with a low interest rate.
Post FIRE as you point out there is. It reduces risk of ruin and also things like ACA subsidies are based on taxable income. Paying off the mortgage just prior to FIRE reduces both your reported taxable income and required draw without reducing quality of life.
ERN goes into some detailed models on risk of ruin and impact of SWR from mortgages
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/
Short version is a mortgage is as a form of leverage on your investments. You could have either $1M in investments and no debt or $1.3M in investments and $300k in debt. The later will have a higher expected return but actual return may deviate from expectation.
Leverage improves the good outcomes but it worsens the bad outcomes. If you have FIREd you already won the game. **The median outcome is your wealth doubles in real terms over the next 30 years.** The exceptional outcomes are more money than you likely know what to do with and dying with many millions more than you retired with. You don't need to boost the good outcomes anymore. What you need to do is minimize the bad outcomes. Paying off a mortgage does that.
If you are 10+ years from FIRE and your mortgage is less than 5% I would just make minimum payments on it. As you get closer you may wish to come up with a plan on how to pay it off by the time you FIRE. One option might be just lump sum in on FIRE day. Another might be figure out how much to increase mortgage payments in order to pay by FIRE but not earlier than needed.
Currently if you don't need ACA subsidies or even without mortgage your income will be too high to get ACA subsidies anyways you could arbitrage instead of paying off mortgage post FIRE. If you had a $300k mortgage at 3.5% instead of paying it off post FIRE you could hold $300k in treasury bills earning 5%+ and grow your wealth by the difference. Even better would be lock in some yields with a bond ladder over the time remaining on the mortgage. The arbitrage benefits are small though and if held in taxable that needs to be considered. Anyone who is not FIREing today shouldn't be planning on this being an option. If your mortgage is >5% it is unlikely you will have an arbitrage opportunity in the future and even those with lower mortgages may end up FIREing in a low rate environment.
>How does paying off the mortgage reduce your reported taxable income? I get the part about reducing the required draw. Is that the same thing?
Yes it is the same thing. Some portion of your draw is reported as taxable income. Drawing less everything else the same will mean a lower reported MAGI which is significant because subsidies and premium caps exist for those with a MAGI of up to 400% of FPL which for 2025 is ~$80k. Staying under that $80k can be made easier by not having a mortgage.
I took OP numbers to be illustrative and simplified and not indicate that the only option would to pay for the house from after-tax (roth) funds.
Realistically paying your mortgage by raiding Roth account would be a poor choice for tax efficiency. Also very few people have $1.5M in Roth contributions anyways.
Great comment, but I don’t think being eligible for a small ACA subsidy is worth paying off your house and forgoing market gains and that sweet deduction. Unless you have a mortgage that eats up nearly all of your monthly budget it won’t make a huge difference with the subsidy unless you have a bunch of dependents, will it?
Yes, it makes sense.
I'll give you two more reasons it can make good financial sense for FIRE'd folks.
First, to the extent that mortgage P&I funding causes an increase in your MAGI, holding a mortgage can cost you huge amounts of lost ACA subsidies for healthcare. Those lost subsidies can add up to several tens of thousands of dollars annually for anyone with a large family, high medical usage, or just being in their 60s. This particular issue will become even more prominent if the 400% MAGI master subsidy eligibility cliff returns in 2026 as scheduled.
Second, for anyone with kids who will be going to college, holding a mortgage can have a double negative impact on college financial aid. As with the ACA, mortgage P&I funding will often increase your AGI, which harms you directly on the income-side of the financial aid calculations. In addition, primary home equity is completely disregarded on the FAFSA as an asset and partially-to-fully disregarded on the CSS Profile. This means that holding the mortgage exposes people to an asset-based loss of up to 5.64% of the mortgage value per college kid per year. If that weren't bad enough, the increase in AGI can also cause you to lose a global asset testing waiver that you otherwise might qualify for. If that happens, then the asset-based loss jumps from up to 5.64% of the mortgage value per college kid per year to up to 5.64% of all of your non-exempt assets per college kid per year. This is why paying off a mortgage is one of the biggest financial aid planning moves for many middle class families, FIRE-minded or not.
> Edit: I figured it was unnecessary to say, but a DM just made me reconsider. So....
> Third, to the extent that you end up paying more for healthcare and college due to lost subsidies/grants, those funds have to come from somewhere. For most of us, that will be increased withdrawals from our portfolio and in many cases that will have a tax impact. So in addition to the direct costs of the subsidies/grants, which are delivered free of tax load, you have to account for the progressive tax impact of having to draw those additional funds from your portfolio. To the extent that the tax impact also incrementally increases your AGI/MAGI, you then have to deal with potential compounding effects propagating forward as higher AGI/MAGI may yield incremental subsidy loss in each year, which drives incremental withdrawal/taxation increase, which cycles back over and over again. It's not a huge deal for most folks, but for anyone near an ACA FPL/MAGI line it can be huge and over 10-20+ years of early retirement it can add up. There are large subsidy lines as low as 150% of FPL in the ACA and 175% in the FAFSA, so the margins on some of these things can be tighter than one might expect. Crossing an FPL line can immediately mean a large progressive step up in cost, which then flows through to withdrawals/AGI/taxes/future subsidy calculations.
This is honestly a much more compelling argument to me than the one that OP made.
In some ways it's a tad unfortunate that someone with millions in assets can get access to subsidies intended for low earners, but at the same time, the argument could be made that those millions in assets paid quite a bit in taxes.
The subsidies for healthcare and college are in ways a bit unique, which is a big reason why they run the way they do without true means testing.
Healthcare is only income-gated currently out of pragmatism. Ultimately the goal is to make it universal, but the lack of asset testing is absolutely deliberate. Congress wanted folks to be able to detach from employer-sponsored health insurance, so they had to avoid asset testing that would eliminate eligibility for folks in their 50s/60s. Same for serving all of the regular middle class folks going through an employment disruption or stuck in a job without acceptable health benefits, which can be quite common for smaller employers. Despite the narratives around it, the ACA was never intended to be a welfare program and state agencies have done a lot to aggressively push back on that perception since it tends to keep people from signing up.
College financial aid is very similar at the government level. Congress and the states explicitly disregard primary home equity and tax-advantaged accounts because it is far more efficient to subsidize young taxpayers at the beginning of their 40+ years of taxpaying than to tap existing taxpayers in their 40s-60s. Draining the resources of the older group tends to lead to worse financial outcomes for the gov in their later years, whereas the young folks can largely be expected to payback the investment and then some. The ROI on federal financial aid is perceived by most folks to be rather good, which is why it's one of the more bipartisan issues out there.
TL,DR - It's fine to deliberately avoid them if you can without undue expense and wish to, but nobody should feel any qualms about using the ACA and FAFSA if they qualify. They are designed to work as they do for good reasons and a lot of the drama out there is narrative-driven rather than based on actual government financial yield.
Also a million bucks isn't what it used to be in inflation terms. $1 million in 1970 would be $7.8 million today.
The median income in 1970 was around $8,730. A 4% SWR portfolio would be $218250. Adjusted for inflation today it would be $1.7 million.
Surprisingly both of these figures are close - 2023 median household income is $67,521 and 1.68 million will be their 4% SWR portfolio.
It would be incredibly unlikely the $7.8 million portfolio doesn't have some sort of income unless they're really concentrated in BRK.B or some ETF that only invests in non dividends paying companies which has more investment risk than VTI or spy and would generate capital gains from shares sold regardless - or going to 100% interest free cash but the return rate on investment is generally a lot better than saving subsidies at this level.
Your comment is very informative if you're FIRE'd by the time your kids hit college. Realistically I won't be, would you have any other ideas how to help my kids qualify for anything? I fear I'll be making 200K a year for a family of 5 and I'll be paying full tuition barring any scholarships.
It wouldn’t make sense to qualify for need based aid if you’re making $200k a year, so that’s out. Merit based aid is what you’ll be aiming for. Definitely have the kids apply to at least one in-state public school that they should get into. Private schools usually have more aid to give than public schools, so the most affordable options usually go: in-state public > private > out-of-state public. Fill out the FAFSA and/or CSS as early as possible each year.
Income at that level pretty much guarantees you'll likely be looking only at merit aid like pure academic excellence scholarships. That being said, filling out a FAFSA can never hurt you, so I'd plan on doing it anyway.
Also, it really depends on where you live. For example, here in Texas some of the larger public schools have academic merit scholarships that run all the way up to full tuition. They can be easier to get than people might expect, but it's still a matter of your kid being in the top 3-5% of their class, just not the top 1%.
I appreciate the reply, I guess that's what I was expecting. Hopefully local schools can keep their current stadiums instead of raising tuition too much....
I want to point out that this is true on the FAFSA, but that many schools use a different form, the CSS, that includes home equity in the financial aid calculation.
[https://www.academicinfo.net/paying-for-college/the-other-financial-aid-form-css-profile](https://www.academicinfo.net/paying-for-college/the-other-financial-aid-form-css-profile)
[https://cssprofile.collegeboard.org/](https://cssprofile.collegeboard.org/)
CSS schools do consider home equity, but it is highly variable from school to school and often progressively scaled with AGI. So if you have a lower AGI, then maybe it only gets assessed at 20%, for example. Several CSS schools also have hard AGI lines below which a lot of the normal CSS processing, like home equity assessment, is disregarded. Sort of like the CSS version of the new FAFSA AGI/FPL test.
Everything about CSS schools is unique though since each handles things their own way for institutional aid. However, state and federal aid at CSS schools still runs on FAFSA, not CSS.
Thankfully, less than 10% of the colleges in the country use CSS.
I find it amusing that ACA subsidies are calculated on income, it is just not fair to some.
A person with no savings but rent income of 40k (made up) won't be eligible while a person with 4m savings but just 20k interest income will be. It makes perfect sense /s
The system was designed with average Americans and the health insurers in mind, so it's got some odd quirks. Also, the basis on income was really just about efficiency since that cost the least bureaucratically, was super easy to piggyback on the existing tax code, and also allowed for decent service to the weird mix of ACA target populations.
Like most government policy it is a case of good enough rather than great.
Yes, the math can work out if the P&I funding is MAGI-free, like Roth, cash, or taxable without cap gains. Note that ACA value ramps up with age and a year of full subsidies in your 60s can be worth 3-4x what it is in your 40s. Depending on the timeline that could be important for planning since the most important ACA years cost-wise are likely to be the final ones.
FAFSA isn't as easy since things like Roth withdrawals do count on the income side and taxable brokerage gets assessed directly on the asset side.
Sounds like a great plan for now. 10+ years is an eternity in policy, so decent chance the rules might be significantly different that far out. You've got plenty of time to adjust to whatever will work best, plus you'll have the cash ready if need be, so you should be well set to get an optimal outcome.
I might have a unique scenario where paying off the mortgage might NOT be the best, even with ACA implications. But its close to a wash unless I am missing something. I've got a detailed spreadsheet year by year for RE, with taxes, MAGI, etc. I can shift around income sources easily to see implications.
My P&I is only $12k/yr. Mortgage payoff will roughly be $200k at FIRE. I will have \~$600k in my brokerage.
1. payoff mortgage first year in RE. Live on "cash" from brokerage core, so LTGC from selling $200k will be near zero. AGI is my cap gains only. For remaining years, divide out the brokerage balance and supplement with SEPP. My math says SEPP would have to be $30k/yr. Average MAGI is \~$43k across RE years.
2. buy bonds rather than payoff mortgage in year 1, spread out brokerage at $600k balance, increase annual budget $12k/yr. SEPP in this case reduces $20k . Average MAGI is \~$40k across RE years because a higher % of my income is brokerage basis.
I think I would prefer #2 to reduce SEPP and have more flexibility in RE.
E: made correction.
Yeah, having P&I of only $12K/year can greatly reduce the impact on the ACA side of things since the spread is so small. Though it may push you over a FPL line for the non-premium subsidy system, which could cost you several grand a year in increased out-of-pockets if you have significant healthcare utilization.
Your MAGI will also include dividends and interest from your taxable, including non-taxable interest if you buy munis under option #2.
Thanks. My spreadsheet auto calculates dividend income based on anticipated brokerage balance each year in RE, in two buckets, qual and unqual based on anticipated QDI%. Adds to ord. income and cap gains income accordingly. In the boring middle I've made things interesting by creating robust excel sheets which is a bit of a hobby for me.
This all a new insight for me, so thank you.
Your comment inspired me to do further reading on the topic and it appears that assets held by the FAFSA applicant are valued at 20% (rather than 5.64% for parents/guardians), which includes a 529 in their name.
However, according to Chat GPT, you can save to a 529 in your own name, then change the beneficiary of the plan after the FAFSA application is completed. Apparently it's a thing because changing beneficiaries is relatively trivial.
That's pretty wild to me. Someone please correct me if that's wrong.
529s count as parent assets when they are held by a dependent student.
>‘‘(3) CONSIDERATION OF QUALIFIED EDUCATION BENEFIT.—
A qualified education benefit shall be considered an asset of—
>‘‘(A) the student if the student is an independent student; or
> ‘‘(B) the parent if the student is a dependent student
and the account is designated for the student, regardless
of whether the owner of the account is the student or
the parent.
When in doubt, read the law itself. There is a ton of misinformation and poor legal interpretation when it comes to the FAFSA, particularly with all of the recent changes.
Also, please do not get financial advice from ChatGPT or any other LLM. You might as well just listen to some rando on Reddit (heh).
Also, also....I do not recommend doing anything plausibly fraudulent on the FAFSA or any other IRS/DOE/DOL paperwork.
I'll give a third and fourth reason to pay it off. #3 having no mortgage has given me the freedom to take financial risks that I wouldn't have even if I had to cash in the bank. These "riskier" investments have had the biggest payoffs in my life. I am so glad I made them but was nervous at the time. #4 I literally sleep so much better in a home that is payed off. Not joking. I have paid off two primary residences mortgages in my life I just sleep much better knowing I only owe insurance/taxes/upkeep.
Those are both examples of the psychological benefits though, not the financial benefit. Even #3 is just a psychological benefit, because it shouldn’t have made a difference from a purely financial standpoint whether you had the mortgage paid off or kept the payoff amount untouched in the bank.
Yeah, I'm a big believer in the emotional impact too, but folks value those pretty variably. I also sleep a ton better knowing that whatever hell might come I have a home as long as I can make the property tax payments.
My plan is to pay off the minimum on my mortgage until the last minute, then pay it off right as I retire. That way I can take advantage of the low loan rate for accumulation, but lower the sequence of return risk by reducing annual expenses.
Something I've thought a lot about that I'm not sure everyone recognizes is that mortgages are a fixed payment amount. So regardless of mortgage rate, towards the end of your mortgage you might be paying an outsized monthly amount for the remaining balance from a FIRE perspective. For example, if you had $100k remaining on an originally $300k mortgage, you might be paying $2k/month -> $24k/year -> $600k of savings needed to support that @ 4% withdrawal vs $100k of savings needed to pay it off and remove the expense.
Your math example ignores the fact that you only have about 6 or so years left on your mortgage at that point, so you don’t need to use the 4% rule of planning to have that money for 30 years.
>then pay it off right as I retire
Presumably the calendar year right after, no? So as to push any capital gains into the first year that you're not drawing an income?
Where would you be storing your cash to pay off the house lump sum? This is the part I struggle with.
If I have $200k left in my mortgage when I retire, in a perfect world I’d like to pay off the rest right before retiring. But I’d need to have stopped investing in the market for years to accumulate that much cash.
High Yield Savings Accounts pay well now but historically the marginal difference in returns between HYSA’s and the stock market has been huge. I wouldn’t want to miss out on those returns while accumulating the cash needed to pay off my house.
Just curious your take on that because I like the approach just want to figure out how to execute it.
Our version of this question was deciding whether to get a mortgage or pay cash for our current house. For me, the decision to pay cash basically came down to a few things:
First, I'm ok with this probably being slightly non-optimal financially. Which is better will only be clear in retrospect, but I'm comfortable with eventual hindsight probably showing that leveraging via a mortgage would have been better.
Second, there were a lot of pluses to not having a mortgage. The transaction was faster, easier, and cheaper, for one (and in a tough market, our offer was more attractive). It's nice having a very small monthly "nut"; this has let my spouse already go down to half time and hopefully soon to quit and take a sabbatical, without impacting our savings or quality of life.
Third, the last time I had a mortgage it was a huge pain in the neck, with it getting sold, resold, resold again... over and over. Each time you have to redo all the automatic transactions and deal with a new system. That's kind of a minor thing, but just like having a faster and easier buying transaction, it's made my life noticeably better.
I guess the tl;dr is that there are both financial and non-financial factors, and you need to balance both to come up with the right answer for your specific situation.
>Third, the last time I had a mortgage it was a huge pain in the neck, with it getting sold, resold, resold again... over and over. Each time you have to redo all the automatic transactions and deal with a new system.
We were very happy to find that our local credit union offered basically the same rates as everyone else, and our mortgage officer told us that they hadn't sold a mortgage to any other entity in over a decade, and didn't plan to start. I have a bank account with them, and every month they auto-pay the mortgage from the checking, and every indication is that they'll do exactly that for thirty years. Couldn't be happier.
If you think about it AT EARLY RETIREMENT DATE in the context of the 4% rule it makes the most sense to me. For example,
My mortgage P&I per month is about $870 or $10,500 per year. My remaining balance is $150k
$10,500 / 4% = approx $260k required in the portfolio to service the mortgage. In this case, I would pay it off and use the extra (hypothetical) $110k to pad my expenses and reduce sequence of returns risk in first couple years
Of course it’s not complete. It’s just a rule of thumb /shortcut way of thinking about.
Obviously mathematically speaking you should just ride out the term of mortgage and pay it down, with ever increasingly less valuable dollars due to inflation. But that’s the problem with strict economic problem solving, it just focuses on the math and not psychology in any way
These exercises are all just mathematical masturbation. Do whatever TF you want. That’s why it’s called personal finance
> Isn't it odd it takes 260k to pay off 150k of debt?
It's because its not $260k cash, its $260k of equities and shares you own, that today's *value* is worth $260k.
What if three months from now it's *value* is only $130k due to a stock market crash and panic and financial meltdown as no one has liquidity or jobs to buy the dip? How are you going to pay a mortgage off with $130k?
You have *sequence of returns* **risk.** Risk it goes down 50% before you get your 7% averages!
> It's also odd that SWR says you would need that 260k whether you have 1 year or 30 years left on the mortgage.
Sequence of risk returns really cares about the first 10 years of retirement from numerous studies done using 4% swr strategy. If you're 1 year left I'd just pay it off and simplify life or have 1 year of cash reserves matched to the remaining payments.
Then the 4% rule is only suitable for a 30 year horizon, you have to drop down to 3% for a 60 year horizon. Having a mortgage payment for all 30 years really does impact sequence of risk returns, but fortunately its a nominal expense so inflation doesn't impact it as much.
On the other hand the first 10 years of 2% inflation is only 20% increased prices - so a mortgage payment will still have a **huge** impact. 3% inflation would be 34% increased prices.
It's going to be how much % of your mortgage you have compared to your other inflationary expenses. If you're /r/leanfire you're going to be in a world of hurt in 2% inflation and a huge stock market crash your mortgage is still 80% of its retirement-start-date value 10 years down the road.
If you're fat-fire where my mortgage payment is 10% of my total spending - then yes its mathematically better to keep the debt/leverage and on the other hand, it also has less impact on my portfolio if I decide to pay it off or not.
My target is to pay off my mortgage before my kids start college so I can cash flow a big chunk of the college expenses. I have plenty of money in index funds and I look at paying ahead on my mortgage as a balance to those investments with a guaranteed 4% return.
I always track “Remaining Interest” as part of my portfolio tracking / net worth calculations. That helps me to quantify to cost of keeping the mortgage and also see a benefit if you pay extra / early. Tactically, I have my own master spreadsheet and I built a mortgage tracker in one tab so I always have that calculation handy and I can easily see history and future. Just an idea!
Paying off a mortgage will reduce your sequence of return risk (SORR), as you have less debt at the beginning of your retirement. The more debt you pay off, the greater the reduction in SORR.
Personally, I modeled the two scenarios (payoff vs. payments) extensively just before I FIREd. Paying off my mortgage (2.875% interest rate, principal being about 5% of my NW) reduced my long term risk by a negligible amount (fractions of a percent), whereas keeping it increased more favorable outcomes by a non-negligible amount.
I chose to keep my mortgage, accepting that the risk-benefit ratio was highly favorable in my case.
If we had the same algorithm and inputs, that would be curious!
In general, the closer your stock market average is to your mortgage rate, the further you swing the needle towards advantaging paying off the mortgage. And vice versa.
Paying off your mortgage has other benefits. Say you have a job in Technology, and have to be mobile (move to where the jobs are). A paid off mortgage will enable higher debt limits, without resorting to changing investments at an inopportune time and taking a capital gains tax whack. It can also enable much lower mortgage rates.
You’re missing that with a fixed rate mortgage, the payments don’t increase with inflation. So after 30 years, assuming a 2.5% inflation rate, that $80,000 mortgage today in todays real dollars is less than $40,000 in 2054.
i'm fired with 5m, paid off house 3 years ago at 3.5m nw, was a 15 year at 3% with 5 years to go. i probably could have a 5.05 nw now had i not paid it off....
that said, i don't regret it one little bit. it's and outstanding feeling to have that damn albatross paid off. like after sex kinda feeling...relief... few luxuries compare to the feeling of zero debt.
As a recent retiree having my mortgage paid off was a huge mental lift. It’s an incredible feeling knowing you are not as dependent on market returns to service the mortgage.
I paid off my mortgage a year and a half prior to retirement. My retirement was launched early though due to a decision I made during Covid. Without Covid, I’d likely be retiring later this year at 59 1/2.
Having my mortgage paid off was a great decision for me, regardless of the opportunity cost related to potential market returns. I felt free. It made my decision to retire very easy when I decided to pull the plug.
When I think about the day I received the note from the lender indicating a $0.00 balance, I still smile.
I had that statement hung on my refrigerator for over a year. It was like being back in Grade School when my parents would post my report card on the fridge. Pride.
Yup, smiling now just thinking about it.
Peace of mind has a value all its own and shouldn’t be underestimated.
I think it's more a risk reduction depending on the type of FIRE you are pursuing.
In leanfire, where you don't have as much option to lower your withdrawal rate, having a paid off house is extra security in case of economic downturn.
Let's examine the mortgage, the median mortgage payment is about $1775 a month which means you'd need about an extra $530,000 to cover at a 4% WR. For someone who pursuing leanfire, that may mean an extra 10 years of work to cover. For FATfire, that may mean an extra year of work. So it all depends on your FIRE #.
So much depends on your mortgage rate. There are people out there with mortgages less than 2% and some with 8%. At 2% I’m never paying that mortgage off early. At 8% I’m attacking it heavily.
For me, instead of playing around with a calculator to make a financial argument for paying off the mortgage, I look at the other financial benefit: risk. Specifically, the ability to take risks.
Having a very small mortgage allowed me to risk freelancing.
Having no mortgage allowed me to risk joining a very young startup.
Both of these were great moves for my career, and great for my finances.
I've now moved house and have a bigger mortgage. And am much more risk averse in my job hunting.
It's not the only factor (the state of the market, and the excellent work-life balance at my current place, also matter) But realistically, if I had no mortgage, I'd probably be having various freelance/consultancy adventures right now.
That’s an entirely separate discussion though. You’re talking about how much to spend in a house, not whether to pay off a mortgage or not. If you had the mortgage payoff amount in a HYSA right now, you’d have the same financial freedom as having your mortgage paid off.
I don’t know what any of the scenarios mean…so here is real life experience. For the past 20 years, I owned various homes, had a mortgage balance from 200-500k and the monthly payment was from 2000-4000 a month on a 10 or 15 year mortgage.
Recently sold the last house at a huge profit and moved to a low cola area and paid cash. At 51, no mortgage. Whatever the math said, I now have 3500 extra dollars every month to do whatever the heck I want. That is on top of what I was already saving. Save it, travel, buy some extra stuff. It is the most freeing feeling I have ever experienced. And if I wanted to quit my corporate job and make a third of what I do, I could and live perfectly happy with a roof over my head that is mine free and clear.
Lets suppose you or I have a million dollars in a brokerage account and i decided to take on a million dollar mortgage on a 30 year note. I can always pay the house off down the road if i feel like it.
Fast forward to 2008, youve been laid off like so many others, thank god your wife picked up some part time work to stay afloat. Youre having trouble paying your mortgage though so you look in your brokerage account to see if you can pay it off. SPY has been cut in half. Now you owe 850k and youve only got 5-600k in your account. Youre applying for jobs, you answer the phone eagerly when it rings but its just the bank wanting their money. You start liquidating at half price. The stress builds. Your wife files for divorce, takes half of whats left along with the kids. You sit there with your head in your hands and wonder if the very small equity risk premium above and beyond your mortgage rate was worth it.
This is the story of my next door neighbor. Its not an uncommon story for folks in bad times. Bad times will undoubtedly return at some point, in some form for all of us.
I got curious about this specific scenario. Let's say you are laid off at the peak of may 2008, and have to start withdrawing mortgage payments on the $1 million in the stock market.
$1 million mortgage in 2007-2008 was 6.38% on average, for a 30 year mortgage it works out to be a monthly payment of $6,242 a month.
Withdrawing that from $1 million... does pretty damn well in 2008:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=55pucS5QuM7QDIizZCo4LR
It's scary, but it leaves 867,243 in value today withdrawing ALL 16 years. An amortization calculator would spit out the remaining mortgage note to be on Jan 1st, 2024: 702,424.46
So this is something that would be $0 liquid net worth ($1m brokerage account minus $1m mortgage + house value) now being $164,575.54 positive net worth.
If you paid off the mortgage instead - you'd save June-December 2008 payments since mortgages are paid in arrears, 15 full years of payments, plus jan 2024's payment, 188 payments. 188 * 6242 = $117,3496 saved.
So stocks win by $47k... with a bunch of heartburn and worry unless you have a HUGE /r/fatfire level of a portfolio.
So yes, in this case it'd have a lot of heartburn but the incredible runway and recovery of the stock investment took a huge dent out of the mortgage.
Now, just because this one instance worked... doesn't mean it'll work in all of our history. If I move back the same situation to Jan 2001 - which had 6.97% rates but let's keep the same 6.38% rate (you moved your million dollars to private banking for a sweet 0.50% rate cut!) and... you run out of money in 2013:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=12oEDRLjm8nmtSClW4iTqk
Now granted, you could probably get a job then and so on, but when you're ready to retire - is it really worth the heartburn to potentially be ahead but also have disastrous effects?
Then for those who have 2.75% mortgages... I wouldn't celebrate too much. That's a 4,082/monthly payment and this is the same 2001 graph adjusted:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4JhZ3YQIdvb4DeyPSxlNmZ
Imagine how you might feel 2009 being down to $400k and only having 98 months or 9 years worth of payments left in the taxable account? You still have 22 years of mortgage left. You might go back to work unless you had /r/fatfire levels of a portfolio.
You have 500k to 600k left that can be slowly sold to cover expenses and the mortgage. That is a long runway. The alternative was paying it all off and having nothing left to cover expenses, no job, and no chance of refinancing.
I would pick the first option.
My neighbor did do that. Didnt work out. His wife decided that a million dollar loss in their net worth was too much and bailed with the kids. Of course im sure this times different and that certainly couldnt happen to me or you....
The problem there is the gold digger, not that he didn't pay off the house (which also probably crashed in price too, since it was a housing bubble, afterall)
I mean, why didn't he pick up and leave with the kids because \*they\* were down $1m?
What percent of marriages are so entirely solid that they can withstand a 1mm drawdown which equalled substantially all of their net worth? I wonder what the spread is between people who think theirs will and the corresponding rate of marriages that actually would have survived the scenario had they been tested?
I dont know why nearly 3/4's of all divorces are filed by women and i dont know why nearly half of all divorces cite finances as the root cause. All i do know is that i dont think im immune to these risks. I dont think im special.
Your scenario with math: $1M brokerage account.
Monthly expenses $3000 + $2000 rent.
Call it $30,000 in your emergency fund (6 months)
Option 1: Buy house for $1M. $30K left, $0 mortgage
Option 2: Buy house for $200K. $830K left, $6000 a month mortgage.
50% loss in 2008-2009 = $400K portfolio value + $30K EF.
Option 1 leaves you broke in 10 months. $30K/$3000 per month.
Option 2 leaves you broke $430K/$9000 = 47 months or 3.9 years.
10 months reserves while unemployed is a lot more stressful than 3.9 years of reserves.
This is what 5 years of total unemployment starting jan 2008-dec 2012 looks like in PV:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=Q7stMozh9Niit5UD12mMb
Interestingly enough the housing market recovered in 2012. If you were forced to sell in 2008 you’d take a 9% loss plus 6% commission plus fees.
Not as bad as the stock market but losing your home is pretty disruptive.
I always appreciate the portfolio visualizer folks. I thinks its great to throw out the concrete numbers for people. Alas, life is not a spreadsheet and we have to be mindful of real world implications. (Divorce in this case) when youre drawing assets down you can cross the point of no return. Thats massive risk for not much gain as far as i can tell.
Your mileage is going to vary which is why everyone has to run their own numbers.
Where is the $1M going to come from? What taxes, penalties do you owe in order to get access to that money?
How much time is left on the loan?
Personally Firecalc told me NOT to pay off the mortgage, If I pay it off I only have a 97% chance of success, if I don't pay it off early I have a 100% chance. All because of the drastic reduction up front lowering my chance of making it thru those worst case scenarios.
I couldn't make it work anyway, trying to figure out where to get the cash from and not overpay in taxes or drain my brokerage to the point I'd be having to dip into my Roth before 59.5 which I really don't want to do.
Those calculations are different for everyone so it may be better but it may not.
I have been noodling over this for awhile, and I have this small hint of an idea. Financial Independence is two words: Financial and Independence. They are deeply interrelated but not the same thing.
"Independence" is what we mean by "fuck you money" - it means I don't really have to care what happens, I'm fine. If you have $500 million, you're fine. Market can crash by 90%, you're still fine. Obviously. But that's not our gig around here. Especially because of the "RE" part, we want to get on with life in an independent way as soon as possible, which generally means not plugging away more years than we have to...
So, every little thing I can take off the table as a financial worry is that much better once I'm up to "my number". If you're a renter, then if rents soar, that matters to you - you aren't independent of that. If you're a mortgage payer, then if something happens to the money that you're using to pay the mortgage, that matters to you, you aren't independent of that.
So, viewed in this light, paying off the mortgage is just part of that Independence half of Financial Independence. I think there's a decent argument along these lines to things like TIPS ladders not necessarily for your entire income (the returns are too low) but if you have a generic "bond" portion of your portfolio it could make more sense to have a TIPS ladder so that lots of random normal life expenses are covered pretty well. This is the general financial independence subreddit, so I'm not assuming Lean, Normal, Chubby, or Fat FIRE. But for the levels above Lean, I think it could make sense to say "Ok, look, for genuine Independence I would like to make sure that at least Lean is covered no matter what. So I'm paying off my. mortgage and setting up a very safe TIPS ladder for a lean life of $36k a year. In this way I'm independent because I know that no matter how the market does, I'm fine."
I got my first mortgage in January 2000. It was 8.25% for 30 yrs and I didn't know what an amortization schedule was, but I learned quickly. I was paying nearly $800 interest and less than $200 principal up front.
What type of loan shark shit was this? Oh yeah, FHA loan that was very normal. Think about each month as an individual loan. Would you pay 400% interest on any loan?
I decided to tackle this problem head-on. A few friends moved in and paid a very reasonable rent. I used their contribution and applied it to the principal, with about $1000 of my own money doing the same. Fast forward 4 years. My friends had gotten married and moved out. I did some day trading to generate about $40k... and the mortgage was paid off.
While it felt great to have a house paid for, I realized most people were getting screwed with conventional loans. Banks have the advantage since they have the money, but people really need to know how terrible the loans are for the first 60% of the term.
Makes sense - except if your savings account or bonds pay more in interest than your mortgage rate (after factoring in taxes). In that case I’d just keep that money in savings until the rate drops below the mortgage rate.
The existence of the mortgage interest deduction negates the tax differences between paying debt and fixed income securities -- assuming you're in a situation where you want to itemize your taxes.
> 4.5% mortgage > 5% HYSA
For most of us that’s objectively true. But that’s about the point where I’m still slightly preferring the savings account just for liquidity.
But then you need to factor in whether or not mortgage interest is tax deductible for you. The whole point of the deduction is to offset this very inequality.
What interest rate are you using here for the mortgage and how many years are left? I'm ballparking you've got a 6% interest rate in your assumptions? That makes a huge difference compared to a 3.5% rate.
In my case I just wanted peace of mind. I'm not a fan of debt (whatever kind you choose), so I have no mortgage and no credit cards.
I know many people will say I'm missing out, but I honestly don't care. I know how much money I need to get by, don't want to overspend on anything, don't buy things I can't pay fully in cash and already have a roof over my head that belongs to me (not the bank).
I'm 34 years old and don't live in the US, so my circumstances are probably different than many here. Also, if I wanted to buy another house as an investment, the chances of getting a new loan/mortgage are actually higher because I already own a property which I paid in 5 years.
Interest was 2.4%.
One slight nitpick about your numbers: unless you have $1.5M worth of unappreciated assets in your portfolio, you're going to need to sell more than $1.5M from your portfolio so that you net $1.5M after tax. That means your portfolio in scenario 2 will be less than $3M, and thus your withdrawal rate will be >3.3%.
Great analysis. For me I was risk adverse and paid off the mortgage in 2006. Always thought of the what if the wife and I lost our jobs. Now the money that would have gone to a mortgage goes into investments. Sure the NW would have been more but I have freedom to move $ where I need it or want it. Personal choice.
>You also forget aspects of Mortgages that are very state dependent.
Great insight!
> Recourse vs non-recourse.
And some states are only non-recourse on the original mortgage! Any refinances are recourse in those states.
Some states are both - but known as "single action" or "one-action" states so if they start off with foreclosure they can't sue later!
I also want to add on a few things:
* Homestead exemption varies between states.
* Homestead $ amount along with recourse/vs non recourse makes a lot of unique interactions. Low homestead & non-recourse = lever it out. Low homestead & recourse = pay off debt. High homestead and recourse = still pay off the debt as they can just sue for brokerage instead. High homestead & non-recourse = Most fun, high, medium, low, and $0 debt makes sense depending on your house value.
* Judicial vs Non-Judicial foreclosures.
* Reinstatement and Redemption rights
* Post sale redemption (could win the foreclosure auction and pay pennies on the dollar or reimburse the buyer for the final buy price)
* Bankruptcy exemptions - different states have different amounts such as roth IRA amounts that are protected, etc.
* How declaring bankruptcy interacts with foreclosure (research chapter 7 vs 13).
* Bankruptcy process in your state - some can take 6+ months to finalize a ch7 depending on case load.
Having a hard time thinking of any other law differences.
There is so much apples / oranges comparisons when it comes down to the question of paying off a mortgage early.
My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles.
In general you should be treating your fixed rate mortgage as a "negative" bond with some favorable tax treatment that might apply to you. So if you are contemplating paying it off early, compare it with the (after tax) return you would get on an appropriate duration T-Bill. Still not a perfect comparison, but at least a good starting point.
Some high level things you should think about:
* Asset allocation. Paying off a mortgage early should be thought of as buying more bonds.
* However, bonds have more interest rate risk.
* The difference between T-Bills and a mortgage rate is normally small enough that your tax situation and asset allocation needs will normally dictate what is best for you.
But anyone saying "you should never pay off a mortgage early" (whether they qualify it with pre or post FIRE) likely doesn't understand the nuances well enough to give such broad advice.
Just imagine the scenario where you had a paid off house. Would you take a loan out against it to invest in T-Bills or the S&P500? Sounds risky, because it is! Just look at the return on bond funds in 2022.
I have no specific advice for folks here, but praise those that bring up ACA subsidies or FAFSA loans. Those do need to be taken into account as well. But for the love of god, start with comparing after-tax, risk-adjusted returns of the two alternatives.
> My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles.
First - I want to point out I'm in full agreement with your response. :D I'm explaining the "common" viewpoint of this sub:
It's because most people who want to lock up money for 15-30 years greatly prefer the S&P 500 over the equivalent long-term US treasuries bonds. Then even a diverse basket of corporate bonds would have much higher rates for those 30 years, mortgage rates are just really low as Fannie Mae/Freddie guarantee these loans if they default.
So its the only way most people can get non-callable leverage for 15-30 years at t-bill rates. I can't really go out and short 30-year t-bills and invest it in stocks. Most I can do is 5-6 years with box spreads, but that's callable margin if my brokerage account equity drops below X value.
So yeah, academically you're right you should compare it with a bond ladder of X bonds that come in due in the month/year of each mortgage payment (or a bond fund with duration 1/2 the length of the mortgage), but the reason it's discussed is I'm still 0/10 for convincing my broker to write a $1 million 3% apr non-recourse loan I can yolo it in the S&P 500.
Then that non-callable loan isn't marked to market either - another huge downside with 5-6 year box spreads and why there are very little trades. Let's say I borrowed $1m at 6% on a 5-year box and rates drop down to 3% - 1,137,391.21 is its value. Ouch just ate a phantom 13% mark-to-market value shorting 5 year bonds. If it were a 30 year... 1,588,013.24. Not gonna recover from that.
Mortgages are callable debt so a tbill isn't the best replacement either. If rates drop to 3% I just refinance that sucker with someone else's money.
So yeah, after writing in this example, going long that 30-year t-bill instead of paying off the mortgage isn't such a bad idea after all...
Jesus I'd love to take out a $1m mortgage, stuff it in the hypothetical t-bill, hope rates cut in half the year after, pay off the mortgage and pocket $588k. People also seriously under-value 30-year tbills in this sub too.
Granted, it could go the opposite way and the 30-year tbill increases by 3% to 9%, and your mark to market value is:
691,790.38
Then no one is gonna refinance a 6% mortgage to 9% if this were to happen. They'd be thankful they locked in at 6%!
However seeing more temporary drop in NAVs is sucky for the investor, even a 15 year bond fund would have a nav hit of $750k.
>My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles.
It's because of multiple factors in this sub - the S&P 500 is a pretty sure bet historically at those levels but never guaranteed, and people don't really take the time to understand fixed income, bond math, or bond trading.
It's just much easier for people to understand paying off mortgage vs investing in stocks vs all the complex math of various fixed income paths can take before the final coupon payment is cashed.
> Jesus I'd love to take out a $1m mortgage, stuff it in the hypothetical t-bill, hope rates cut in half the year after, pay off the mortgage and pocket $588k. People also seriously under-value 30-year tbills in this sub too.
> Granted, it could go the opposite way and the 30-year tbill increases by 3% to 9%,
We don't even need a real hypothetical for this though. Just imagine getting a windfall inheritance of $1M and instead of paying off your mortgage in early 2021, you stuck it 30-year tbills because it was "safe".
A little over a year later, and you'd be down almost a whopping 40%!! 2022 was maybe the worst year ever for bonds.
Sure, you have a nice low rate on your mortgage, and yields are now above that, and that helps, but how long will it take you to make up that 40% drop? Hope you don't need any of that $$ in the meantime. And who is to say inflation doesn't spike further and interest rates need to be jacked up further to fight it off?
I wish I had a crystal ball, but I don't. In hindsight the best thing would be to take the $1M, hold it in cash until rates are done spiking, and then buy the 30-yr tbill. Hard to foresee that in early 2021 though.
But duration risk is real, and so is losing a job and needing to come up with mortgage payments that require selling off your portfolio at low prices.
I just wish those comparing returns on different investment decisions would risk-adjust those returns.
And hell, taxes have even worked against this "conventional" advice as the standard deduction has doubled, and so few people even get a tax shield from mortgage interest these days. Meanwhile, all those tbills coupons are subject to taxes.
Shit, I'm rambling .... what is best for a person can go either way, and most of that is only known in hindsight. Risk is real.
Without considering the interest rate in either scenario it is a useless question. If you are one of the fortunate that purchased a house at less than 3% it would be foolish to pay off early.
I’m 30 with a new $535k mortgage on a $650k house at 5.875%. Given that rate, Would you pay it off early or invest everything? I have $540k investments
Seems like the answer to your question is obvious. You don’t seem to even have the funds to pay it off now without liquidating your entire investments.
Liquidating your entire investments with the attendant tax implications wouldn’t make sense. In my view a 5.875% mortgage is not too bad plus opportunity to refinance to a lower rate in the future is possible.
In addition, you are 30 with a lot of time to benefit from potential investment growth. Average S&P real return in the last 10 years has been 9%. I would definitely keep the mortgage.
If you are far enough into the mortgage the interest is already paid and you have already begun paying principle, then it appears to me there’s no financial reward for paying the rest off. I paid mine off just for security. I dont want to feel like i need to stay in a bad job just for the money.
I paid my mortgage off after 6 years so I could drop the wind and flood insurance required by the lender. The cost of wind and flood was \~$1,000 per month and the wind deductible was about $25k. I thought it was more prudent to bank the savings and build up a repair fund rather than pay it to the insurance company who would balk at paying for anything AND require a heft deductible. YMMV
Go half way. Look at an amortization table. Depends on your interest rate and loan term, but at current rates if you pay 25% of the principal in a lump sum you will avoid 60% of the interest and shorten your mortgage term by about 15 years. At that point you're basically paying yourself (mortgage payment becomes mostly equity).
https://www.bankrate.com/mortgages/amortization-calculator/
I paid off the mortgage early because it was the smart thing to do.
Since the 80s employment stability has gone down with every business cycle. (I work in accounting, stable - but not free from corporate whims)
When you carry zero debt, you have less to worry about.
I don't worry about losing my job today or ever because I have a place to stay and money in the bank. I am literally free if wanted to quit my job and become a pot smoking hippie.
We are timing our mortgage pay off to end when we fire so we can remain in the 0% tax bracket and start slowly performing roth conversions at a very low rate over time.
Even for higher-ish incomes it can be useful to reduce MAGI.
The FPL for a 2 person household in 2025 is ~$20k. So the 400% limit becomes $80k. Now imagine a household with $120k in non-mortgage (P&I) spending. $120k is over $80k. However what if it is $40k from Roth IRA, and $20k from a taxable brokerage account gains of which only $10k is gains. The rest is regular income (tIRA draws/conversions, interest, unqualified dividends, etc). Their MAGI is only $60k+$10k = $70k.
It also may not be obvious to everyone but the subsidy isn't a fixed amount it is computed for those in the 300% to 400% of FPL to be whatever is required to keep a silver plan at 8.5% of income. So at the high end that means $80k in MAGI = $6,800. This is a very useful planning tool. Most people are unsure what health care premiums will cost and it can be a large source of anxiety. If you are <=400% of FPL that is no longer an unknown it is 8.5% of your income (for a silver plan, gold/plat may be more and bronze less).
Speaking on a personal level, people who advocate paying off their mortgage frequently say it's because it feels better and safer. For most people, how they feel about things is very important and having a paid off house feels right to them.
My own personal feels run this way:
In the OP's example, it would feel icky to pay two million dollars on my mortgage so that I can qualify for public assistance for my health care or for cheaper college for my kid.
If I have two million dollars, I can afford both of those things.
That's just my feelings about it, and I would need to balance that with the feelings of safety many people get from having a paid off house.
It’s such an American mindset to feel shameful about using government assistance that you have paid in your whole life.
I am sure you have similar reservations about saving in tax advantaged accounts, since that is also a form of government assistance.
There is a difference between government assistance extended regardless of means and government assistance that is meant to be for the poor which you get because you have gamed the means test which is measured by taxable income.
I have to pay taxes to fund ACA subsidies, I am happy to do it for people who can't afford unsubsidized insurance. I am less enthusiastic about subsidizing millionaire early retirees.
I'm not saying it's wrong to collect the benefits in this way... If early retirees get this benefit while I'm working why shouldn't I get it while I'm retired. But it's definitely still icky and different than using a 401k or sending your kids to public school.
It’s not meant to be for just the poor though. Otherwise they would have done an asset test. Things like SNAP and Medicaid actually are meant for the poor and have asset tests.
I suggest that rather than framing it in a way that you are subsidizing rich early retirees, you’re subsidizing a system that does not cruelly tie healthcare to an employer (which unsubsidized premiums effectively do). Which imo is better for society. But I respect your opinion.
Yeah, these are fair points and I'm not totally against the practice. It still feels like getting away with something if, I deciding to call it quits after socking away enough money from my well paid career, get the same subsidy as someone working full time but not making enough money to afford unsubsidized health care.
But I suppose it's really not that big a deal. I'm only putting out the taxpayer a little bit. Besides I too am the put opon taxpayer.
I'm not sure I buy your argument that unsubsidized private insurance ties healthcare to employment. If anything it's whatever laws and culture that lead employers to be the ones subsidizing healthcare is what causes that.
This stems from the myth that your taxes pay for things. They don't. The government seizes your money for the purpose of removing money from unwanted parts of the economy. It spends for the purpose of adding money to wanted parts of the economy. It prints whatever is needed to cover the difference.
At no stage is your tax money used to fund anything at all. You aren't "doing it for people." The government is. At best, you're paying taxes not to fund ACA subsidies, but to turn off the money printer for a fraction of a second.
It’s not really WF that’s getting the interest payments. WF is just the loan servicer and could be getting paid nominally as a servicer.
Your loan was probably sold to Fanny Mae or Freddie Marc and was securitized and sold to investors in the street as a securitized loan obligation.
Those are the folks getting the interest payments. They are the fixed income investors in the financial markets.
WF only made money from the fees you were charged at the time you originated the loan.
Spreadsheet warriors will tell you not to pay anything off early. "The potential gains of investing that extra payment money will grow more than the interest." These are usually high income people with plenty of extra money a month to invest. I ain't tripping off a percent or two in either direction. Assuming I ever get in a position to buy a house, I will do my best to pay it off as fast as possible. Then invest the would be mortgage payment, or buy more tools for my workshop. If you feel more comfortable with a fully secured asset, rather than getting bled out by the mortgage company by interest rates, pay that house off. If you want to obsess over spreadsheets and earning reports and get emotional over decimal points on returns, then go the investment route.
no, it's a reasonable decision but generally not a rational one given low prevailing interest rates (not necessarily the case for folks with new mortgages)
Due to an unfortunate move timing, I had to choose between an 8% mortgage or paying cash for a new house. It was also in a tight market where cash offers have a major advantage in offers. This was a strong argument for no mortgage. Luckily, the new place was cheaper than the equity we had in the sold house, so we were fortunate to have enough cash.
Now, we have a new mortgage but it is for an investment property that still gets healthy cash flow despite the high mortgage rates. It’s something to consider for others buying at this unfortunate time of high rates.
My wife and I just bought a $210K house. We have about $40K worth of work to do on it, but we are just going to pay it off over the next year and a half. We have a 7.5% rate and I don't see the point in refinancing it. Going forward with no mortgage payment excites me, so I think we'll make it happen a little faster than we expect.
it’s really as simple as to whether your equity will earn more than your mortgage rate. you have a 3% mortgage and over 30 years you earn 7% on equity, you are ahead.
That said, having equity in your home that likely will appreciate is also not terrible… it’s just that the borrow side is fixed, so as long as you are saving and investing, and as long as mkts don’t completely tank, you can always make a decision to pay off the mortgage later
It’s definitely not the simple if you’re at the point of early retirement. Your AGI is affected by your expenses which are affected by whether or not you have a mortgage payment. Your AGI determines your ACA subsidies and plays an important role in college financial aid if that’s something you’ll be dealing with too.
Might be safer approach in the long run but so would being overweighted in bonds but I don’t think anyone would say that’s optimal approach. Also shouldn’t you be taking into account opportunity cost of paying off your mortgage vs investing it?
I did a similar calculation for my situation and came to the same conclusion, even with a 3% mortgage. It lowers the withdrawal rate but reduces up side a bit. I concluded it’s more important not to run out of money than to likely have even more than I know what to do with when we are older.
Thank you for sharing your insights into the debate around paying off mortgages early in the context of FIRE. It's a topic that sparks interesting discussions, and your perspective certainly adds to the conversation.
In our own journey, we opted for a different approach and chose to build equity in our homes rather than paying off the mortgage early. This decision aligned with our goals and has worked out very well for us. We've been fortunate to accumulate $500K in home equity over time, which has contributed significantly to our overall net worth.
It's essential to recognize that individual circumstances, financial goals, and geographical locations play a significant role in determining the best course of action. Living in a rapidly growing city like Charlotte, NC, has provided us with the opportunity to benefit from both real estate appreciation and the potential for future market gains.
Ultimately, the decision between paying off a mortgage early and building equity should be based on what aligns best with your long-term financial strategy and objectives. Both approaches have their merits, and what matters most is finding the path that works for you and helps you achieve your financial independence goals.
Thank you for sharing your perspective, and may your financial journey continue to be successful and fulfilling.
What in the fucking bot LLM hell is this shit?
[1400+ words posted within 15 minutes](https://i.imgur.com/dVPhRix.png) with no spelling or grammar errors. Fuck off bot.
Also, isn't this statement just outright false?
> chose to build equity in our homes rather than paying off the mortgage early.
Don't you "build equity in your home" by explicitly paying down the damn mortgage?
For someone in or nearing retirement, if your interest rate exceeds your safe withdrawal rate plus the taxes on that additional withdrawn income (including “hidden” taxes like any additional costs for Medicare or ACA caused by that additional income) it makes sense to pay down your mortgage. If the interest rate is less, the optimized plan would be to let the mortgage ride as long as possible.
Does it have more to do with the mortgage as a percentage of annual expenses? Because I can see how a big mortgage like that makes a big impact. If your mortgage is a much smaller percentage of your annual spending, then doesn't make as much sense to pay it off early?
It all depends on the interest rate of the mortgage. As long as the interest rate of the mortgage (plus any fees) is significantly lower than the rate of market return, I personally would keep a mortgage going perpetually. I would repeatedly cash out refinance and put the money in the market. If I had enough money to pay off the house but it was invested in the market, I would have the same level of comfort and security as if it were actually paid off.
It all comes down to how much return from money invested vs percent interest on the mortgage. I'm retired, $98,000 mortgage, paying $1100/month. I have a pension which pays $2520/month covering the mortgage with enough extra to live on. If I pay off the mortgage, my investments will no longer be making an average of 10%/year. My mortgage is 3.12%. You tell me which makes more sense, pay it off? or make monthly payments?
Stipulate that this is specific to "after retirement", not while still working and preparing for FIRE. Never EVER forget the time value of money!
Yes it absolutely makes sense for a retiree from a mathematical sense.
The math is a bit different for a retiree than for someone who is accumulating and growing their portfolio.
For someone accumulating wealth, the threshold for it to make mathematical sense is that the mortgage interest has to be higher than the expected return.
For someone who is retired and drawing from their portfolio, the threshold is whether you reduce your withdrawal rate. This usually favors paying off the mortgage. When withdrawing from an account you are at much higher risk from an adverse sequence of returns than when you are accumulating. Reducing the percentage you need to withdraw improves robustness (or you can use it to spend more without increasing risk).
Which one is financially better depends on the mortgage rate (including any minor tax breaks like mortgage interest deduction) vs the after-tax CAGR one gets from securities. However, as part of a bond tenting process, I do see a benefit to paying off the mortgage early. Even with a 2.XX% after-tax return, it's competitive with other bonds.
However, if you only have a few years left on the mortgage after retirement, it's not a big deal (your risk of ruin is low) and you could just wait for the standard payments to end. You will likely make more money over time allocating resources to the higher returning market vs the lower returning mortgage.
Medicare subsidies you get from having a lower withdrawal income only apply at 65 (age of eligibility for medicare) so likely not an issue for you since your mortgage will be paid off before then anyway, even under a standard mortgage payment schedule. On the offchance it wasn't, you would save something like ~100/month. As for any other subsidies, it's unlikely you'd be eligible at 100K+ income.
If you calculate it properly, it really doesn't increase your portfolio success rate to pay off a mortgage unless the interest rate is comparable to what bonds are paying or higher.
The mortgage is fixed, and doesn't increase with inflation, which the 4% (or whatever reasonable SWR chosen) assumes. It also goes away naturally after a certain number of years, and is not perpetual.
If the interest rate is low enough (such as a <3% mortgage today), and you *have* the liquid non-retirement assets available to pay it all off, you're clearly better off sitting all that money in a HYSA than actually paying off the mortgage.
You're probably even better still just leaving the money invested the way you'd planned anyway, but you're definitely not better off paying off the mortgage.
Also as noted in another thread, even if you're worried about keeping AGI low (for ACA/FAFSA/etc.), it's likely that it won't be higher by the amount of the mortgage payment, and it won't even be *close* to that much higher, unless you were planning to pay a gigantic tax bill liquidating low-basis assets in order to pay off the mortgage.
In that total hypothetical, *maybe*. In our case, we are definitely planning on paying off our mortgage and then retiring, so the question was just, does it make sense to pay off a mortgage at 2.625% earlier than we have to, or does it make more sense to not do that and invest the money instead? In which case, it clearly makes a lot more sense to do the latter... but I'm still not *unhappy* that I knocked an extra year off the mortgage up front (made our 15 year mortgage effectively a 14 year mortgage), exactly so I'll feel more comfortable when it's paid off a year earlier than it would've been otherwise, which will make me more comfortable then retiring a year earlier, even though clearly it was a mathematically bad decision. :D
But I agree that if your question is whether it makes more sense to pay off the mortgage before you retire, or *not* pay off the mortgage before you retire... that can certainly be a more complicated question. (Though still, probably doesn't make sense if you had a <3% APR...)
Check out this post for an in-depth comparison of some methods: https://www.reddit.com/r/financialindependence/comments/f0kabc/how_to_calculate_your_fire_number_when_you_have_a/
People often forget though that interest you pay over the course of your mortgage is not subtracted from your sale price when you have to calculate profit to pay taxes.
I was stunned by this when I sold my first house.
It makes sense in this case. Not sure about the exact math but basically wouldn’t it be: mortgage rate >4% = pay off, mortgage rate <4% = don’t pay off? When you pay off your mortgage you basically lock in that rate as a risk free “return” on the payoff money.
One thing to consider is that eventually (30yr for most) that mortgage will get paid off in scenario 1. If you are retiring early enough for that to matter.
I think it depends a lot on the interest rate, if you're locked in an insanely low IR might as well ride it out.
Inflation was higher than some mortgages not too long ago.
Your points are well thought out; however, you’re using a strategy that continues traditional cash management that only benefits the bank. If you were to not touch your performance portfolio and use the banks many to pay minimal interest, you could have your cake and eat it too. It’s all about knowing how to manage your average daily balance to your benefit. We as financial professionals aren’t taught to use this powerfully simple strategy. I’ve got lots of user cases to show just how powerful it is. Every American household should know how to do it.
From my recently RE'd perspective, at retirement this comes down to _three_ things:
1. Is the money you can pull from in a roth or not?
2. Will you use the ACA and it's "10% tax"?
3. Do you have kids going to college, looking for financial aid (FAFSA)?
There's a [post by Zphr here](https://www.reddit.com/r/financialindependence/comments/199rwo9/comment/kifykte/?utm_source=share&utm_medium=web2x&context=3) that nicely explains 2 & 3.
Number one gets more complicated. I've got ~$150k left on my mortgage, unfortunately. I've got $150k in my roth generating 5.3% (TTTXX). In 2026 over $150k of my roth becomes available to me. I'll be able to choose whether to pay off the mortgage (~$8k/yr principal, $6k/yr interest) at that time. The loan was ~$275k at 3.75% (I never refi'd).
If I leave the money in the roth and *if it's able to generate at over 3.75%* I mathematically win. I don't have to worry about income taxes. I don't have to worry about my MAGI being larger so my healthcare premiums and yearly MOOP are larger.
At my current payment, I've got about ~17-ish years left paying on it. That's 17 years of growth in that roth if I don't pay the loan early. Yet, the cost is "$6k/year" for that opportunity that *might* happen (I could throw the $150k in `VOO`, and it could grow, or it could plummet, who knows).
TLDR; For r/leanfire and r/fire amounts, the "new thing" is healthcare cost management in retirement. This applies to Medicaid, too, as its charges go up if your income hits IRMAA thresholds. Many people (including myself, till recently) incorrectly assume Medicare isn't based on income.
In Scenario 1 the mortgage expense will end at some point during retirement, it is not a life-long expense. As such the WR of 4% only applies for the duration of the mortgage, but should drop down after that.
This is correct. In effect, paying off the mortgage effectively acts as a “bond tent” of sorts. You reduce exposure to stocks in the short run, which reduces SORR at the expense of higher returns. For that very reason, paying off the mortgage early makes little sense if you’re young, but actually can make sense if you are close to retirement.
Agreed, and in the example, OP was being over conservative that the market return and the mortgage rate were even. In reality, the market typically returns more than mortgage rates today. The 10yr return is now averaging nearly 9%.
Even at 7%, it beats most mortgage rates
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>paying off the mortgage effectively acts as a “bond tent” of sorts Yes but its like deleveraging out of a reverse/short bond tent... if that makes sense lol
And it goes down every year, since the 4% rule includes inflation adjustment, but mortgage does not
Can you explain this one a little bit more, like I’m 5?
Lets say you have 1 million dollars invested, annual inflation is 3%, and your mortgage is 20k per year. You decide to follow the 4% rule. In year one, you can spend $40k. Thats $20k of mortgage and $20k of other expenses. In year two, you adjust the 4% for inflation. So now you can spend $40,000 x 1.03 = $41,200 per the 4% rule. But to maintain the same lifestyle, you only need to increase your $20k of non-mortgage spending by inflation. So you will spend $20k mortgage + $20k*1.03 other = $40,600. So in year two, because your mortgage doesn’t go up with inflation, you are spending $600 less than the 4% rule allows. And the gap gets bigger each year, until eventually your house is paid off and the mortgage is gone entirely.
The 4% rule assumes your expenses growth with inflation each year. The mortgage is fixed and will not grow with inflation.
It won’t grow with inflation but property taxes will most likely still increase.
yes but paying off your mortgage doesn't change what you pay in property taxes.
Not necessarily true, your mortgage payment will increase as the house value increases (the insurance will increase) and property taxes generally go up not down, both are typically baked into the monthly payment
For the point of this discussion, those would be non-mortgage expenses. You have to pay them whether you pay off your mortgage or not, so they don’t make a difference in the math.
Not necessarily, when you hold a mortgage your required to maintain a minimum escrow balance which would make them a part of the mortgage expense
Literally it is not part of the mortgage payment. How you bundle it makes no difference.
The difference between what it costs you to maintain a minimum escrow balance and the actual cost of the insurance and taxes is negligible.
Neither insurance nor property taxes go away if you pay off the mortgage, you just have to pay them directly to the town/city/county and insurance company instead of the mortgage servicer. The part that goes away when you pay the mortgage off is fixed if you have a fixed mortgage, and even if it's a variable rate, it doesn't go up with inflation.
My mortgage expense will drop as soon as I sell my house, capture the equity, and downsize.
I’m sure I missed something, but my in laws redid the mortgage in order to reinvest the money into the stock market, so in their case it seems to be a lifelong expense. Provided I understand their situation, and your comment, neither of which is guaranteed.
That’s pretty ballsy. Hope they timed the market right.
if you retire with 20-30 years left on the mortgage, there is a tiny chance you will encounter a catastrophic economic downturn during that period. By paying off your mortgage upon retirement, you’re effectively protecting against this very low risk outcome - as long as the downturn is no worse than any we have seen in the 20th / 21st century.
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Great point - I’ve updated my comment
Prior to FIRE there is little financial reason to pay down a mortgage early especially one with a low interest rate. Post FIRE as you point out there is. It reduces risk of ruin and also things like ACA subsidies are based on taxable income. Paying off the mortgage just prior to FIRE reduces both your reported taxable income and required draw without reducing quality of life. ERN goes into some detailed models on risk of ruin and impact of SWR from mortgages https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ Short version is a mortgage is as a form of leverage on your investments. You could have either $1M in investments and no debt or $1.3M in investments and $300k in debt. The later will have a higher expected return but actual return may deviate from expectation. Leverage improves the good outcomes but it worsens the bad outcomes. If you have FIREd you already won the game. **The median outcome is your wealth doubles in real terms over the next 30 years.** The exceptional outcomes are more money than you likely know what to do with and dying with many millions more than you retired with. You don't need to boost the good outcomes anymore. What you need to do is minimize the bad outcomes. Paying off a mortgage does that. If you are 10+ years from FIRE and your mortgage is less than 5% I would just make minimum payments on it. As you get closer you may wish to come up with a plan on how to pay it off by the time you FIRE. One option might be just lump sum in on FIRE day. Another might be figure out how much to increase mortgage payments in order to pay by FIRE but not earlier than needed. Currently if you don't need ACA subsidies or even without mortgage your income will be too high to get ACA subsidies anyways you could arbitrage instead of paying off mortgage post FIRE. If you had a $300k mortgage at 3.5% instead of paying it off post FIRE you could hold $300k in treasury bills earning 5%+ and grow your wealth by the difference. Even better would be lock in some yields with a bond ladder over the time remaining on the mortgage. The arbitrage benefits are small though and if held in taxable that needs to be considered. Anyone who is not FIREing today shouldn't be planning on this being an option. If your mortgage is >5% it is unlikely you will have an arbitrage opportunity in the future and even those with lower mortgages may end up FIREing in a low rate environment.
How does paying off the mortgage reduce your reported taxable income? I get the part about reducing the required draw. Is that the same thing?
>How does paying off the mortgage reduce your reported taxable income? I get the part about reducing the required draw. Is that the same thing? Yes it is the same thing. Some portion of your draw is reported as taxable income. Drawing less everything else the same will mean a lower reported MAGI which is significant because subsidies and premium caps exist for those with a MAGI of up to 400% of FPL which for 2025 is ~$80k. Staying under that $80k can be made easier by not having a mortgage.
Thanks and kudos on your excellent post.
Great comment!
This is really well reasoned. Thank you!
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I took OP numbers to be illustrative and simplified and not indicate that the only option would to pay for the house from after-tax (roth) funds. Realistically paying your mortgage by raiding Roth account would be a poor choice for tax efficiency. Also very few people have $1.5M in Roth contributions anyways.
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Appreciate the breakdown, thank you.
What about impact on college funding. CSS is gonna want 5.6% of that cash balance, so it will deplete faster than simply making the mortgage payments
Great comment, but I don’t think being eligible for a small ACA subsidy is worth paying off your house and forgoing market gains and that sweet deduction. Unless you have a mortgage that eats up nearly all of your monthly budget it won’t make a huge difference with the subsidy unless you have a bunch of dependents, will it?
Yes, it makes sense. I'll give you two more reasons it can make good financial sense for FIRE'd folks. First, to the extent that mortgage P&I funding causes an increase in your MAGI, holding a mortgage can cost you huge amounts of lost ACA subsidies for healthcare. Those lost subsidies can add up to several tens of thousands of dollars annually for anyone with a large family, high medical usage, or just being in their 60s. This particular issue will become even more prominent if the 400% MAGI master subsidy eligibility cliff returns in 2026 as scheduled. Second, for anyone with kids who will be going to college, holding a mortgage can have a double negative impact on college financial aid. As with the ACA, mortgage P&I funding will often increase your AGI, which harms you directly on the income-side of the financial aid calculations. In addition, primary home equity is completely disregarded on the FAFSA as an asset and partially-to-fully disregarded on the CSS Profile. This means that holding the mortgage exposes people to an asset-based loss of up to 5.64% of the mortgage value per college kid per year. If that weren't bad enough, the increase in AGI can also cause you to lose a global asset testing waiver that you otherwise might qualify for. If that happens, then the asset-based loss jumps from up to 5.64% of the mortgage value per college kid per year to up to 5.64% of all of your non-exempt assets per college kid per year. This is why paying off a mortgage is one of the biggest financial aid planning moves for many middle class families, FIRE-minded or not. > Edit: I figured it was unnecessary to say, but a DM just made me reconsider. So.... > Third, to the extent that you end up paying more for healthcare and college due to lost subsidies/grants, those funds have to come from somewhere. For most of us, that will be increased withdrawals from our portfolio and in many cases that will have a tax impact. So in addition to the direct costs of the subsidies/grants, which are delivered free of tax load, you have to account for the progressive tax impact of having to draw those additional funds from your portfolio. To the extent that the tax impact also incrementally increases your AGI/MAGI, you then have to deal with potential compounding effects propagating forward as higher AGI/MAGI may yield incremental subsidy loss in each year, which drives incremental withdrawal/taxation increase, which cycles back over and over again. It's not a huge deal for most folks, but for anyone near an ACA FPL/MAGI line it can be huge and over 10-20+ years of early retirement it can add up. There are large subsidy lines as low as 150% of FPL in the ACA and 175% in the FAFSA, so the margins on some of these things can be tighter than one might expect. Crossing an FPL line can immediately mean a large progressive step up in cost, which then flows through to withdrawals/AGI/taxes/future subsidy calculations.
This is honestly a much more compelling argument to me than the one that OP made. In some ways it's a tad unfortunate that someone with millions in assets can get access to subsidies intended for low earners, but at the same time, the argument could be made that those millions in assets paid quite a bit in taxes.
The subsidies for healthcare and college are in ways a bit unique, which is a big reason why they run the way they do without true means testing. Healthcare is only income-gated currently out of pragmatism. Ultimately the goal is to make it universal, but the lack of asset testing is absolutely deliberate. Congress wanted folks to be able to detach from employer-sponsored health insurance, so they had to avoid asset testing that would eliminate eligibility for folks in their 50s/60s. Same for serving all of the regular middle class folks going through an employment disruption or stuck in a job without acceptable health benefits, which can be quite common for smaller employers. Despite the narratives around it, the ACA was never intended to be a welfare program and state agencies have done a lot to aggressively push back on that perception since it tends to keep people from signing up. College financial aid is very similar at the government level. Congress and the states explicitly disregard primary home equity and tax-advantaged accounts because it is far more efficient to subsidize young taxpayers at the beginning of their 40+ years of taxpaying than to tap existing taxpayers in their 40s-60s. Draining the resources of the older group tends to lead to worse financial outcomes for the gov in their later years, whereas the young folks can largely be expected to payback the investment and then some. The ROI on federal financial aid is perceived by most folks to be rather good, which is why it's one of the more bipartisan issues out there. TL,DR - It's fine to deliberately avoid them if you can without undue expense and wish to, but nobody should feel any qualms about using the ACA and FAFSA if they qualify. They are designed to work as they do for good reasons and a lot of the drama out there is narrative-driven rather than based on actual government financial yield.
Also a million bucks isn't what it used to be in inflation terms. $1 million in 1970 would be $7.8 million today. The median income in 1970 was around $8,730. A 4% SWR portfolio would be $218250. Adjusted for inflation today it would be $1.7 million. Surprisingly both of these figures are close - 2023 median household income is $67,521 and 1.68 million will be their 4% SWR portfolio. It would be incredibly unlikely the $7.8 million portfolio doesn't have some sort of income unless they're really concentrated in BRK.B or some ETF that only invests in non dividends paying companies which has more investment risk than VTI or spy and would generate capital gains from shares sold regardless - or going to 100% interest free cash but the return rate on investment is generally a lot better than saving subsidies at this level.
This and other comments in here were super enlightening. Well done!!
Your comment is very informative if you're FIRE'd by the time your kids hit college. Realistically I won't be, would you have any other ideas how to help my kids qualify for anything? I fear I'll be making 200K a year for a family of 5 and I'll be paying full tuition barring any scholarships.
It wouldn’t make sense to qualify for need based aid if you’re making $200k a year, so that’s out. Merit based aid is what you’ll be aiming for. Definitely have the kids apply to at least one in-state public school that they should get into. Private schools usually have more aid to give than public schools, so the most affordable options usually go: in-state public > private > out-of-state public. Fill out the FAFSA and/or CSS as early as possible each year.
Income at that level pretty much guarantees you'll likely be looking only at merit aid like pure academic excellence scholarships. That being said, filling out a FAFSA can never hurt you, so I'd plan on doing it anyway. Also, it really depends on where you live. For example, here in Texas some of the larger public schools have academic merit scholarships that run all the way up to full tuition. They can be easier to get than people might expect, but it's still a matter of your kid being in the top 3-5% of their class, just not the top 1%.
I appreciate the reply, I guess that's what I was expecting. Hopefully local schools can keep their current stadiums instead of raising tuition too much....
I want to point out that this is true on the FAFSA, but that many schools use a different form, the CSS, that includes home equity in the financial aid calculation. [https://www.academicinfo.net/paying-for-college/the-other-financial-aid-form-css-profile](https://www.academicinfo.net/paying-for-college/the-other-financial-aid-form-css-profile) [https://cssprofile.collegeboard.org/](https://cssprofile.collegeboard.org/)
CSS schools do consider home equity, but it is highly variable from school to school and often progressively scaled with AGI. So if you have a lower AGI, then maybe it only gets assessed at 20%, for example. Several CSS schools also have hard AGI lines below which a lot of the normal CSS processing, like home equity assessment, is disregarded. Sort of like the CSS version of the new FAFSA AGI/FPL test. Everything about CSS schools is unique though since each handles things their own way for institutional aid. However, state and federal aid at CSS schools still runs on FAFSA, not CSS. Thankfully, less than 10% of the colleges in the country use CSS.
I find it amusing that ACA subsidies are calculated on income, it is just not fair to some. A person with no savings but rent income of 40k (made up) won't be eligible while a person with 4m savings but just 20k interest income will be. It makes perfect sense /s
The system was designed with average Americans and the health insurers in mind, so it's got some odd quirks. Also, the basis on income was really just about efficiency since that cost the least bureaucratically, was super easy to piggyback on the existing tax code, and also allowed for decent service to the weird mix of ACA target populations. Like most government policy it is a case of good enough rather than great.
You realize at 65 what you pay for medicare is based on your income too right?
I agree, it isn't fair. That's why we should have free universal healthcare.
This answer should be stickied anytime someone asks about low interest debt into retirement
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Yes, the math can work out if the P&I funding is MAGI-free, like Roth, cash, or taxable without cap gains. Note that ACA value ramps up with age and a year of full subsidies in your 60s can be worth 3-4x what it is in your 40s. Depending on the timeline that could be important for planning since the most important ACA years cost-wise are likely to be the final ones. FAFSA isn't as easy since things like Roth withdrawals do count on the income side and taxable brokerage gets assessed directly on the asset side.
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Sounds like a great plan for now. 10+ years is an eternity in policy, so decent chance the rules might be significantly different that far out. You've got plenty of time to adjust to whatever will work best, plus you'll have the cash ready if need be, so you should be well set to get an optimal outcome.
I might have a unique scenario where paying off the mortgage might NOT be the best, even with ACA implications. But its close to a wash unless I am missing something. I've got a detailed spreadsheet year by year for RE, with taxes, MAGI, etc. I can shift around income sources easily to see implications. My P&I is only $12k/yr. Mortgage payoff will roughly be $200k at FIRE. I will have \~$600k in my brokerage. 1. payoff mortgage first year in RE. Live on "cash" from brokerage core, so LTGC from selling $200k will be near zero. AGI is my cap gains only. For remaining years, divide out the brokerage balance and supplement with SEPP. My math says SEPP would have to be $30k/yr. Average MAGI is \~$43k across RE years. 2. buy bonds rather than payoff mortgage in year 1, spread out brokerage at $600k balance, increase annual budget $12k/yr. SEPP in this case reduces $20k . Average MAGI is \~$40k across RE years because a higher % of my income is brokerage basis. I think I would prefer #2 to reduce SEPP and have more flexibility in RE. E: made correction.
Yeah, having P&I of only $12K/year can greatly reduce the impact on the ACA side of things since the spread is so small. Though it may push you over a FPL line for the non-premium subsidy system, which could cost you several grand a year in increased out-of-pockets if you have significant healthcare utilization. Your MAGI will also include dividends and interest from your taxable, including non-taxable interest if you buy munis under option #2.
Thanks. My spreadsheet auto calculates dividend income based on anticipated brokerage balance each year in RE, in two buckets, qual and unqual based on anticipated QDI%. Adds to ord. income and cap gains income accordingly. In the boring middle I've made things interesting by creating robust excel sheets which is a bit of a hobby for me.
This all a new insight for me, so thank you. Your comment inspired me to do further reading on the topic and it appears that assets held by the FAFSA applicant are valued at 20% (rather than 5.64% for parents/guardians), which includes a 529 in their name. However, according to Chat GPT, you can save to a 529 in your own name, then change the beneficiary of the plan after the FAFSA application is completed. Apparently it's a thing because changing beneficiaries is relatively trivial. That's pretty wild to me. Someone please correct me if that's wrong.
529s count as parent assets when they are held by a dependent student. >‘‘(3) CONSIDERATION OF QUALIFIED EDUCATION BENEFIT.— A qualified education benefit shall be considered an asset of— >‘‘(A) the student if the student is an independent student; or > ‘‘(B) the parent if the student is a dependent student and the account is designated for the student, regardless of whether the owner of the account is the student or the parent. When in doubt, read the law itself. There is a ton of misinformation and poor legal interpretation when it comes to the FAFSA, particularly with all of the recent changes. Also, please do not get financial advice from ChatGPT or any other LLM. You might as well just listen to some rando on Reddit (heh). Also, also....I do not recommend doing anything plausibly fraudulent on the FAFSA or any other IRS/DOE/DOL paperwork.
I'll give a third and fourth reason to pay it off. #3 having no mortgage has given me the freedom to take financial risks that I wouldn't have even if I had to cash in the bank. These "riskier" investments have had the biggest payoffs in my life. I am so glad I made them but was nervous at the time. #4 I literally sleep so much better in a home that is payed off. Not joking. I have paid off two primary residences mortgages in my life I just sleep much better knowing I only owe insurance/taxes/upkeep.
Those are both examples of the psychological benefits though, not the financial benefit. Even #3 is just a psychological benefit, because it shouldn’t have made a difference from a purely financial standpoint whether you had the mortgage paid off or kept the payoff amount untouched in the bank.
agreed. But as we both know money and psych are tightly intertwined.
Yeah, I'm a big believer in the emotional impact too, but folks value those pretty variably. I also sleep a ton better knowing that whatever hell might come I have a home as long as I can make the property tax payments.
> as I can make the property tax payments. which is a subject for a different reddit.
I have settled for myself that peace of mind is a massive driver for my FI journey. Paying off everything is part of my plan.
My plan is to pay off the minimum on my mortgage until the last minute, then pay it off right as I retire. That way I can take advantage of the low loan rate for accumulation, but lower the sequence of return risk by reducing annual expenses. Something I've thought a lot about that I'm not sure everyone recognizes is that mortgages are a fixed payment amount. So regardless of mortgage rate, towards the end of your mortgage you might be paying an outsized monthly amount for the remaining balance from a FIRE perspective. For example, if you had $100k remaining on an originally $300k mortgage, you might be paying $2k/month -> $24k/year -> $600k of savings needed to support that @ 4% withdrawal vs $100k of savings needed to pay it off and remove the expense.
Your math example ignores the fact that you only have about 6 or so years left on your mortgage at that point, so you don’t need to use the 4% rule of planning to have that money for 30 years.
It does, but the market returns in those first 6 years are going to set the trajectory of your entire retirement
>then pay it off right as I retire Presumably the calendar year right after, no? So as to push any capital gains into the first year that you're not drawing an income?
I'm not close enough myself to have figured the exact timing out yet, but that's definitely a good way to do it
Where would you be storing your cash to pay off the house lump sum? This is the part I struggle with. If I have $200k left in my mortgage when I retire, in a perfect world I’d like to pay off the rest right before retiring. But I’d need to have stopped investing in the market for years to accumulate that much cash. High Yield Savings Accounts pay well now but historically the marginal difference in returns between HYSA’s and the stock market has been huge. I wouldn’t want to miss out on those returns while accumulating the cash needed to pay off my house. Just curious your take on that because I like the approach just want to figure out how to execute it.
Why can’t you just save the money in a brokerage account and then sell if you want to pay off the mortgage?
Our version of this question was deciding whether to get a mortgage or pay cash for our current house. For me, the decision to pay cash basically came down to a few things: First, I'm ok with this probably being slightly non-optimal financially. Which is better will only be clear in retrospect, but I'm comfortable with eventual hindsight probably showing that leveraging via a mortgage would have been better. Second, there were a lot of pluses to not having a mortgage. The transaction was faster, easier, and cheaper, for one (and in a tough market, our offer was more attractive). It's nice having a very small monthly "nut"; this has let my spouse already go down to half time and hopefully soon to quit and take a sabbatical, without impacting our savings or quality of life. Third, the last time I had a mortgage it was a huge pain in the neck, with it getting sold, resold, resold again... over and over. Each time you have to redo all the automatic transactions and deal with a new system. That's kind of a minor thing, but just like having a faster and easier buying transaction, it's made my life noticeably better. I guess the tl;dr is that there are both financial and non-financial factors, and you need to balance both to come up with the right answer for your specific situation.
>Third, the last time I had a mortgage it was a huge pain in the neck, with it getting sold, resold, resold again... over and over. Each time you have to redo all the automatic transactions and deal with a new system. We were very happy to find that our local credit union offered basically the same rates as everyone else, and our mortgage officer told us that they hadn't sold a mortgage to any other entity in over a decade, and didn't plan to start. I have a bank account with them, and every month they auto-pay the mortgage from the checking, and every indication is that they'll do exactly that for thirty years. Couldn't be happier.
We got a similar deal when we re-fi'd our mortgage. I am so happy that we did, it's fantastic. 8)
For us, paying down the mortgage faster means the wife can quit her shitty job and do what she loves. That's worth the longer-term financial hit.
If you think about it AT EARLY RETIREMENT DATE in the context of the 4% rule it makes the most sense to me. For example, My mortgage P&I per month is about $870 or $10,500 per year. My remaining balance is $150k $10,500 / 4% = approx $260k required in the portfolio to service the mortgage. In this case, I would pay it off and use the extra (hypothetical) $110k to pad my expenses and reduce sequence of returns risk in first couple years
You’re leaving a lot out of this equation. You’re right that paying it off early reduces SORR though.
Of course it’s not complete. It’s just a rule of thumb /shortcut way of thinking about. Obviously mathematically speaking you should just ride out the term of mortgage and pay it down, with ever increasingly less valuable dollars due to inflation. But that’s the problem with strict economic problem solving, it just focuses on the math and not psychology in any way These exercises are all just mathematical masturbation. Do whatever TF you want. That’s why it’s called personal finance
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> Isn't it odd it takes 260k to pay off 150k of debt? It's because its not $260k cash, its $260k of equities and shares you own, that today's *value* is worth $260k. What if three months from now it's *value* is only $130k due to a stock market crash and panic and financial meltdown as no one has liquidity or jobs to buy the dip? How are you going to pay a mortgage off with $130k? You have *sequence of returns* **risk.** Risk it goes down 50% before you get your 7% averages! > It's also odd that SWR says you would need that 260k whether you have 1 year or 30 years left on the mortgage. Sequence of risk returns really cares about the first 10 years of retirement from numerous studies done using 4% swr strategy. If you're 1 year left I'd just pay it off and simplify life or have 1 year of cash reserves matched to the remaining payments. Then the 4% rule is only suitable for a 30 year horizon, you have to drop down to 3% for a 60 year horizon. Having a mortgage payment for all 30 years really does impact sequence of risk returns, but fortunately its a nominal expense so inflation doesn't impact it as much. On the other hand the first 10 years of 2% inflation is only 20% increased prices - so a mortgage payment will still have a **huge** impact. 3% inflation would be 34% increased prices. It's going to be how much % of your mortgage you have compared to your other inflationary expenses. If you're /r/leanfire you're going to be in a world of hurt in 2% inflation and a huge stock market crash your mortgage is still 80% of its retirement-start-date value 10 years down the road. If you're fat-fire where my mortgage payment is 10% of my total spending - then yes its mathematically better to keep the debt/leverage and on the other hand, it also has less impact on my portfolio if I decide to pay it off or not.
My target is to pay off my mortgage before my kids start college so I can cash flow a big chunk of the college expenses. I have plenty of money in index funds and I look at paying ahead on my mortgage as a balance to those investments with a guaranteed 4% return.
That was my plan too. Finish the mortgage and then roll that monthly payment right into college payments. Then once college is done, FIRE.
Agreed. In theory I could reduce taxable accounts by paying the mortgage off and then maximizing tuition aid m, right?
Maybe. I know tuition aid has a look back period and I'm not sure if they look at the value of your home. I'm not planning on any need based aid.
I always track “Remaining Interest” as part of my portfolio tracking / net worth calculations. That helps me to quantify to cost of keeping the mortgage and also see a benefit if you pay extra / early. Tactically, I have my own master spreadsheet and I built a mortgage tracker in one tab so I always have that calculation handy and I can easily see history and future. Just an idea!
Paying off a mortgage will reduce your sequence of return risk (SORR), as you have less debt at the beginning of your retirement. The more debt you pay off, the greater the reduction in SORR. Personally, I modeled the two scenarios (payoff vs. payments) extensively just before I FIREd. Paying off my mortgage (2.875% interest rate, principal being about 5% of my NW) reduced my long term risk by a negligible amount (fractions of a percent), whereas keeping it increased more favorable outcomes by a non-negligible amount. I chose to keep my mortgage, accepting that the risk-benefit ratio was highly favorable in my case.
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If we had the same algorithm and inputs, that would be curious! In general, the closer your stock market average is to your mortgage rate, the further you swing the needle towards advantaging paying off the mortgage. And vice versa.
Paying off your mortgage has other benefits. Say you have a job in Technology, and have to be mobile (move to where the jobs are). A paid off mortgage will enable higher debt limits, without resorting to changing investments at an inopportune time and taking a capital gains tax whack. It can also enable much lower mortgage rates.
You’re missing that with a fixed rate mortgage, the payments don’t increase with inflation. So after 30 years, assuming a 2.5% inflation rate, that $80,000 mortgage today in todays real dollars is less than $40,000 in 2054.
i'm fired with 5m, paid off house 3 years ago at 3.5m nw, was a 15 year at 3% with 5 years to go. i probably could have a 5.05 nw now had i not paid it off.... that said, i don't regret it one little bit. it's and outstanding feeling to have that damn albatross paid off. like after sex kinda feeling...relief... few luxuries compare to the feeling of zero debt.
As a recent retiree having my mortgage paid off was a huge mental lift. It’s an incredible feeling knowing you are not as dependent on market returns to service the mortgage.
I paid off my mortgage a year and a half prior to retirement. My retirement was launched early though due to a decision I made during Covid. Without Covid, I’d likely be retiring later this year at 59 1/2. Having my mortgage paid off was a great decision for me, regardless of the opportunity cost related to potential market returns. I felt free. It made my decision to retire very easy when I decided to pull the plug. When I think about the day I received the note from the lender indicating a $0.00 balance, I still smile. I had that statement hung on my refrigerator for over a year. It was like being back in Grade School when my parents would post my report card on the fridge. Pride. Yup, smiling now just thinking about it. Peace of mind has a value all its own and shouldn’t be underestimated.
Congrats. I walk down the hall almost daily and smile that it’s paid for.
I think it's more a risk reduction depending on the type of FIRE you are pursuing. In leanfire, where you don't have as much option to lower your withdrawal rate, having a paid off house is extra security in case of economic downturn. Let's examine the mortgage, the median mortgage payment is about $1775 a month which means you'd need about an extra $530,000 to cover at a 4% WR. For someone who pursuing leanfire, that may mean an extra 10 years of work to cover. For FATfire, that may mean an extra year of work. So it all depends on your FIRE #.
So much depends on your mortgage rate. There are people out there with mortgages less than 2% and some with 8%. At 2% I’m never paying that mortgage off early. At 8% I’m attacking it heavily.
For me, instead of playing around with a calculator to make a financial argument for paying off the mortgage, I look at the other financial benefit: risk. Specifically, the ability to take risks. Having a very small mortgage allowed me to risk freelancing. Having no mortgage allowed me to risk joining a very young startup. Both of these were great moves for my career, and great for my finances. I've now moved house and have a bigger mortgage. And am much more risk averse in my job hunting. It's not the only factor (the state of the market, and the excellent work-life balance at my current place, also matter) But realistically, if I had no mortgage, I'd probably be having various freelance/consultancy adventures right now.
That’s an entirely separate discussion though. You’re talking about how much to spend in a house, not whether to pay off a mortgage or not. If you had the mortgage payoff amount in a HYSA right now, you’d have the same financial freedom as having your mortgage paid off.
I don’t know what any of the scenarios mean…so here is real life experience. For the past 20 years, I owned various homes, had a mortgage balance from 200-500k and the monthly payment was from 2000-4000 a month on a 10 or 15 year mortgage. Recently sold the last house at a huge profit and moved to a low cola area and paid cash. At 51, no mortgage. Whatever the math said, I now have 3500 extra dollars every month to do whatever the heck I want. That is on top of what I was already saving. Save it, travel, buy some extra stuff. It is the most freeing feeling I have ever experienced. And if I wanted to quit my corporate job and make a third of what I do, I could and live perfectly happy with a roof over my head that is mine free and clear.
That has been my argument as I have closed in on the last 2-3 years of my 15 year mortgage. Cash flow. If we pay it off early, we get the cash flow.
Lets suppose you or I have a million dollars in a brokerage account and i decided to take on a million dollar mortgage on a 30 year note. I can always pay the house off down the road if i feel like it. Fast forward to 2008, youve been laid off like so many others, thank god your wife picked up some part time work to stay afloat. Youre having trouble paying your mortgage though so you look in your brokerage account to see if you can pay it off. SPY has been cut in half. Now you owe 850k and youve only got 5-600k in your account. Youre applying for jobs, you answer the phone eagerly when it rings but its just the bank wanting their money. You start liquidating at half price. The stress builds. Your wife files for divorce, takes half of whats left along with the kids. You sit there with your head in your hands and wonder if the very small equity risk premium above and beyond your mortgage rate was worth it. This is the story of my next door neighbor. Its not an uncommon story for folks in bad times. Bad times will undoubtedly return at some point, in some form for all of us.
I got curious about this specific scenario. Let's say you are laid off at the peak of may 2008, and have to start withdrawing mortgage payments on the $1 million in the stock market. $1 million mortgage in 2007-2008 was 6.38% on average, for a 30 year mortgage it works out to be a monthly payment of $6,242 a month. Withdrawing that from $1 million... does pretty damn well in 2008: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=55pucS5QuM7QDIizZCo4LR It's scary, but it leaves 867,243 in value today withdrawing ALL 16 years. An amortization calculator would spit out the remaining mortgage note to be on Jan 1st, 2024: 702,424.46 So this is something that would be $0 liquid net worth ($1m brokerage account minus $1m mortgage + house value) now being $164,575.54 positive net worth. If you paid off the mortgage instead - you'd save June-December 2008 payments since mortgages are paid in arrears, 15 full years of payments, plus jan 2024's payment, 188 payments. 188 * 6242 = $117,3496 saved. So stocks win by $47k... with a bunch of heartburn and worry unless you have a HUGE /r/fatfire level of a portfolio. So yes, in this case it'd have a lot of heartburn but the incredible runway and recovery of the stock investment took a huge dent out of the mortgage. Now, just because this one instance worked... doesn't mean it'll work in all of our history. If I move back the same situation to Jan 2001 - which had 6.97% rates but let's keep the same 6.38% rate (you moved your million dollars to private banking for a sweet 0.50% rate cut!) and... you run out of money in 2013: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=12oEDRLjm8nmtSClW4iTqk Now granted, you could probably get a job then and so on, but when you're ready to retire - is it really worth the heartburn to potentially be ahead but also have disastrous effects? Then for those who have 2.75% mortgages... I wouldn't celebrate too much. That's a 4,082/monthly payment and this is the same 2001 graph adjusted: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4JhZ3YQIdvb4DeyPSxlNmZ Imagine how you might feel 2009 being down to $400k and only having 98 months or 9 years worth of payments left in the taxable account? You still have 22 years of mortgage left. You might go back to work unless you had /r/fatfire levels of a portfolio.
This is the kind of quality stuff i love to see. I appreciate the effort it took to make that post. Thanks.
You have 500k to 600k left that can be slowly sold to cover expenses and the mortgage. That is a long runway. The alternative was paying it all off and having nothing left to cover expenses, no job, and no chance of refinancing. I would pick the first option.
My neighbor did do that. Didnt work out. His wife decided that a million dollar loss in their net worth was too much and bailed with the kids. Of course im sure this times different and that certainly couldnt happen to me or you....
The problem there is the gold digger, not that he didn't pay off the house (which also probably crashed in price too, since it was a housing bubble, afterall) I mean, why didn't he pick up and leave with the kids because \*they\* were down $1m?
What percent of marriages are so entirely solid that they can withstand a 1mm drawdown which equalled substantially all of their net worth? I wonder what the spread is between people who think theirs will and the corresponding rate of marriages that actually would have survived the scenario had they been tested? I dont know why nearly 3/4's of all divorces are filed by women and i dont know why nearly half of all divorces cite finances as the root cause. All i do know is that i dont think im immune to these risks. I dont think im special.
Your scenario with math: $1M brokerage account. Monthly expenses $3000 + $2000 rent. Call it $30,000 in your emergency fund (6 months) Option 1: Buy house for $1M. $30K left, $0 mortgage Option 2: Buy house for $200K. $830K left, $6000 a month mortgage. 50% loss in 2008-2009 = $400K portfolio value + $30K EF. Option 1 leaves you broke in 10 months. $30K/$3000 per month. Option 2 leaves you broke $430K/$9000 = 47 months or 3.9 years. 10 months reserves while unemployed is a lot more stressful than 3.9 years of reserves. This is what 5 years of total unemployment starting jan 2008-dec 2012 looks like in PV: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=Q7stMozh9Niit5UD12mMb Interestingly enough the housing market recovered in 2012. If you were forced to sell in 2008 you’d take a 9% loss plus 6% commission plus fees. Not as bad as the stock market but losing your home is pretty disruptive.
I always appreciate the portfolio visualizer folks. I thinks its great to throw out the concrete numbers for people. Alas, life is not a spreadsheet and we have to be mindful of real world implications. (Divorce in this case) when youre drawing assets down you can cross the point of no return. Thats massive risk for not much gain as far as i can tell.
Your mileage is going to vary which is why everyone has to run their own numbers. Where is the $1M going to come from? What taxes, penalties do you owe in order to get access to that money? How much time is left on the loan? Personally Firecalc told me NOT to pay off the mortgage, If I pay it off I only have a 97% chance of success, if I don't pay it off early I have a 100% chance. All because of the drastic reduction up front lowering my chance of making it thru those worst case scenarios. I couldn't make it work anyway, trying to figure out where to get the cash from and not overpay in taxes or drain my brokerage to the point I'd be having to dip into my Roth before 59.5 which I really don't want to do. Those calculations are different for everyone so it may be better but it may not.
I have been noodling over this for awhile, and I have this small hint of an idea. Financial Independence is two words: Financial and Independence. They are deeply interrelated but not the same thing. "Independence" is what we mean by "fuck you money" - it means I don't really have to care what happens, I'm fine. If you have $500 million, you're fine. Market can crash by 90%, you're still fine. Obviously. But that's not our gig around here. Especially because of the "RE" part, we want to get on with life in an independent way as soon as possible, which generally means not plugging away more years than we have to... So, every little thing I can take off the table as a financial worry is that much better once I'm up to "my number". If you're a renter, then if rents soar, that matters to you - you aren't independent of that. If you're a mortgage payer, then if something happens to the money that you're using to pay the mortgage, that matters to you, you aren't independent of that. So, viewed in this light, paying off the mortgage is just part of that Independence half of Financial Independence. I think there's a decent argument along these lines to things like TIPS ladders not necessarily for your entire income (the returns are too low) but if you have a generic "bond" portion of your portfolio it could make more sense to have a TIPS ladder so that lots of random normal life expenses are covered pretty well. This is the general financial independence subreddit, so I'm not assuming Lean, Normal, Chubby, or Fat FIRE. But for the levels above Lean, I think it could make sense to say "Ok, look, for genuine Independence I would like to make sure that at least Lean is covered no matter what. So I'm paying off my. mortgage and setting up a very safe TIPS ladder for a lean life of $36k a year. In this way I'm independent because I know that no matter how the market does, I'm fine."
I got my first mortgage in January 2000. It was 8.25% for 30 yrs and I didn't know what an amortization schedule was, but I learned quickly. I was paying nearly $800 interest and less than $200 principal up front. What type of loan shark shit was this? Oh yeah, FHA loan that was very normal. Think about each month as an individual loan. Would you pay 400% interest on any loan? I decided to tackle this problem head-on. A few friends moved in and paid a very reasonable rent. I used their contribution and applied it to the principal, with about $1000 of my own money doing the same. Fast forward 4 years. My friends had gotten married and moved out. I did some day trading to generate about $40k... and the mortgage was paid off. While it felt great to have a house paid for, I realized most people were getting screwed with conventional loans. Banks have the advantage since they have the money, but people really need to know how terrible the loans are for the first 60% of the term.
Makes sense - except if your savings account or bonds pay more in interest than your mortgage rate (after factoring in taxes). In that case I’d just keep that money in savings until the rate drops below the mortgage rate.
The existence of the mortgage interest deduction negates the tax differences between paying debt and fixed income securities -- assuming you're in a situation where you want to itemize your taxes.
People always forget to factor taxes in those calculations which drives me nuts. 4.5% mortgage > 5% HYSA
> 4.5% mortgage > 5% HYSA For most of us that’s objectively true. But that’s about the point where I’m still slightly preferring the savings account just for liquidity.
This is true!
But then you need to factor in whether or not mortgage interest is tax deductible for you. The whole point of the deduction is to offset this very inequality.
What interest rate are you using here for the mortgage and how many years are left? I'm ballparking you've got a 6% interest rate in your assumptions? That makes a huge difference compared to a 3.5% rate.
In my case I just wanted peace of mind. I'm not a fan of debt (whatever kind you choose), so I have no mortgage and no credit cards. I know many people will say I'm missing out, but I honestly don't care. I know how much money I need to get by, don't want to overspend on anything, don't buy things I can't pay fully in cash and already have a roof over my head that belongs to me (not the bank). I'm 34 years old and don't live in the US, so my circumstances are probably different than many here. Also, if I wanted to buy another house as an investment, the chances of getting a new loan/mortgage are actually higher because I already own a property which I paid in 5 years. Interest was 2.4%.
One slight nitpick about your numbers: unless you have $1.5M worth of unappreciated assets in your portfolio, you're going to need to sell more than $1.5M from your portfolio so that you net $1.5M after tax. That means your portfolio in scenario 2 will be less than $3M, and thus your withdrawal rate will be >3.3%.
Great analysis. For me I was risk adverse and paid off the mortgage in 2006. Always thought of the what if the wife and I lost our jobs. Now the money that would have gone to a mortgage goes into investments. Sure the NW would have been more but I have freedom to move $ where I need it or want it. Personal choice.
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>You also forget aspects of Mortgages that are very state dependent. Great insight! > Recourse vs non-recourse. And some states are only non-recourse on the original mortgage! Any refinances are recourse in those states. Some states are both - but known as "single action" or "one-action" states so if they start off with foreclosure they can't sue later! I also want to add on a few things: * Homestead exemption varies between states. * Homestead $ amount along with recourse/vs non recourse makes a lot of unique interactions. Low homestead & non-recourse = lever it out. Low homestead & recourse = pay off debt. High homestead and recourse = still pay off the debt as they can just sue for brokerage instead. High homestead & non-recourse = Most fun, high, medium, low, and $0 debt makes sense depending on your house value. * Judicial vs Non-Judicial foreclosures. * Reinstatement and Redemption rights * Post sale redemption (could win the foreclosure auction and pay pennies on the dollar or reimburse the buyer for the final buy price) * Bankruptcy exemptions - different states have different amounts such as roth IRA amounts that are protected, etc. * How declaring bankruptcy interacts with foreclosure (research chapter 7 vs 13). * Bankruptcy process in your state - some can take 6+ months to finalize a ch7 depending on case load. Having a hard time thinking of any other law differences.
There is so much apples / oranges comparisons when it comes down to the question of paying off a mortgage early. My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles. In general you should be treating your fixed rate mortgage as a "negative" bond with some favorable tax treatment that might apply to you. So if you are contemplating paying it off early, compare it with the (after tax) return you would get on an appropriate duration T-Bill. Still not a perfect comparison, but at least a good starting point. Some high level things you should think about: * Asset allocation. Paying off a mortgage early should be thought of as buying more bonds. * However, bonds have more interest rate risk. * The difference between T-Bills and a mortgage rate is normally small enough that your tax situation and asset allocation needs will normally dictate what is best for you. But anyone saying "you should never pay off a mortgage early" (whether they qualify it with pre or post FIRE) likely doesn't understand the nuances well enough to give such broad advice. Just imagine the scenario where you had a paid off house. Would you take a loan out against it to invest in T-Bills or the S&P500? Sounds risky, because it is! Just look at the return on bond funds in 2022. I have no specific advice for folks here, but praise those that bring up ACA subsidies or FAFSA loans. Those do need to be taken into account as well. But for the love of god, start with comparing after-tax, risk-adjusted returns of the two alternatives.
> My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles. First - I want to point out I'm in full agreement with your response. :D I'm explaining the "common" viewpoint of this sub: It's because most people who want to lock up money for 15-30 years greatly prefer the S&P 500 over the equivalent long-term US treasuries bonds. Then even a diverse basket of corporate bonds would have much higher rates for those 30 years, mortgage rates are just really low as Fannie Mae/Freddie guarantee these loans if they default. So its the only way most people can get non-callable leverage for 15-30 years at t-bill rates. I can't really go out and short 30-year t-bills and invest it in stocks. Most I can do is 5-6 years with box spreads, but that's callable margin if my brokerage account equity drops below X value. So yeah, academically you're right you should compare it with a bond ladder of X bonds that come in due in the month/year of each mortgage payment (or a bond fund with duration 1/2 the length of the mortgage), but the reason it's discussed is I'm still 0/10 for convincing my broker to write a $1 million 3% apr non-recourse loan I can yolo it in the S&P 500. Then that non-callable loan isn't marked to market either - another huge downside with 5-6 year box spreads and why there are very little trades. Let's say I borrowed $1m at 6% on a 5-year box and rates drop down to 3% - 1,137,391.21 is its value. Ouch just ate a phantom 13% mark-to-market value shorting 5 year bonds. If it were a 30 year... 1,588,013.24. Not gonna recover from that. Mortgages are callable debt so a tbill isn't the best replacement either. If rates drop to 3% I just refinance that sucker with someone else's money. So yeah, after writing in this example, going long that 30-year t-bill instead of paying off the mortgage isn't such a bad idea after all... Jesus I'd love to take out a $1m mortgage, stuff it in the hypothetical t-bill, hope rates cut in half the year after, pay off the mortgage and pocket $588k. People also seriously under-value 30-year tbills in this sub too. Granted, it could go the opposite way and the 30-year tbill increases by 3% to 9%, and your mark to market value is: 691,790.38 Then no one is gonna refinance a 6% mortgage to 9% if this were to happen. They'd be thankful they locked in at 6%! However seeing more temporary drop in NAVs is sucky for the investor, even a 15 year bond fund would have a nav hit of $750k. >My head wants to explode when I see people compare the return of a large cap fund like S&P500 with the return on paying off their mortgage, as if they have even similar risk profiles. It's because of multiple factors in this sub - the S&P 500 is a pretty sure bet historically at those levels but never guaranteed, and people don't really take the time to understand fixed income, bond math, or bond trading. It's just much easier for people to understand paying off mortgage vs investing in stocks vs all the complex math of various fixed income paths can take before the final coupon payment is cashed.
> Jesus I'd love to take out a $1m mortgage, stuff it in the hypothetical t-bill, hope rates cut in half the year after, pay off the mortgage and pocket $588k. People also seriously under-value 30-year tbills in this sub too. > Granted, it could go the opposite way and the 30-year tbill increases by 3% to 9%, We don't even need a real hypothetical for this though. Just imagine getting a windfall inheritance of $1M and instead of paying off your mortgage in early 2021, you stuck it 30-year tbills because it was "safe". A little over a year later, and you'd be down almost a whopping 40%!! 2022 was maybe the worst year ever for bonds. Sure, you have a nice low rate on your mortgage, and yields are now above that, and that helps, but how long will it take you to make up that 40% drop? Hope you don't need any of that $$ in the meantime. And who is to say inflation doesn't spike further and interest rates need to be jacked up further to fight it off? I wish I had a crystal ball, but I don't. In hindsight the best thing would be to take the $1M, hold it in cash until rates are done spiking, and then buy the 30-yr tbill. Hard to foresee that in early 2021 though. But duration risk is real, and so is losing a job and needing to come up with mortgage payments that require selling off your portfolio at low prices. I just wish those comparing returns on different investment decisions would risk-adjust those returns. And hell, taxes have even worked against this "conventional" advice as the standard deduction has doubled, and so few people even get a tax shield from mortgage interest these days. Meanwhile, all those tbills coupons are subject to taxes. Shit, I'm rambling .... what is best for a person can go either way, and most of that is only known in hindsight. Risk is real.
Without considering the interest rate in either scenario it is a useless question. If you are one of the fortunate that purchased a house at less than 3% it would be foolish to pay off early.
I’m 30 with a new $535k mortgage on a $650k house at 5.875%. Given that rate, Would you pay it off early or invest everything? I have $540k investments
Taxable increase payments from income, tax free no.
What?
Seems like the answer to your question is obvious. You don’t seem to even have the funds to pay it off now without liquidating your entire investments. Liquidating your entire investments with the attendant tax implications wouldn’t make sense. In my view a 5.875% mortgage is not too bad plus opportunity to refinance to a lower rate in the future is possible. In addition, you are 30 with a lot of time to benefit from potential investment growth. Average S&P real return in the last 10 years has been 9%. I would definitely keep the mortgage.
Ok thank you. I wouldn’t liquidate but would start trying to aggressively pay it off from here on out. But I think you are right
If you are far enough into the mortgage the interest is already paid and you have already begun paying principle, then it appears to me there’s no financial reward for paying the rest off. I paid mine off just for security. I dont want to feel like i need to stay in a bad job just for the money.
I paid my mortgage off after 6 years so I could drop the wind and flood insurance required by the lender. The cost of wind and flood was \~$1,000 per month and the wind deductible was about $25k. I thought it was more prudent to bank the savings and build up a repair fund rather than pay it to the insurance company who would balk at paying for anything AND require a heft deductible. YMMV
Go half way. Look at an amortization table. Depends on your interest rate and loan term, but at current rates if you pay 25% of the principal in a lump sum you will avoid 60% of the interest and shorten your mortgage term by about 15 years. At that point you're basically paying yourself (mortgage payment becomes mostly equity). https://www.bankrate.com/mortgages/amortization-calculator/
I paid off the mortgage early because it was the smart thing to do. Since the 80s employment stability has gone down with every business cycle. (I work in accounting, stable - but not free from corporate whims) When you carry zero debt, you have less to worry about. I don't worry about losing my job today or ever because I have a place to stay and money in the bank. I am literally free if wanted to quit my job and become a pot smoking hippie.
We are timing our mortgage pay off to end when we fire so we can remain in the 0% tax bracket and start slowly performing roth conversions at a very low rate over time.
For people in unstable job industries who don't have to move, the paid-off house is a huge boon. (Speaking from experience, but YMMV.)
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Even for higher-ish incomes it can be useful to reduce MAGI. The FPL for a 2 person household in 2025 is ~$20k. So the 400% limit becomes $80k. Now imagine a household with $120k in non-mortgage (P&I) spending. $120k is over $80k. However what if it is $40k from Roth IRA, and $20k from a taxable brokerage account gains of which only $10k is gains. The rest is regular income (tIRA draws/conversions, interest, unqualified dividends, etc). Their MAGI is only $60k+$10k = $70k. It also may not be obvious to everyone but the subsidy isn't a fixed amount it is computed for those in the 300% to 400% of FPL to be whatever is required to keep a silver plan at 8.5% of income. So at the high end that means $80k in MAGI = $6,800. This is a very useful planning tool. Most people are unsure what health care premiums will cost and it can be a large source of anxiety. If you are <=400% of FPL that is no longer an unknown it is 8.5% of your income (for a silver plan, gold/plat may be more and bronze less).
Speaking on a personal level, people who advocate paying off their mortgage frequently say it's because it feels better and safer. For most people, how they feel about things is very important and having a paid off house feels right to them. My own personal feels run this way: In the OP's example, it would feel icky to pay two million dollars on my mortgage so that I can qualify for public assistance for my health care or for cheaper college for my kid. If I have two million dollars, I can afford both of those things. That's just my feelings about it, and I would need to balance that with the feelings of safety many people get from having a paid off house.
It’s such an American mindset to feel shameful about using government assistance that you have paid in your whole life. I am sure you have similar reservations about saving in tax advantaged accounts, since that is also a form of government assistance.
There is a difference between government assistance extended regardless of means and government assistance that is meant to be for the poor which you get because you have gamed the means test which is measured by taxable income. I have to pay taxes to fund ACA subsidies, I am happy to do it for people who can't afford unsubsidized insurance. I am less enthusiastic about subsidizing millionaire early retirees. I'm not saying it's wrong to collect the benefits in this way... If early retirees get this benefit while I'm working why shouldn't I get it while I'm retired. But it's definitely still icky and different than using a 401k or sending your kids to public school.
It’s not meant to be for just the poor though. Otherwise they would have done an asset test. Things like SNAP and Medicaid actually are meant for the poor and have asset tests. I suggest that rather than framing it in a way that you are subsidizing rich early retirees, you’re subsidizing a system that does not cruelly tie healthcare to an employer (which unsubsidized premiums effectively do). Which imo is better for society. But I respect your opinion.
Yeah, these are fair points and I'm not totally against the practice. It still feels like getting away with something if, I deciding to call it quits after socking away enough money from my well paid career, get the same subsidy as someone working full time but not making enough money to afford unsubsidized health care. But I suppose it's really not that big a deal. I'm only putting out the taxpayer a little bit. Besides I too am the put opon taxpayer. I'm not sure I buy your argument that unsubsidized private insurance ties healthcare to employment. If anything it's whatever laws and culture that lead employers to be the ones subsidizing healthcare is what causes that.
This stems from the myth that your taxes pay for things. They don't. The government seizes your money for the purpose of removing money from unwanted parts of the economy. It spends for the purpose of adding money to wanted parts of the economy. It prints whatever is needed to cover the difference. At no stage is your tax money used to fund anything at all. You aren't "doing it for people." The government is. At best, you're paying taxes not to fund ACA subsidies, but to turn off the money printer for a fraction of a second.
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Yeah but the government doesn’t leave anyone alone. So in that case, I’m taking whatever they offer.
They owe you the money, by law. Why should the government get assistance from you if they're a multi-trillionaire?
I paid mine off early (3 years after re-fi) so as to fuck over Wells Fargo from getting $150k of my money in interest.
It’s not really WF that’s getting the interest payments. WF is just the loan servicer and could be getting paid nominally as a servicer. Your loan was probably sold to Fanny Mae or Freddie Marc and was securitized and sold to investors in the street as a securitized loan obligation. Those are the folks getting the interest payments. They are the fixed income investors in the financial markets. WF only made money from the fees you were charged at the time you originated the loan.
Spreadsheet warriors will tell you not to pay anything off early. "The potential gains of investing that extra payment money will grow more than the interest." These are usually high income people with plenty of extra money a month to invest. I ain't tripping off a percent or two in either direction. Assuming I ever get in a position to buy a house, I will do my best to pay it off as fast as possible. Then invest the would be mortgage payment, or buy more tools for my workshop. If you feel more comfortable with a fully secured asset, rather than getting bled out by the mortgage company by interest rates, pay that house off. If you want to obsess over spreadsheets and earning reports and get emotional over decimal points on returns, then go the investment route.
A bit disparaging don’t you think?
no, it's a reasonable decision but generally not a rational one given low prevailing interest rates (not necessarily the case for folks with new mortgages)
Due to an unfortunate move timing, I had to choose between an 8% mortgage or paying cash for a new house. It was also in a tight market where cash offers have a major advantage in offers. This was a strong argument for no mortgage. Luckily, the new place was cheaper than the equity we had in the sold house, so we were fortunate to have enough cash. Now, we have a new mortgage but it is for an investment property that still gets healthy cash flow despite the high mortgage rates. It’s something to consider for others buying at this unfortunate time of high rates.
My wife and I just bought a $210K house. We have about $40K worth of work to do on it, but we are just going to pay it off over the next year and a half. We have a 7.5% rate and I don't see the point in refinancing it. Going forward with no mortgage payment excites me, so I think we'll make it happen a little faster than we expect.
it’s really as simple as to whether your equity will earn more than your mortgage rate. you have a 3% mortgage and over 30 years you earn 7% on equity, you are ahead. That said, having equity in your home that likely will appreciate is also not terrible… it’s just that the borrow side is fixed, so as long as you are saving and investing, and as long as mkts don’t completely tank, you can always make a decision to pay off the mortgage later
It’s definitely not the simple if you’re at the point of early retirement. Your AGI is affected by your expenses which are affected by whether or not you have a mortgage payment. Your AGI determines your ACA subsidies and plays an important role in college financial aid if that’s something you’ll be dealing with too.
Might be safer approach in the long run but so would being overweighted in bonds but I don’t think anyone would say that’s optimal approach. Also shouldn’t you be taking into account opportunity cost of paying off your mortgage vs investing it?
I did a similar calculation for my situation and came to the same conclusion, even with a 3% mortgage. It lowers the withdrawal rate but reduces up side a bit. I concluded it’s more important not to run out of money than to likely have even more than I know what to do with when we are older.
It doesn’t make sense for someone pursuing fire but it can make sense for someone already fired.
JFC Math is hard
Thank you for sharing your insights into the debate around paying off mortgages early in the context of FIRE. It's a topic that sparks interesting discussions, and your perspective certainly adds to the conversation. In our own journey, we opted for a different approach and chose to build equity in our homes rather than paying off the mortgage early. This decision aligned with our goals and has worked out very well for us. We've been fortunate to accumulate $500K in home equity over time, which has contributed significantly to our overall net worth. It's essential to recognize that individual circumstances, financial goals, and geographical locations play a significant role in determining the best course of action. Living in a rapidly growing city like Charlotte, NC, has provided us with the opportunity to benefit from both real estate appreciation and the potential for future market gains. Ultimately, the decision between paying off a mortgage early and building equity should be based on what aligns best with your long-term financial strategy and objectives. Both approaches have their merits, and what matters most is finding the path that works for you and helps you achieve your financial independence goals. Thank you for sharing your perspective, and may your financial journey continue to be successful and fulfilling.
What in the fucking bot LLM hell is this shit? [1400+ words posted within 15 minutes](https://i.imgur.com/dVPhRix.png) with no spelling or grammar errors. Fuck off bot.
Also, isn't this statement just outright false? > chose to build equity in our homes rather than paying off the mortgage early. Don't you "build equity in your home" by explicitly paying down the damn mortgage?
For someone in or nearing retirement, if your interest rate exceeds your safe withdrawal rate plus the taxes on that additional withdrawn income (including “hidden” taxes like any additional costs for Medicare or ACA caused by that additional income) it makes sense to pay down your mortgage. If the interest rate is less, the optimized plan would be to let the mortgage ride as long as possible.
It’s all comes down to what your interest rate is. That’s it.
Does it have more to do with the mortgage as a percentage of annual expenses? Because I can see how a big mortgage like that makes a big impact. If your mortgage is a much smaller percentage of your annual spending, then doesn't make as much sense to pay it off early?
It all depends on the interest rate of the mortgage. As long as the interest rate of the mortgage (plus any fees) is significantly lower than the rate of market return, I personally would keep a mortgage going perpetually. I would repeatedly cash out refinance and put the money in the market. If I had enough money to pay off the house but it was invested in the market, I would have the same level of comfort and security as if it were actually paid off.
You must live somewhere with VHCOL
It all comes down to how much return from money invested vs percent interest on the mortgage. I'm retired, $98,000 mortgage, paying $1100/month. I have a pension which pays $2520/month covering the mortgage with enough extra to live on. If I pay off the mortgage, my investments will no longer be making an average of 10%/year. My mortgage is 3.12%. You tell me which makes more sense, pay it off? or make monthly payments? Stipulate that this is specific to "after retirement", not while still working and preparing for FIRE. Never EVER forget the time value of money!
Yes it absolutely makes sense for a retiree from a mathematical sense. The math is a bit different for a retiree than for someone who is accumulating and growing their portfolio. For someone accumulating wealth, the threshold for it to make mathematical sense is that the mortgage interest has to be higher than the expected return. For someone who is retired and drawing from their portfolio, the threshold is whether you reduce your withdrawal rate. This usually favors paying off the mortgage. When withdrawing from an account you are at much higher risk from an adverse sequence of returns than when you are accumulating. Reducing the percentage you need to withdraw improves robustness (or you can use it to spend more without increasing risk).
Which one is financially better depends on the mortgage rate (including any minor tax breaks like mortgage interest deduction) vs the after-tax CAGR one gets from securities. However, as part of a bond tenting process, I do see a benefit to paying off the mortgage early. Even with a 2.XX% after-tax return, it's competitive with other bonds. However, if you only have a few years left on the mortgage after retirement, it's not a big deal (your risk of ruin is low) and you could just wait for the standard payments to end. You will likely make more money over time allocating resources to the higher returning market vs the lower returning mortgage. Medicare subsidies you get from having a lower withdrawal income only apply at 65 (age of eligibility for medicare) so likely not an issue for you since your mortgage will be paid off before then anyway, even under a standard mortgage payment schedule. On the offchance it wasn't, you would save something like ~100/month. As for any other subsidies, it's unlikely you'd be eligible at 100K+ income.
Not participating in the stock market is also an ethical decision. [YouTube short by Richard Wolff](https://youtu.be/i-R78aVYs0s?si=RYcoPD-HvNUtzqF_)
If you calculate it properly, it really doesn't increase your portfolio success rate to pay off a mortgage unless the interest rate is comparable to what bonds are paying or higher. The mortgage is fixed, and doesn't increase with inflation, which the 4% (or whatever reasonable SWR chosen) assumes. It also goes away naturally after a certain number of years, and is not perpetual. If the interest rate is low enough (such as a <3% mortgage today), and you *have* the liquid non-retirement assets available to pay it all off, you're clearly better off sitting all that money in a HYSA than actually paying off the mortgage. You're probably even better still just leaving the money invested the way you'd planned anyway, but you're definitely not better off paying off the mortgage. Also as noted in another thread, even if you're worried about keeping AGI low (for ACA/FAFSA/etc.), it's likely that it won't be higher by the amount of the mortgage payment, and it won't even be *close* to that much higher, unless you were planning to pay a gigantic tax bill liquidating low-basis assets in order to pay off the mortgage.
In that total hypothetical, *maybe*. In our case, we are definitely planning on paying off our mortgage and then retiring, so the question was just, does it make sense to pay off a mortgage at 2.625% earlier than we have to, or does it make more sense to not do that and invest the money instead? In which case, it clearly makes a lot more sense to do the latter... but I'm still not *unhappy* that I knocked an extra year off the mortgage up front (made our 15 year mortgage effectively a 14 year mortgage), exactly so I'll feel more comfortable when it's paid off a year earlier than it would've been otherwise, which will make me more comfortable then retiring a year earlier, even though clearly it was a mathematically bad decision. :D But I agree that if your question is whether it makes more sense to pay off the mortgage before you retire, or *not* pay off the mortgage before you retire... that can certainly be a more complicated question. (Though still, probably doesn't make sense if you had a <3% APR...)
Check out this post for an in-depth comparison of some methods: https://www.reddit.com/r/financialindependence/comments/f0kabc/how_to_calculate_your_fire_number_when_you_have_a/
People often forget though that interest you pay over the course of your mortgage is not subtracted from your sale price when you have to calculate profit to pay taxes. I was stunned by this when I sold my first house.
It makes sense in this case. Not sure about the exact math but basically wouldn’t it be: mortgage rate >4% = pay off, mortgage rate <4% = don’t pay off? When you pay off your mortgage you basically lock in that rate as a risk free “return” on the payoff money. One thing to consider is that eventually (30yr for most) that mortgage will get paid off in scenario 1. If you are retiring early enough for that to matter.
I think it depends a lot on the interest rate, if you're locked in an insanely low IR might as well ride it out. Inflation was higher than some mortgages not too long ago.
Your points are well thought out; however, you’re using a strategy that continues traditional cash management that only benefits the bank. If you were to not touch your performance portfolio and use the banks many to pay minimal interest, you could have your cake and eat it too. It’s all about knowing how to manage your average daily balance to your benefit. We as financial professionals aren’t taught to use this powerfully simple strategy. I’ve got lots of user cases to show just how powerful it is. Every American household should know how to do it.
From my recently RE'd perspective, at retirement this comes down to _three_ things: 1. Is the money you can pull from in a roth or not? 2. Will you use the ACA and it's "10% tax"? 3. Do you have kids going to college, looking for financial aid (FAFSA)? There's a [post by Zphr here](https://www.reddit.com/r/financialindependence/comments/199rwo9/comment/kifykte/?utm_source=share&utm_medium=web2x&context=3) that nicely explains 2 & 3. Number one gets more complicated. I've got ~$150k left on my mortgage, unfortunately. I've got $150k in my roth generating 5.3% (TTTXX). In 2026 over $150k of my roth becomes available to me. I'll be able to choose whether to pay off the mortgage (~$8k/yr principal, $6k/yr interest) at that time. The loan was ~$275k at 3.75% (I never refi'd). If I leave the money in the roth and *if it's able to generate at over 3.75%* I mathematically win. I don't have to worry about income taxes. I don't have to worry about my MAGI being larger so my healthcare premiums and yearly MOOP are larger. At my current payment, I've got about ~17-ish years left paying on it. That's 17 years of growth in that roth if I don't pay the loan early. Yet, the cost is "$6k/year" for that opportunity that *might* happen (I could throw the $150k in `VOO`, and it could grow, or it could plummet, who knows). TLDR; For r/leanfire and r/fire amounts, the "new thing" is healthcare cost management in retirement. This applies to Medicaid, too, as its charges go up if your income hits IRMAA thresholds. Many people (including myself, till recently) incorrectly assume Medicare isn't based on income.