Paying off mortgage on a vacation home

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Marymom16
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Paying off mortgage on a vacation home

Post by Marymom16 »

We are retired and bought a vacation home. We have a mortgage of approximately 150,000 at a 3.3 interest rate for 30 years. My question is should we withdraw from our retirement accounts either traditional or Roth to payoff the mortgage? Since the market is so high we could do this with just this years gains. We do not itemize so no tax advantages to keep the mortgage.Thanks in advance for your thoughts.
DoTheMath
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Re: Paying off mortgage on a vacation home

Post by DoTheMath »

Do get a truly useful answer, you would need to share more information about your situation.

That said, it could make a lot of sense for people who are retired to take money off the table and paying off a mortgage is a better option for most than, say, bonds right now.

The flip side is that it reduces your liquidity by locking up money in the vacation home. What happens if you have an emergency? This is where more information is needed.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir
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RickBoglehead
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Re: Paying off mortgage on a vacation home

Post by RickBoglehead »

Refinance and save a point.
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phxjcc
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Re: Paying off mortgage on a vacation home

Post by phxjcc »

Marymom16 wrote: Sat Jul 31, 2021 1:14 pm We are retired and bought a vacation home. We have a mortgage of approximately 150,000 at a 3.3 interest rate for 30 years. My question is should we withdraw from our retirement accounts either traditional or Roth to payoff the mortgage? Since the market is so high we could do this with just this years gains. We do not itemize so no tax advantages to keep the mortgage.Thanks in advance for your thoughts.
I am going through the same thing.

The unspoken issue is mortality.

I will no doubt die prior to paying off the mortgage—therefore I do not see the point in paying it off. The “debt is bad” boys and girls will disagree, but with a mortgage interest rate at or near inflation—I will need to see the mathematical proof that paying it off is beneficial.
lakpr
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Re: Paying off mortgage on a vacation home

Post by lakpr »

If you have bonds in your portfolio that are earning less than 3.3% after tax return, which is almost a certainty in today's low rate environment, it makes sense to sell those bonds and payoff the mortgage.

Not sure what mortality has got to do with the mortgage. Until you die you are paying more interest than what you are earning, so bleeding money. When you die, your estate still has to pay the mortgage off.

The one and only consideration should be: does this impact my cashflow? If you have $1.5 million in retirement assets, paying off a $150k mortgage is a no brainer. If you have only $500k assets, not so much, better to keep the mortgage.
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grabiner
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Re: Paying off mortgage on a vacation home

Post by grabiner »

phxjcc wrote: Sun Aug 01, 2021 12:54 am The unspoken issue is mortality.

I will no doubt die prior to paying off the mortgage—therefore I do not see the point in paying it off. The “debt is bad” boys and girls will disagree, but with a mortgage interest rate at or near inflation—I will need to see the mathematical proof that paying it off is beneficial.
Here's the mathematical proof.

If you have a bond worth X dollars with duration of N years equal to the time at which the mortgage will be paid off (which might be at your death, or when you sell it), and the bond rate is Y, you will have X*(1+Y)^N dollars. If you sell that bond to pay down the mortgage at rate Z, you will reduce your mortgage balance by X*(1+Z)^N dollars. If Z is greater than Y, you get a higher net worth by selling the bond, with no additional risk taken.

The math does break down slightly if Y is close to Z, because of options. If mortgage rates fall below Y and you still have the mortgage, you can refinance, or sell the bond for a capital gain and pay down the mortgage then. If rates rise so that the bond yield exceeds the mortgage rate and you still have the mortgage, you can keep the mortgage because you are now earning more interest than you are paying. But if Y is significantly below Z, you lose money every year while waiting for these things to happen.

The fact that the interest rate is near inflation is not relevant, because you can't get a risk-free return near inflation. TIPS yields are negative, and I-Bond yields are zero, which will become negative when you pay the income tax for cashing them in.

The main non-mathematical issue is liquidity. If you keep a mortgage on your home, you have more money to use during your lifetime, and this may have some value.
Wiki David Grabiner
babystep
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Re: Paying off mortgage on a vacation home

Post by babystep »

Reading your question makes me wonder that you may benefit more if you can provide more details.

How much do you have in:
Roth
Traditional
Taxable

What are they invested in?
How much would be SS and pension, if any?
How much are your annual expenses?
phxjcc
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Re: Paying off mortgage on a vacation home

Post by phxjcc »

grabiner wrote: Sun Aug 01, 2021 5:42 pm
phxjcc wrote: Sun Aug 01, 2021 12:54 am The unspoken issue is mortality.

I will no doubt die prior to paying off the mortgage—therefore I do not see the point in paying it off. The “debt is bad” boys and girls will disagree, but with a mortgage interest rate at or near inflation—I will need to see the mathematical proof that paying it off is beneficial.
Here's the mathematical proof.

If you have a bond worth X dollars with duration of N years equal to the time at which the mortgage will be paid off (which might be at your death, or when you sell it), and the bond rate is Y, you will have X*(1+Y)^N dollars. If you sell that bond to pay down the mortgage at rate Z, you will reduce your mortgage balance by X*(1+Z)^N dollars. If Z is greater than Y, you get a higher net worth by selling the bond, with no additional risk taken.

The math does break down slightly if Y is close to Z, because of options. If mortgage rates fall below Y and you still have the mortgage, you can refinance, or sell the bond for a capital gain and pay down the mortgage then. If rates rise so that the bond yield exceeds the mortgage rate and you still have the mortgage, you can keep the mortgage because you are now earning more interest than you are paying. But if Y is significantly below Z, you lose money every year while waiting for these things to happen.

The fact that the interest rate is near inflation is not relevant, because you can't get a risk-free return near inflation. TIPS yields are negative, and I-Bond yields are zero, which will become negative when you pay the income tax for cashing them in.

The main non-mathematical issue is liquidity. If you keep a mortgage on your home, you have more money to use during your lifetime, and this may have some value.
Thank you
hudson
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Re: Paying off mortgage on a vacation home

Post by hudson »

Marymom16 wrote: Sat Jul 31, 2021 1:14 pm We are retired and bought a vacation home. We have a mortgage of approximately 150,000 at a 3.3 interest rate for 30 years. My question is should we withdraw from our retirement accounts either traditional or Roth to payoff the mortgage? Since the market is so high we could do this with just this years gains. We do not itemize so no tax advantages to keep the mortgage.Thanks in advance for your thoughts.
It depends. I can't see all your holdings and situation.
If it was me, pulling $150K out of retirement accounts would cause me to pay more taxes than last year. That would give me great heartburn.
I would only pay off $150K out of current income. I might double or triple my payments, but I would leave the $150K where it was.
I plan to leave my Roth untouched forever; I would only touch the Roth as a last resort.
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