Mortgage? Pay cash?

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GoFish
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Mortgage? Pay cash?

Post by GoFish » Fri Nov 15, 2019 1:17 am

Ages 64 and 63. Retired 5 years. Income sources are commercial real estate plus annual withdrawals from 55/45 investment accounts (<3% withdrawal rate). About 50/50 taxable vs IRA overall. Kids launched and financially independent. No known health issues. Planning to start SS at age 70.

Considering relocation to an area of the upper midwest that we know well, and very near where we once lived for 10 yrs. Net proceeds from sale of present home will fall $123K short of amount needed to close the deal after we are done paying commissions and moving costs.

Question is how to finance the new house?

Option A: Pay cash using net proceeds from sale of current home supplemented by $123K withdrawn from an existing taxable account. Our withdrawal rate would remain under 3% of our investable assets. After the move, we are $123K “cash poorer”, but with zero debt.

Option B: 30 yr fixed rate mortgage at around 4%. Set up new taxable account at VG dedicated to generating $1,800 monthly income to cover mortgage payments. Present thinking is to fund the new account with $10K cash, $400K VWIAX (total $410K) using $257K from home sale, plus $153K moved from present FIDO taxable account. Rely on approximately 5.5% annual distributions from VWIAX to cover monthly mortgage payments, with just a little cash to smooth out rough spots. End up $257K “cash richer”, but with a $380K mortgage.

I am presently slightly favoring Option B. Not necessarily trying to beat the mortgage rate with my investing prowess :D. More so looking to increase liquidity.

Opinions?

Goal33
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Re: Mortgage? Pay cash?

Post by Goal33 » Fri Nov 15, 2019 1:53 am

You’re missing some in between options such as taking a loan for the 123k
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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 2:00 am

If you still need that much liquidity as a retiree, then it sounds like you're buying too much house. But since your withdrawal rate is under 3%, you frankly do not need the liquidity of all that cash.

Mortgages increase sequence of returns risk for retirees, so it's better to avoid them if possible. The catch for you is that there may be negative tax implications by selling assets in your taxable account, but it sounds like this may be cash. If so, it makes no sense at all to retain cash that might be earning 1.8% or so pre-tax while you're also holding a 4% post-tax mortgage. Your other investments should be liquid enough.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Fri Nov 15, 2019 2:04 am

Goal33 wrote:
Fri Nov 15, 2019 1:53 am
You’re missing some in between options such as taking a loan for the 123k
Yup, that’s an option in my spreadsheet! Thanks.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Fri Nov 15, 2019 2:25 am

willthrill81 wrote:
Fri Nov 15, 2019 2:00 am
If you still need that much liquidity as a retiree, then it sounds like you're buying too much house. But since your withdrawal rate is under 3%, you frankly do not need the liquidity of all that cash.

Mortgages increase sequence of returns risk for retirees, so it's better to avoid them if possible. The catch for you is that there may be negative tax implications by selling assets in your taxable account, but it sounds like this may be cash. If so, it makes no sense at all to retain cash that might be earning 1.8% or so pre-tax while you're also holding a 4% post-tax mortgage. Your other investments should be liquid enough.
You raise some excellent points.

I don’t need the liquidity. It is probably emotion that leads me to want it. We do not have a long term care insurance policy. The equity in our house serves that purpose. It would be nice, but maybe not necessary, to have ready access to the funds without selling or refinancing.

I keep between 5% and 10% cash in my taxable account. I would need to liquidate around $50K equity holdings at closing. Then another $75K or so to eventually restore the cash balance going forward. I can do the $50K with minimal tax consequences, actually using it for TLH. But the remainder will generate some CG.

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birdog
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Re: Mortgage? Pay cash?

Post by birdog » Fri Nov 15, 2019 3:36 am

I would almost certainly pay cash for the house, especially if I was retired. If I was doing a mortgage, however, I would choose a 15 year over a 30 year for the 123k in order to lower the interest rate.

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 12:13 pm

GoFish wrote:
Fri Nov 15, 2019 2:25 am
willthrill81 wrote:
Fri Nov 15, 2019 2:00 am
If you still need that much liquidity as a retiree, then it sounds like you're buying too much house. But since your withdrawal rate is under 3%, you frankly do not need the liquidity of all that cash.

Mortgages increase sequence of returns risk for retirees, so it's better to avoid them if possible. The catch for you is that there may be negative tax implications by selling assets in your taxable account, but it sounds like this may be cash. If so, it makes no sense at all to retain cash that might be earning 1.8% or so pre-tax while you're also holding a 4% post-tax mortgage. Your other investments should be liquid enough.
You raise some excellent points.

I don’t need the liquidity. It is probably emotion that leads me to want it. We do not have a long term care insurance policy. The equity in our house serves that purpose. It would be nice, but maybe not necessary, to have ready access to the funds without selling or refinancing.

I keep between 5% and 10% cash in my taxable account. I would need to liquidate around $50K equity holdings at closing. Then another $75K or so to eventually restore the cash balance going forward. I can do the $50K with minimal tax consequences, actually using it for TLH. But the remainder will generate some CG.
Even if you have to pay LTCG of 20% on $75k, that's very likely to be significantly better than taking out a 4% mortgage in order to retain cash paying 1.8%.

If you're able to use a <3% withdrawal rate, I'd say that you have the ability to fairly easily pay for most realistic long-term care situations.

If you just want cash, I'd say that since there is less than 1% difference in the yield of cash and bonds, I'd just trade some bonds for cash.

I reiterate that borrowing at 4% post-tax in order to retain cash paying 1.8% pre-tax just in order to further provide unnecessary liquidity doesn't make sense at all, especially since it also increases your sequence of returns risk (i.e. you must pay the mortgage every month, regardless of how your portfolio performs).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage? Pay cash?

Post by stan1 » Fri Nov 15, 2019 12:22 pm

In the big picture if the cost of the new house is less than 20% of your net worth it is unlikely to make much of a difference and it becomes a personal preference. Personally I would probably pay cash for the new house with taking out a loan for the difference between the sales price of the current home and the purchase price of the new home being a close second. I would not take out a large mortgage and invest the balance. If I needed the liquidity under that scenario I'd also be buying a home that is too expensive.

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 12:30 pm

stan1 wrote:
Fri Nov 15, 2019 12:22 pm
If I needed the liquidity under that scenario I'd also be buying a home that is too expensive.
:thumbsup That was precisely my earlier point.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dknightd
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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 12:33 pm

I'd probably sell my home and finance the $123K over 15 years

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 12:35 pm

dknightd wrote:
Fri Nov 15, 2019 12:33 pm
I'd probably sell my home and finance the $123K over 15 years
Would you do so primarily to (1) retain the liquidity of the assets, (2) because you believed that your stocks (certainly not bonds) will outperform 4% after-taxes, or (3) to slightly reduce the tax burden?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dknightd
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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 12:39 pm

willthrill81 wrote:
Fri Nov 15, 2019 12:35 pm
dknightd wrote:
Fri Nov 15, 2019 12:33 pm
I'd probably sell my home and finance the $123K over 15 years
Would you do so primarily to (1) retain the liquidity of the assets, (2) because you believed that your stocks (certainly not bonds) will outperform 4% after-taxes, or (3) to slightly reduce the tax burden?
All of the above. And you can probably get a 15 year mortgage at a lower rate than a 30 year

Edit: taking $123K out of my 403b in one year would bump me up a tax bracket, or two
Last edited by dknightd on Fri Nov 15, 2019 12:48 pm, edited 1 time in total.

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1789
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Re: Mortgage? Pay cash?

Post by 1789 » Fri Nov 15, 2019 12:41 pm

I would stay away from debt if i am retired. Paying with cash sounds the way i would take if i were you.
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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 12:47 pm

dknightd wrote:
Fri Nov 15, 2019 12:39 pm
willthrill81 wrote:
Fri Nov 15, 2019 12:35 pm
dknightd wrote:
Fri Nov 15, 2019 12:33 pm
I'd probably sell my home and finance the $123K over 15 years
Would you do so primarily to (1) retain the liquidity of the assets, (2) because you believed that your stocks (certainly not bonds) will outperform 4% after-taxes, or (3) to slightly reduce the tax burden?
All of the above. And you can probably get a 15 year mortgage at a lower rate than a 30 year
1. Why would someone with a <3% withdrawal rate need the liquidity unless they are buying too much house?
2. Stocks may outperform 4% nominal on an after-tax basis, but they could do much worse (e.g. 2000-2009).
3. The tax burden for the OP is likely to be very low.

#2 is the only potential reason that I find at all compelling. But I'm not sure that it outweighs the increased sequence of returns risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dknightd
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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 12:58 pm

For me it comes down to taxes. Why would I pay 22% taxes to come up with cash that I can borrow at less than that.
If your money is already after tax your calculation might be different.
12% + 4% is still less than 22%

CZjc1330
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Re: Mortgage? Pay cash?

Post by CZjc1330 » Fri Nov 15, 2019 1:08 pm

In my humble opinion -- don't sound humble at all, eh wot!?

Okay in my biased opinion, I don't think anyone should enter retirement with a mortgage. Circumstances may vary. Smart of you to seek input!! :sharebeer

Others have made good"economic" arguments. They are valid. Perhaps you should work a few years more, save money, etc. Maybe you should consider buying a smaller residence. Perhaps in a lower cost of living location. Etc., etc.
All good and sound recommendations.

Let me give you the psychic, feel good rec. The relief and freedom one feels in being mortgage-free is liberating, rejuvenating and just plain great. Best insomnia cure! That should be our goal. Achieved hopefully before retirement but most assuredly in retirement!!.
Just a suggestion. (IMHO) Good luck!

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 1:09 pm

dknightd wrote:
Fri Nov 15, 2019 12:58 pm
For me it comes down to taxes. Why would I pay 22% taxes to come up with cash that I can borrow at less than that.
If your money is already after tax your calculation might be different.
12% + 4% is still less than 22%
That's 4% each year on the current mortgage balance, whereas LTCG taxes are one-time (i.e. apple vs. oranges). The interest paid on a 15 year, $75k mortgage at 3.17% (the current average 15 year mortgage rate according to BankRate.com) is $19,336.20 or 25.7% of the amount borrowed, and that's beside closing costs. In no way do taxes make a mortgage preferable to paying cash and LTCG taxes now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dknightd
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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 1:10 pm

In my simple mind, here is my thinking.
I could pay off my 3.25% mortgage balance tomorrow.
But doing that would bump me up from the 12% tax bracket to the 22% bracket.
It does not matter if I pay 3.25% or 4% on my loan. It does not matter what my investments might earn.
What matters is the total cost. I do not see any benefit of paying 10% more taxes.
Perhaps I'm missing something.

dknightd
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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 1:14 pm

Most of my money is in a 403b. It gets taxed as ordinary income when I take it out. If your money is some place else it gets taxed differently, and as I said, it will changed your calculation

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 1:17 pm

dknightd wrote:
Fri Nov 15, 2019 1:10 pm
In my simple mind, here is my thinking.
I could pay off my 3.25% mortgage balance tomorrow.
But doing that would bump me up from the 12% tax bracket to the 22% bracket.
It does not matter if I pay 3.25% or 4% on my loan. It does not matter what my investments might earn.
What matters is the total cost. I do not see any benefit of paying 10% more taxes.
Perhaps I'm missing something.
I've shown you that the problem is you're comparing an ongoing interest rate with a one-time tax rate. That's completely faulty.

Further, we're talking about LTCG taxes on a taxable account, not withdrawals from a 403b, which are taxed as ordinary income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage? Pay cash?

Post by dknightd » Fri Nov 15, 2019 1:33 pm

willthrill81 wrote:
Fri Nov 15, 2019 1:17 pm

I've shown you that the problem is you're comparing an ongoing interest rate with a one-time tax rate. That's completely faulty.
I must have missed that. sorry. Can you explain that again? thanks.
willthrill81 wrote:
Fri Nov 15, 2019 1:17 pm
Further, we're talking about LTCG taxes on a taxable account, not withdrawals from a 403b, which are taxed as ordinary income.
Yep. Totally different.

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Fri Nov 15, 2019 2:48 pm

dknightd wrote:
Fri Nov 15, 2019 1:33 pm
willthrill81 wrote:
Fri Nov 15, 2019 1:17 pm

I've shown you that the problem is you're comparing an ongoing interest rate with a one-time tax rate. That's completely faulty.
I must have missed that. sorry. Can you explain that again? thanks.
willthrill81 wrote:That's 4% each year on the current mortgage balance, whereas LTCG taxes are one-time (i.e. apple vs. oranges). The interest paid on a 15 year, $75k mortgage at 3.17% (the current average 15 year mortgage rate according to BankRate.com) is $19,336.20 or 25.7% of the amount borrowed, and that's beside closing costs. In no way do taxes make a mortgage preferable to paying cash and LTCG taxes now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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JoeRetire
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Re: Mortgage? Pay cash?

Post by JoeRetire » Fri Nov 15, 2019 2:58 pm

GoFish wrote:
Fri Nov 15, 2019 1:17 am
Question is how to finance the new house?

Option A: Pay cash using net proceeds from sale of current home supplemented by $123K withdrawn from an existing taxable account. Our withdrawal rate would remain under 3% of our investable assets. After the move, we are $123K “cash poorer”, but with zero debt.

Option B: 30 yr fixed rate mortgage at around 4%. Set up new taxable account at VG dedicated to generating $1,800 monthly income to cover mortgage payments. Present thinking is to fund the new account with $10K cash, $400K VWIAX (total $410K) using $257K from home sale, plus $153K moved from present FIDO taxable account. Rely on approximately 5.5% annual distributions from VWIAX to cover monthly mortgage payments, with just a little cash to smooth out rough spots. End up $257K “cash richer”, but with a $380K mortgage.

I am presently slightly favoring Option B. Not necessarily trying to beat the mortgage rate with my investing prowess :D. More so looking to increase liquidity.

Opinions?
How "poor" does losing $123k in cash make you? If it brings you very close to $0, then it's probably not wise. Otherwise, it's just a personal preference.

If you fear having a mortgage more than you value the liquidity, then go with Option A.
If you value the liquidity more than you fear having a mortgage, then go with Option B.

For me, I'd likely go with Option B. A mortgage at 4% is pretty cheap money. Your mileage may vary.
Don't be a lemming.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Fri Nov 15, 2019 5:32 pm

Wow. Can’t tell you how much I appreciate the responses! Thank you.

We are in good shape financially (knock, knock). If we make the move, our home would represent a little less than 15% of our total net worth (real estate holdings plus investable assets).

The basic question is whether to borrow money at around 4% in order to invest that money into VWIAX or similar income fund. The two possible benefits from borrowing the money are:
  • Potential of small after tax return on the interest rate difference between mortgage and VWIAX
  • Increase in liquidity (real estate is less liquid than mutual fund)
Under neither scenario would I have significant cash lying around earning 1.5%-2%. I would keep only enough cash (or short bond ETF’s) on hand for buying opportunities in a downturn and for about a year’s living expenses.

Either scenario requires liquidating $125 to $150K worth of equities. The tax impacts of this are minor, though, because I have some equities with small LTCG, or with losses that should probably be harvested for tax purposes anyway.

I hear a lot of sentiment, which is persuasive, to avoid going into debt. Our present home has been paid off for 7 years, which is a nice feeling.

After the discussion I am leaning more towards a cash purchase. It would reduce our investable assets by a little more than 4%, but we’d still be well under 3% withdrawal rate.

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Watty
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Re: Mortgage? Pay cash?

Post by Watty » Fri Nov 15, 2019 8:30 pm

GoFish wrote:
Fri Nov 15, 2019 1:17 am
....withdrawals from 55/45 investment accounts
I assume that is 55% stocks and 45% bonds.

That means that if you have a $123K 4% mortage then you would have an additional $123K in investments. 45% of that is $55K that would be invested at 2%.

Borrowing money at 4% and investing almost half of it at 2% makes it sort of hard to come out ahead.

You would also have sequence of returns risk. This is an example that I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://www.vanguard.com/us/insights/sa ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.

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Re: Mortgage? Pay cash?

Post by miket29 » Sat Nov 16, 2019 7:42 pm

GoFish wrote:
Fri Nov 15, 2019 2:25 am
I don’t need the liquidity. It is probably emotion that leads me to want it. We do not have a long term care insurance policy. The equity in our house serves that purpose. It would be nice, but maybe not necessary, to have ready access to the funds without selling or refinancing.
To me it sounds like your AA may be the real issue here. If, after paying cash for the house, you still are withdrawing around 3% of your portfolio for annual expenses then you have enough saved. The liquidity issue only comes into play if you have a significant amount in the market and might be forced to sell at an inopportune time. But at this point why is there a need to continue to grow your assets? Keeping up with inflation seems like it would be more than sufficient, and you can reduce your market exposure until you have the liquidity you feel comfortable with. Avenues to investigate would include a TIPS ladder.

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Re: Mortgage? Pay cash?

Post by themuse » Sat Nov 16, 2019 8:28 pm

Based on the info, I would pay cash. I would prefer to not take another mortgage after retirement.
--themuse-- | | Investing should be boring

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Sat Nov 16, 2019 8:49 pm

miket29 wrote:
Sat Nov 16, 2019 7:42 pm
GoFish wrote:
Fri Nov 15, 2019 2:25 am
I don’t need the liquidity. It is probably emotion that leads me to want it. We do not have a long term care insurance policy. The equity in our house serves that purpose. It would be nice, but maybe not necessary, to have ready access to the funds without selling or refinancing.
To me it sounds like your AA may be the real issue here. If, after paying cash for the house, you still are withdrawing around 3% of your portfolio for annual expenses then you have enough saved. The liquidity issue only comes into play if you have a significant amount in the market and might be forced to sell at an inopportune time. But at this point why is there a need to continue to grow your assets? Keeping up with inflation seems like it would be more than sufficient, and you can reduce your market exposure until you have the liquidity you feel comfortable with. Avenues to investigate would include a TIPS ladder.
I do believe we have enough saved. “Paying cash” for the new house means reducing investable funds by $125K, not the entire cost of the new house since we have property for a trade in. A reduction to our portfolio of this amount will not bump the withdrawal percentage by much, assuming we continue to withdraw the same dollars annually.

It is my desire to leave a modest inheritance for our 2 children. I know for many this is not important, and I respect that viewpoint, but it is a financial goal of mine. I’m not willing to significantly throttle our spending to make it happen 8-) , but I am willing to tolerate a moderate increase in risk.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Sat Nov 16, 2019 8:50 pm

themuse wrote:
Sat Nov 16, 2019 8:28 pm
Based on the info, I would pay cash. I would prefer to not take another mortgage after retirement.
I am coming around to that point of view :wink:

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Toons
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Re: Mortgage? Pay cash?

Post by Toons » Sat Nov 16, 2019 9:38 pm

Pay Cash
No loan.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

RogerR
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Re: Mortgage? Pay cash?

Post by RogerR » Sun Nov 17, 2019 1:28 am

GoFish wrote:
Fri Nov 15, 2019 1:17 am
Ages 64 and 63. Retired 5 years. Income sources are commercial real estate plus annual withdrawals from 55/45 investment accounts (<3% withdrawal rate). About 50/50 taxable vs IRA overall. Kids launched and financially independent. No known health issues. Planning to start SS at age 70.

Considering relocation to an area of the upper midwest that we know well, and very near where we once lived for 10 yrs. Net proceeds from sale of present home will fall $123K short of amount needed to close the deal after we are done paying commissions and moving costs.

Question is how to finance the new house?

Option A: Pay cash using net proceeds from sale of current home supplemented by $123K withdrawn from an existing taxable account. Our withdrawal rate would remain under 3% of our investable assets. After the move, we are $123K “cash poorer”, but with zero debt.

Option B: 30 yr fixed rate mortgage at around 4%. Set up new taxable account at VG dedicated to generating $1,800 monthly income to cover mortgage payments. Present thinking is to fund the new account with $10K cash, $400K VWIAX (total $410K) using $257K from home sale, plus $153K moved from present FIDO taxable account. Rely on approximately 5.5% annual distributions from VWIAX to cover monthly mortgage payments, with just a little cash to smooth out rough spots. End up $257K “cash richer”, but with a $380K mortgage.

I am presently slightly favoring Option B. Not necessarily trying to beat the mortgage rate with my investing prowess :D. More so looking to increase liquidity.

Opinions?
Why would you want debt at your age? My golden rule is for Mortgage to be paid off by age 55 so one can fully focus on saving for retirement. Being in debt is like living in hand cuffs.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Sun Nov 17, 2019 8:06 am

Why might I want debt? Answer: to have access to the equity without the need to sell my house and move. IOW, liquidity.

I might say that having $380K of my net worth tied up in real estate is like living in handcuffs.

I think in the end I will probably pay cash because the current mortgage interest rates are higher than I’d like to pay. But a mortgage at age 64 is not such a crazy idea when considering liquidity.

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Re: Mortgage? Pay cash?

Post by Wricha » Sun Nov 17, 2019 9:58 am

Seems to me we are talking about being clever vs reducing one more hassle since the financial impact is a rounding error.

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Re: Mortgage? Pay cash?

Post by Outer Marker » Sun Nov 17, 2019 10:12 am

GoFish wrote:
Sun Nov 17, 2019 8:06 am
Why might I want debt? Answer: to have access to the equity without the need to sell my house and move. IOW, liquidity.

I might say that having $380K of my net worth tied up in real estate is like living in handcuffs.

I think in the end I will probably pay cash because the current mortgage interest rates are higher than I’d like to pay. But a mortgage at age 64 is not such a crazy idea when considering liquidity.
Paying cash sounds right in this situation. I would not think of owning my house free and clear as "living in handcuffs." I feel much more "free" owning my own four walls free and clear without a bank lien on my property. You are "handcuffed" to the mortgage payments. If you can't live well on your remaining assets, you are probably buying too much house.

In addition, this is slightly different from the many "should I pay off my mortgage threads." You don't yet have a mortgage and in addition to the interest rate will need to pay the up-front costs for attorney fees, appraisal and origination fees. You can skip all that and apply it straight to equity.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Sun Nov 17, 2019 10:27 am

Even with a cash deal, I’d have some attorney fees and appraisal costs. I know a lot about a few subjects, but not enough about real estate to go completely solo :shock:

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Re: Mortgage? Pay cash?

Post by Outer Marker » Sun Nov 17, 2019 10:45 am

GoFish wrote:
Sun Nov 17, 2019 10:27 am
Even with a cash deal, I’d have some attorney fees and appraisal costs. I know a lot about a few subjects, but not enough about real estate to go completely solo :shock:
Right. Some closing costs are going to be unavoidable. That said, closing costs will be less for an all-cash deal. If there is no lien, you don't need an appraisal; no origination fees, and fewer recording requirements.

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Sun Nov 17, 2019 11:19 am

GoFish wrote:
Sun Nov 17, 2019 8:06 am
Why might I want debt? Answer: to have access to the equity without the need to sell my house and move. IOW, liquidity.
You could still retain access to the funds on an as-needed basis with a home equity line of credit. On a paid off home, the likelihood of it being cancelled is very slim.
GoFish wrote:
Sun Nov 17, 2019 8:06 am
I might say that having $380K of my net worth tied up in real estate is like living in handcuffs.
I've never heard someone refer to living rent-free in a paid-off home as being in handcuffs. Getting a guaranteed return on one's capital via imputed rent sounds like a good deal to me. Being forced to make a payment to a bank or else lose your home to a foreclosure sounds more like being handcuffed to me.
GoFish wrote:
Sun Nov 17, 2019 8:06 am
I think in the end I will probably pay cash because the current mortgage interest rates are higher than I’d like to pay. But a mortgage at age 64 is not such a crazy idea when considering liquidity.
It's not crazy to have a mortgage in retirement, but the need for liquidity should not be a logically compelling reason when one's withdrawal rate is below 3%, as yours is. The only potentially compelling argument is using the mortgage to leverage one's stock position, but put in that light, many retirees would recoil in fear.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage? Pay cash?

Post by GoFish » Sun Nov 17, 2019 2:15 pm

If I were going to get a mortgage and try and play the arbitrage game, I’d likely invest in VWIAX (Vanguard Wellesley Income Admiral). It usually runs around 40/60, has had low volatility in the past, and is pretty inexpensive for an actively managed fund. I already have a small position in an IRA and it is a fund I like.

I’d likely invest an amount adequate to cover the monthly mortgage payment, plus enough in a short bond fund or cash to smooth out the dips.

In the end, though, I suspect my conservative nature will win out and I’ll paying cash. The upside reward (maybe a point or two of after tax return and a little extra liquidity) is probably not worth increasing our risk profile.

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willthrill81
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Re: Mortgage? Pay cash?

Post by willthrill81 » Sun Nov 17, 2019 4:26 pm

GoFish wrote:
Sun Nov 17, 2019 2:15 pm
If I were going to get a mortgage and try and play the arbitrage game, I’d likely invest in VWIAX (Vanguard Wellesley Income Admiral). It usually runs around 40/60, has had low volatility in the past, and is pretty inexpensive for an actively managed fund. I already have a small position in an IRA and it is a fund I like.
I too am a fan of Wellesley Income. In this situation, though, its 'problem' is that it is 65% invested in bonds that are yielding significantly less on a pre-tax basis than a 4% post-tax mortgage. So again, we're back to stocks being in the only investment with a decent shot of outperforming the mortgage. And even if stocks did outperform the mortgage on average, you still might be worse off due to sequence of returns risk (e.g. poor returns in the beginning and good returns in the end).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage? Pay cash?

Post by mortfree » Sun Nov 17, 2019 8:12 pm

RogerR wrote:
Sun Nov 17, 2019 1:28 am

Why would you want debt at your age? My golden rule is for Mortgage to be paid off by age 55 so one can fully focus on saving for retirement. Being in debt is like living in hand cuffs.
Interesting rule. If you wait to fully focus on retirement until 55 how many years of compounding and time in market are you giving up?

Can you expand on this plan as it is opposite as to what is recommended here.

The usual advice is 401K, Roth, HSA, taxable, then anything left might go towards extra on mortgage.

I know this year alone my investments have increased more than the total amount of interest that I would pay for the life of the 30 year mortgage that I took out two years ago.

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Re: Mortgage? Pay cash?

Post by RogerR » Mon Nov 18, 2019 1:16 am

During working years my main priority was to pay back mortgages. That made sense to me since interest rates for 30 year fixed were usually (much) higher than the average real return of a balanced 50/50 US stock/bond portfolio (approx 3.7% real return between 1900-2015 according to Vanguard analysis, we got lucky and a bit spoiled during the past 10 years ...).
Due to relatively high income from work I could also feed retirement accounts from early on but debt reduction was always first.
We are currently living abroad and planning to return to the US next year or 2021 at latest. We will then buy a new home but I will certainly not take out a mortgage but pay cash by selling off what is required from the invest portfolio.

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Re: Mortgage? Pay cash?

Post by inbox788 » Mon Nov 18, 2019 1:27 pm

GoFish wrote:
Sun Nov 17, 2019 2:15 pm
If I were going to get a mortgage and try and play the arbitrage game, I’d likely invest in VWIAX (Vanguard Wellesley Income Admiral). It usually runs around 40/60, has had low volatility in the past, and is pretty inexpensive for an actively managed fund. I already have a small position in an IRA and it is a fund I like.

I’d likely invest an amount adequate to cover the monthly mortgage payment, plus enough in a short bond fund or cash to smooth out the dips.

In the end, though, I suspect my conservative nature will win out and I’ll paying cash. The upside reward (maybe a point or two of after tax return and a little extra liquidity) is probably not worth increasing our risk profile.
Makes no sense to me. I think of a mortgage as a negative bond, so you'd be borrowing at 4% to invest 60% of it returning 2-3% (adjust for taxes on either or both).

https://investor.vanguard.com/mutual-fu ... olio/vwiax

You might be hoping for 5-6% or even 8% fund returns and arbitraging, but again, taxes is an issue, not to mention down years. You can achieve the same without borrowing to invest in bonds by taking a smaller mortgage and investing in equities fund only if you wanted to "borrow mortgage to invest in the market" and had a long horizon. Are you really planning on keeping mortgage for 30 years? For shorter term, it wouldn't be worth it for me.

In you situation, I'd just take from the bond side of things and up my AA a little. Achieves pretty much the same thing without too much complication. If you add up the overall AA of the different plans, they should all be similar, or else you're changing the plan.

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Re: Mortgage? Pay cash?

Post by GoFish » Mon Nov 18, 2019 3:27 pm

Two more considerations have entered the picture. One argues in favor of a cash deal, the other for a mortgage
  • Having a mortgage, along with a dedicated account that generates the income needed to make the monthly payments, is a little complicated. If I pass before DW, then she has a more complex financial situation. This argues against the mortgage.
  • Leaving an additional $250K equity in the house could become difficult to access in 10 or 15 years. If a bad circumstance resulted in needing that cash, then that same bad circumstance might make it impossible to borrow against the house. After all, you can only borrow money after you have proven you don’t need it :D
I tend to view the Wellesley fund as monolithic, having low volatility, and returning 5% to 6% pre-tax on average. Yes, it is comprised of up to 65% bonds. But I just view that as the ballast that keeps the fund’s volatility low. I don’t believe that the actively managed individual bonds in the VWIAX fund are equivalent to a similar sized investment in a total bond market index fund.

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Re: Mortgage? Pay cash?

Post by willthrill81 » Mon Nov 18, 2019 3:42 pm

GoFish wrote:
Mon Nov 18, 2019 3:27 pm
Leaving an additional $250K equity in the house could become difficult to access in 10 or 15 years. If a bad circumstance resulted in needing that cash, then that same bad circumstance might make it impossible to borrow against the house.
You should be able to take out a home equity line of credit (HELOC) right now. If you need to convert your home equity into cash, it's easy to do so, and if you don't, then there's little to no cost involved. You're very unlikely to need that cash.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage? Pay cash?

Post by GoFish » Mon Nov 18, 2019 7:19 pm

willthrill81 wrote:
Mon Nov 18, 2019 3:42 pm
GoFish wrote:
Mon Nov 18, 2019 3:27 pm
Leaving an additional $250K equity in the house could become difficult to access in 10 or 15 years. If a bad circumstance resulted in needing that cash, then that same bad circumstance might make it impossible to borrow against the house.
You should be able to take out a home equity line of credit (HELOC) right now. If you need to convert your home equity into cash, it's easy to do so, and if you don't, then there's little to no cost involved. You're very unlikely to need that cash.
That would be a good hedge.

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Re: Mortgage? Pay cash?

Post by howie619159 » Sun Nov 24, 2019 8:29 am

RogerR wrote:
Sun Nov 17, 2019 1:28 am
GoFish wrote:
Fri Nov 15, 2019 1:17 am
Ages 64 and 63. Retired 5 years. Income sources are commercial real estate plus annual withdrawals from 55/45 investment accounts (<3% withdrawal rate). About 50/50 taxable vs IRA overall. Kids launched and financially independent. No known health issues. Planning to start SS at age 70.

Considering relocation to an area of the upper midwest that we know well, and very near where we once lived for 10 yrs. Net proceeds from sale of present home will fall $123K short of amount needed to close the deal after we are done paying commissions and moving costs.

Question is how to finance the new house?

Option A: Pay cash using net proceeds from sale of current home supplemented by $123K withdrawn from an existing taxable account. Our withdrawal rate would remain under 3% of our investable assets. After the move, we are $123K “cash poorer”, but with zero debt.

Option B: 30 yr fixed rate mortgage at around 4%. Set up new taxable account at VG dedicated to generating $1,800 monthly income to cover mortgage payments. Present thinking is to fund the new account with $10K cash, $400K VWIAX (total $410K) using $257K from home sale, plus $153K moved from present FIDO taxable account. Rely on approximately 5.5% annual distributions from VWIAX to cover monthly mortgage payments, with just a little cash to smooth out rough spots. End up $257K “cash richer”, but with a $380K mortgage.

I am presently slightly favoring Option B. Not necessarily trying to beat the mortgage rate with my investing prowess :D. More so looking to increase liquidity.

Opinions?
Why would you want debt at your age? My golden rule is for Mortgage to be paid off by age 55 so one can fully focus on saving for retirement. Being in debt is like living in hand cuffs.
Why not take ss at 66 , your full retirement age and play with the govts money instead of yours.

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Re: Mortgage? Pay cash?

Post by Wiggums » Sun Nov 24, 2019 9:15 am

This is just my personal preference.

I’d pay cash for the house and not have the loan in retirement. I understand that some would prefer to hold a cheap loan and invest that money. And that’s fine if your goal is to continue to build your portfolio in retirement. It’s just not my goal.

We are delaying SS until age 70. Working on Roth conversions since 2/3rds of money is in 401k and IRAs. Our cash flow is very good.

Good luck to you.

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Re: Mortgage? Pay cash?

Post by JBTX » Sun Nov 24, 2019 9:43 am

If you truly don't need the liquidity, at your age I see no point in carrying a 4% mortgage. A guaranteed rate of return of 4% is far higher than the after tax yield on government bonds which would less than 2%. While there is value in having liquidity, the value isn't enough to cover that spread if you don't need the liquidity.

If you were to take mortgage go with a 15 year which is closer to around 3.25%. If I could get close to 2% after tax on a combination of ibonds, money markets, cds I might be willing to make that tradeoff. I am 5+ years younger and carry a 3.25% mortgage when I could safely pay off some of it with existing liquidity.

Comparing a risk free guaranteed 4% return to a moderate Wellesley income fund is apples and oranges.

If you were 20 years younger I'd probably say go with the mortgage.

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Re: Mortgage? Pay cash?

Post by JoeRetire » Sun Nov 24, 2019 9:45 am

howie619159 wrote:
Sun Nov 24, 2019 8:29 am
Why not take ss at 66 , your full retirement age and play with the govts money instead of yours.
Money is fungible.

Why would you want to get less guaranteed, inflation-protected, longevity-protected government money for you and your survivor?
Don't be a lemming.

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GoFish
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Re: Mortgage? Pay cash?

Post by GoFish » Sun Nov 24, 2019 11:24 am

If we accept the premise that I can invest the mortgage amount in a fund that returns 5%, then the calculations show I can set aside $321K now and it will generate the 30-year sequence of monthly payments needed to pay off a $372K mortgage.

OTOH, it takes $331K set aside now to cover the monthly payments with a 15-year mortgage at 3.25%.

So if we accept the premise that the set-aside funds will return 5%, then the 30-year option is better by $10K in present value.

So viewing this in the best possible light, I can pocket $51K now that is mine to keep, set aside $321K in a sequestered account from which the mortgage payments are withdrawn, and still have access to the remaining portion of the sequestered account should I need the funds (liquidity). What could go wrong? :oops:

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