Back in September, Mindy and I bought another home to live-in flip. Getting a good deal meant that we’d have to pay cash and close quickly. Here was our plan to come up with $350,000+ and what we’d do after:
September 2019: Sell $100,000 in stocks, borrow $200,000 from our HELOC, sell the Acura NSX ($45,000) and use cash savings to fund the home purchase.
January 2020: Sell $100,000 in stocks and pay off half of the HELOC.
Sometime in 2020: Get a mortgage on the new place. With the proceeds, pay off the rest of the HELOC, and invest the rest in the stock market.
One may ask why we didn’t just sell more stocks back in September to buy the home. The reason is that we’re trying to stay under the threshold for capital gains. In 2020, capital gains kick in over $80,000, so we mostly stay below that. Capital gains harvesting is pretty cool.
We just finished executing our plan. We closed on a mortgage of about $300,000 in mid-April and got incredibly lucky with the timing:
Most of the money went into index funds and most of that was VTSAX. However, I also put some money into VGT and FTEC which are technology index funds.
I’d love to say that I’m some kind of clairvoyant and had this incredible market timing all planned out, but that would be:
I had no idea the market would get slammed. No one did. I remember lamenting the fact that I’d have a large amount of money sitting out of the markets. Instead, Mr. Market went on vacation and I was able to buy back in at a lower price. I got lucky.
Side note: I would much rather be a little less wealthy and have had none of this COVID stuff thrashing the world.
Getting A Mortgage
A mortgage is one of the most controversial topics in the FIRE community. At the right rate, I love having a mortgage, but most don’t share my enthusiasm:
I have heard two arguments for paying off a mortgage:
Peace of mind: Of course, not having debt is a good feeling. But, I believe that this peace of mind is a case of short-term thinking with a little dose of cognitive dissonance. Most FIRE fans aren’t funding the rest of our lives with a huge chunk of cash. Instead, our money is in VTSAX where we expect it to grow over time and fund future needs. I’d also assume that most of us expect VTSAX to return more than 3.5% (current mortgage rate on a 30-year). If the above assumptions are true, why do folks want to lock in a smaller return? Peace of mind for me is a greater amount of money long-term.
Sequence of returns risk: a mortgage means greater monthly expenses. What if the market goes to hell right after you retire?
BIG ERN discusses it here and he’s correct. He’s a smart dude and a good guy, but there is one thing I don’t see in his article. If you use money to pay off your mortgage instead of investing it, you’re probably going to have a smaller amount of money when you begin retirement. What if instead of paying off your mortgage, you put the money into the markets prior to retirement? I don’t see this factored into his calculations (BIG ERN, I’ll update the post if you care to comment). In the meantime, remember that:
There is always a risk of NOT being in the markets.
Inflation Gyrations
I worry about inflation. While I don’t disagree with what governments are doing to help the humans of the world get through COVID-19, we’re creating a lot of debt. The way out of debt is inflation. If inflation does start to get a little wild:
Interest rates will go up: Would you get a mortgage if the interest rate was 0%? Given some time, this scenario may happen. My online bank currently pays 1.50%. I can see a time in the not-so-distant future when it’s paying 3.5% (the same as my mortgage) or higher.
Inflation hedge: Along the same lines, my mortgage rate won’t go up. But if inflation rears its ugly head, I’ll be paying it down with a dollar that’s worth less. Yay! Or maybe not, but you get the picture.
Me
My situation is different from yours.
I’m not really retired in the traditional sense of the word. When most think about retirement, they form an image of seniors frolicking on the beach or playing endless rounds of golf. I think that this idea of retirement sucks. A life of leisure is incredibly unappealing. Meaningful work makes me happy.
I’ll probably always make money doing something (right now it’s writing on this blog and fixing up houses), so my withdrawals from savings will be less. Also, Mindy still works, so calling us anything even remotely related to retired (again, screw that word) is silly. These income streams make having a mortgage more palatable. However, we’ll still retain the mortgage when Mindy leaves her job and I shut down the blog.
In the meantime, I’m going to keep on building crazy things. My fancy curvy deck is almost done:
My basement is framed out. I even figured out how to install a pocket door in a floating wall:
I had never built a deck anywhere near this complicated or framed out a basement, but the challenge is where the fun is. I live for this stuff.
Next up, I’ll build a little backyard oasis with a pizza oven, fire pit, and pergola with a zip line attached.
And I’ll continue paying my mortgage so that the bank doesn’t repossess all of my projects.
Join the 10s who have signed up already!
Subscribing will improve your life in incredible ways*.
*Only if your life is pretty bad to begin with.
Congrats and I agree, my mortgage is at 3.33% and I have zero reason to pay that off. I could easily but why? Over the past 18+ years it’s been a very wise and wealth building decision.
Dave @ Accidental FIRE recently posted…Earning More And Spending Less To Achieve Financial Independence, The Order Matters
I don’t understand any ambiguity in big ERN’s model. He shows very clearly that no mortgage and an 80/20 portfolio is safer than the bigger portfolio+mortgage.
My personal line of thinking: when you are living off cash flow (job, pension, anything fixed), carry a mortgage. When you are ready to live off a portfolio, don’t carry a mortgage.
Big ERN has also shown extremely convincingly that a leveraged house of modest value is an excellent investments in decent real estate markets, so paying off a mortgage to the detriment of investing in equities is inefficient.
I live in a burgeoning real estate market, bought a modest house at a very low rate, and invested in equities over the last decade. Now that my equity portfolio is substantial I’m paying down the mortgage in anticipation of my ARM term expiring. With all the uncertainty around Covid I’m very comfortable having decreased my leverage somewhat.
“I don’t understand any ambiguity in big ERN’s model.”
I’ll explain it again. For his sequence of returns modeling, Big ERN assumes the same net worth starting point:
If you decided to invest your money instead of paying off your mortgage, everything else being equal, your starting net worth would most likely be bigger because returns of the markets are higher than the gains locked in by paying off a mortgage.
I’m sure that this is beyond the scope of what Big ERN wanted to say, but I’m surprised that no one ever mentions it.
Again: Same net worth means that I compare a $1,000,000 financial portfolio and no mortgage with a $1,200,000 financial portfolio and a $200,000 mortgage. So, the extra money for the mortgage was indeed invested.
With that assumption, you’ll do better ON AVERAGE with the mortgage, but at the expense of having a lot more tail-risk.
EarlyRetirementNow recently posted…Three Equity Investing Styles that did OK in 2020
Carl, I’m more on the riskier spectrum than you since I’m contemplating cash out refinancing and wrote a post justifying my craziness.
I guess to be fair to the no mortgage crowd; the sequence of returns risk is higher in the initial part of retirement.
Having Mindy work (steady W2) ensures that you don’t need to sell investments (in a down market) to pay your mortgage. Mortgage is a fixed cost and ideally one would need lower fixed costs and having more flexibility wrt discretionary costs (which can be reduced) in a down market.
I’m not in the camp of paydown your mortgage before retirement but also not in favor of additional mortgage if you have no household income.
Hey Carl,
Great article! Agree 100% on the mortgage front. With interest rates as (historically!) low as they are today, there’s no reason to pay it off early other than the piece of mind argument. But, piece of mind can certainly be a powerful motivator. (Wish my rentals didn’t have loans on them at this moment…)
I hope you’ve carved out some man cave space in that basement build! 🙂
-Jon
Bah, I hope your rentals are doing OK. Our trailer park actually had a good April. No idea what’s coming in May, but I’m still bracing myself.
Jon,
If it is a rental then the mortgage interest is a write-off. Why would you not keep it?
With the TJCA the benefit of mortgage interest itemization v/s standard deduction on a primary house is mostly a wash and hence is a different story.
Financial Freedom Countdown recently posted…Cash Out Refinance And Why Am I Doing It?
As a person with anxiety issues, count me in the peace of mind camp. With no side hustle and really retired living the 4% rule I have to sell VTSAX to buy groceries. I’d be losing sleep right now if I had to sell stocks on top of groceries to pay a mortgage. I know mathematically and logically it doesn’t make sense, but as I tell Helen, if I could reason away anxiety I wouldn’t have the issue to begin with. Sleep is more important than money. Besides I doubt a 40 something with no job could get a mortgage anyway.
The deck and pocket door looks great by the way Carl. Looking forward to the day this crap is behind us and I can see your handy work in person.
Todd! You’re smart and resourceful. If the zombie apocalypse happens, my money would be on you! That’s why I think you would shake off a financial rough patch like a hippo would shake off an.. ummmm… What does a hippo shake off? Mud? Fleas? Stupid tourists? I’ll go with ant.
Thanks for the kind comments about the deck and pocket door (your design which I appreciate). Regarding the former, I think I came up with a cheapo way to bend the deck boards. Stay tuned…
I am in the “pay off your mortgage” group and not carry any debt. Even with no mortgage here in Florida, the property taxes and home owners and flood insurance payments make it seem like there is an indefinite mortgage payment each month.
The deck looks awesome so far. I love the curve.
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Any learnings you could share in hindsight with the deck? We really want to build one, but have concerns because one side of the area it would cover gets extremely soggy. We could bring in dirt to level it off more, but it’s also right on the fence line where the neighbors property is also lower…it’s almost like a drain trough right at the property line. I’d hate to put the time and money into a deck and have it sink in the first year! Not sure how to offset that.
I’d have to see the spot to get a better idea, but decks are supported by concrete caissons sunk into the ground. I’m not sure how saturated the ground is, but that may be enough.
Another thing you can do is create a drainage system to redirect water: https://www.homedepot.com/c/ah/how-to-install-a-french-drain/9ba683603be9fa5395fab9012cc2665
If we end up coming out to your neck of the woods in late July, we can take a look!
Thanks for the ideas to look into and I’ll keep my fingers crossed for July!
That’s some great timing Carl! Congrats! I wish I your incredible luck!
I had to merely settle for buying near the market lows in late March. Oh well, live and learn! 🙂
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“I don’t see this factored into his calculations (BIG ERN, I’ll update the post if you care to comment)”
I most definitely considered the consequences of paying off the mortgage. See the sim assumptions:
http://earlyretirementnow.com/wp-content/uploads/2017/10/swr-part21-table01.png
Specifically, I assumed that your portfolio was reduced 1-for-1 if you had a mortgage, so as to keep the net worth constant across simulations.
So, the attractiveness of having a mortgage-free home in retirement comes entirely from reducing your Sequence Risk. Again, if you have other cash flows, like blog income, a working spouse, etc., we can easily justify having a mortgage, since the equity expected return is higher than the mortgage rate. But for most retirees, it’s imperative to have no debt and no mandatory monthly mortgage payment. 🙂
EarlyRetirementNow recently posted…Three Equity Investing Styles that did OK in 2020
Sorry, I meant “your portfolio was INCREASED 1-for-1 if you had a mortgage, so as to keep the net worth constant across simulations.”
Yep, I didn’t read carefully.
My level of risk tolerance is much more than average.
Agree on the mortgage b/c of locking in a low rate when the future seems to point to inflation but also to keep liquidity. It’s impossible to get credit when you actually need it. Right now it’s harder to get a mortgage. We don’t have any W2 income and we already have several rentals so it’s increasingly hard to qualify for a mortgage — this makes us appreciate the ones we have even more and never pay them off.
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I’m new here, but congrats on the purchase. I struggle with deciding whether to pay off mortgage or invest. I’ve chosen to do a bit of both rather than an either/or situation. I also am obligated to purchase a condo next month. I purchased it as a second home with the hopes of doing Air BnB while I’m not there. Yikes! Unlike yours, my timing could not have been worse. Interesting times we live in.
Actually, like you, I had to sell stocks to afford the condo. The difference being that I had to liquidate my entire portfolio, but I’m in the slow process of building it back up. Definitely good luck on the construction projects on your house and congrats again for the purchase.
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Except for the amount I need to max out company match in 401k, I invested not one penny in the market until I was 100% debt free, including mortgage. I’m convinced it was a financially sub-optimal move. But I don’t regret it for a second. The idea of having the mortgage payment in the market made me physically ill.
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I think to your point about: if you have the extra money to pay off the mortgage, why not invest instead (to capitalize on the greater return) — there’s a psychology to debt that is stronger than highly analytical folks like you (and me!) appreciate it. It’s the same reason that folks still take out 15 year mortgages at ~3% rates instead of 30 year at ~3.6% rates. Lower rate = better, even though folks could easily do a 30 year mortgage, pay a much lower premium per month, invest the difference, and easily beat that 0.6% rate difference.
A lot of it is the “debt is bad” pyschology made very popular through Dave Ramsey and others. Frankly, it’s a lot easier to tell a wide audience “pay off your debt” than to explain the nuance of rate differences, investment returns, and so on. Combine that with trying to get people to make an active choice to invest versus a required bill payment (in the case of a shorter term loan), and I can see why it happens.
Anyway, we’ve been working through that “pay the mortgage or invest?” question with our recent budget analysis and so it was top of mind, especially moving to early retirement mid-COVID! Thanks for another point of view to reinforce our direction.
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Wanting to pay off the mortgage entirely is my only major emotional money decision. I’m still not doing it but it’s the one thing I seriously want that doesn’t *necessarily* math out. I just want that damn monthly deduction off my balance sheets!
That being said, I’m still choosing to invest any and all extra money instead of using it to whack down the outrageous mortgage because we have a lot of retirement income catching up to do. I have to do *that* now while we’re employed.
Love the deck. I have issues with pocket doors though. They are totally useful for a specific reason but we had a bad experience with shoddy hardware and I’m still a little tetchy about them. XD Wanting to pay off the mortgage entirely is my only major emotional money decision. I’m still not doing it but it’s the one thing I seriously want that doesn’t *necessarily* math out. I just want that damn monthly deduction off my balance sheets!
That being said, I’m still choosing to invest any and all extra money instead of using it to whack down the outrageous mortgage because we have a lot of retirement income catching up to do. I have to do *that* now while we’re employed.
Love the deck! I have issues with pocket doors though. They are totally useful for a specific reason but we had a bad experience with shoddy hardware and I’m still a little tetchy about them. XD
Revanche @ A Gai Shan Life recently posted…Good Thing Friday (65)
Oh man, that deck! A good shaming reminder that I need to start making progress again on my bathroom retiling project. It just looms perpetually over me like an albatross. Sigh.
I had several long arguments with a FIRE friend of mine, until I finally came around to exactly what you’re talking about. I was paying some extra on my mortgage – my plan was to have it end right around my retirement, but he convinced me that the gains would be better in the market than in the mortgage.
One thing I’ve never seen anywhere: how do early retirees calculate their retirement requirements when you have a mortgage that will linger a few years past your FIRE date? Do they calculate for the mortgage payment and then just have a cushion post-mortgage? Or calculate somewhere in between and exceed the 4% rule of thumb for a couple of years, then balance it back by withdrawing a little under 4% during the post-mortgage years? The former would seem to be safer but perhaps overkill. Or do you pay it off the last thing you do before you FI? All are options I suppose. I just wonder what people smarter than me think is optimal.
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Opinions please! I have about $200K left on a mortgage at 3.5%. I have nearly that much in cash with another $1.8M in various retirement accounts. 58 y.o. still working f/t in a self-employment capacity, expect to make around $300K this year. Hope to begin glidepath retirement (i.e., working less than f/t) by 60 y.o. Should I accelerate mortgage payoff with some of the the cash and expected future earnings or ride it out? Thanks in advance!
That is a tough question. I like borrowing money at low rates because I think that the stock market will return more than 3.5% long-term. To boost that argument, you also have a lot of cash. You’re also making a load of money and can go part-time. You’ll probably end up with more money if you invest instead of paying off the mortgage, but there are emotions in this too. Do you feel comfortable retiring with a mortgage? Most don’t.
Wow, that’s some great timing you had. A couple things to note:
Love the deck and very impressed you built that.
I work with high net worth clients at a bank and can tell you many of them have mortgages. I agree that it’s a good idea to have your mortgage paid off when you retire, but if you’re still working it’s cheap debt. For example, I just refinanced my mortgage to 3.125%. After tax benefits rate is below 2.5%.
I realize you didn’t technically do this, but I would avoid taking cash out of your home to invest in the market. You were just replenishing your investment account so it’s different. Had you considered a “bridge loan” that was secured by your investments? That’s a popular option to avoid the tax gains. In your case you lucked out on timing and made the right choice.
Last item to add is the inflation piece. It certainly could be an issue one day with all this money printed. If you lock in your long term cheap rate on your mortgage today, increased inflation would offer better deposit/fixed income rates, actually making your money work harder for paying down debt.
Paul
Hi Paul!
I had not considered a bridge loan. I didn’t know such a thing existed.
Inflation: Yeah, it seems inevitable. And as you say, just one more reason why I like mortgages. I’ll be paying down my debt with money worth less.
They are a nice, short term option. Technically a margin loan secured by your non retirement assets. Not a bad thing to have for capital needs that are less than 12 months.
Sorry to hear about your father. Thoughts and prayers your way.
Paul
You took a huge risk and became successful. I would have thought thousands times before taking this type of risk. Congratulations and wish you all the best.
You are a risk taker!Congratulations on your success!!
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