Question for Mortgage Free Homeowners

[DaveInPgh]

People just need to learn to pick the schools they can afford. It might not be the dream school but we can't all live our dreams.

I am hearing more and more stories from coworkers, family, friends, etc. about their child basing their decision of which school to attend on where their boyfriend/girlfriend is going. Not surprising I have also heard follow up stories on how that didn't turn out so well.

If my child is going to receive any financial assistance from my wife and I, her focus better be her education.

[dawnwes]

I think these two statements somewhat contradict each other but I know what you mean.

You are correct that it is harder to put yourself through a particular school than it was 10 or 20 or 30 years ago because college costs have risen much faster than inflation and wage growth. The school I graduated from in 1986 was $10,000 my senior year. Today, it is $53,000. I would venture to say that most people's wages haven't gone up 5-fold during that time.

However, as you point out, there continue to be affordable college options, and not just community colleges. A local state school with a very good reputation costs about $13,000. That's something that most folks can still afford with a decent summer job and a part time job during the school year and maybe a bit of help from the family. And that doesn't count any scholarships or grants.

People just need to learn to pick the schools they can afford. It might not be the dream school but we can't all live our dreams.

I wasn't trying to contradict myself really, just pointing out what we would pay for or how much we would pay towards our children's educational goals.

There may very well be a particular school that would advance them further. Should my son go into engineering, which he is talking about, I think a better option would be our flagship school, 3 hours away, which would mean adding room and board to the cost.

And of course there are other reasons to go to various schools.

However, the local school will be perfectly fine for about 90% of the careers out there.

[dawnwes]

I am hearing more and more stories from coworkers, family, friends, etc. about their child basing their decision of which school to attend on where their boyfriend/girlfriend is going. Not surprising I have also heard follow up stories on how that didn't turn out so well.

If my child is going to receive any financial assistance from my wife and I, her focus better be her education.

One of my students (when I was a school counselor) got a full ride to MIT.

She chose instead to attend Stanford, so she could stay in CA and be near her boyfriend.

It cost around $20K MORE per year than her free ride. (she still had scholarships, just not a free ride)

And you guessed it, they broke up by the end of her first year.

[ThinkingCapital]

One of my students (when I was a school counselor) got a full ride to MIT.

She chose instead to attend Stanford, so she could stay in CA and be near her boyfriend.

It cost around $20K MORE per year than her free ride. (she still had scholarships, just not a free ride)

And you guessed it, they broke up by the end of her first year.

Wow. I hope things turned out okay for her in her career after something like that!

[LivingAlmostLarge]

I find this very interesting.

There's a general consensus that choosing to NOT pay off the mortgage early due to low interest rate and investing this extra cash toward investment hoping for a higher return is a sound investment move.

However, after the mortgage is paid off, no one is willing to leverage this same low interest rate anymore for the same type of investments...

Maybe it's a psychological thing for you guys because the math is the same either which way...

Singuy it's not it's math for us. We don't pay off the mortgage while working and always refinance and extend our mortgage consciously because we are saving the excess. The gains of our investments combined with the savings on the interest rate makes it highly desirable. We also use arms and use the lower rate excuse we pay down principal faster. What we ended up doing was starting with basically zero and ten years later have $1m in cash since we sold last year and started around 2005. Having two kids and going single income much lower than yours for most of it. But we needed the risk to get ourselves where we are now and will continue because I think it's worth it.

But once we retire we won't have the same cash flow to be able to handle issues. I think when we work if anything happens we could cover most things. We'd have an emergency fund and even unemployment or disability. But once retired were looking more at a fixed income and if it's too close we might be forced to tap too much principal at an inopportune time. So the risk for a mortgage after retiring I see it as much more.

But that's my fiscal reasoning for things. We'll probably never pay off a mortgage until we retire. But three months before we would.

Bow would I mortgage rentals or investment property in retirement? Yes but if I bought it then it probably has high rate of return and it's not a place I need to live. So there are different risks and different requirements I need to be generating the sort of income.

[Singuy]

Singuy it's not it's math for us. We don't pay off the mortgage while working and always refinance and extend our mortgage consciously because we are saving the excess. The gains of our investments combined with the savings on the interest rate makes it highly desirable. We also use arms and use the lower rate excuse we pay down principal faster. What we ended up doing was starting with basically zero and ten years later have $1m in cash since we sold last year and started around 2005. Having two kids and going single income much lower than yours for most of it. But we needed the risk to get ourselves where we are now and will continue because I think it's worth it.

But once we retire we won't have the same cash flow to be able to handle issues. I think when we work if anything happens we could cover most things. We'd have an emergency fund and even unemployment or disability. But once retired were looking more at a fixed income and if it's too close we might be forced to tap too much principal at an inopportune time. So the risk for a mortgage after retiring I see it as much more.

But that's my fiscal reasoning for things. We'll probably never pay off a mortgage until we retire. But three months before we would.

Bow would I mortgage rentals or investment property in retirement? Yes but if I bought it then it probably has high rate of return and it's not a place I need to live. So there are different risks and different requirements I need to be generating the sort of income.

I understand it doesn't make much sense to take out equity from your paid off house at retirement age to invest..time is just not working in your favor and the risk is really high.

What I am saying is..you can pay off a mortgage aggressively, getting rid of it in 5-10 years and then do the reverse..taking out home equity to invest when the opportunity hits. You are still just in your mid to late 30s or early 40s which means you can take a few market crashes.

[disneysteve]

What I am saying is..you can pay off a mortgage aggressively, getting rid of it in 5-10 years and then do the reverse..taking out home equity to invest when the opportunity hits. You are still just in your mid to late 30s or early 40s which means you can take a few market crashes.

This makes no sense.

Let's say my mortgage is at 4%. After the tax deduction, the actual rate is more like 3%. You're suggesting that I spend 5-10 years aggressively paying down the mortgage which gets me a 3% return on my money. Then, you want me to turn around and take that money back out, paying maybe 4% interest on it so that I can invest it and hope to earn more than that. In the mean time, I've lost 5-10 years of investment growth and compounding time which can't ever be replaced. What point was there in prepaying the mortgage if I was just going to turn around and pull the money back out? Why not just pay the mortgage as scheduled and invest from day one? That would be far more likely to get me a positive return due to the extra years of investing.

[DaveInPgh]

This makes no sense.

Let's say my mortgage is at 4%. After the tax deduction, the actual rate is more like 3%. You're suggesting that I spend 5-10 years aggressively paying down the mortgage which gets me a 3% return on my money. Then, you want me to turn around and take that money back out, paying maybe 4% interest on it so that I can invest it and hope to earn more than that. In the mean time, I've lost 5-10 years of investment growth and compounding time which can't ever be replaced. What point was there in prepaying the mortgage if I was just going to turn around and pull the money back out? Why not just pay the mortgage as scheduled and invest from day one? That would be far more likely to get me a positive return due to the extra years of investing.

A few reasons comes to mind.

1. Not having a sound retirement plan when the house was purchased.

2. Retirement plans changing

3. Peace of mind of being debt free.

When my DW and I bought our house, we knew saving for retirement was important. We exceeded the bare minimum recommendation of contributing to our 401ks up the the company match, and followed a recommendation of increasing that contribution by at least half of any future raises. A pretty good plan for anyone saving for normal retirement.

We chose a 15yr mortgage because of the lower total interest and peace of mind that we wouldn't have debt hanging over our heads for 30 years.

Those choices put us on a great path for normal retirement. However, the further we got into our careers the more we realized we didn't want to work into our mid 60s. We both hate our jobs and unfortunately finding alternative employment making anything comparable is not realistic and would also result in giving up a lot of paid time off. So we are doing our best to stick it out.

As you may know from another thread of mine, we just started investing in a Taxable account. Had early retirement been the goal at the time we purchased our home, we would have created & funded that Taxable account instead of paying additional principal each month. It would clearly have been the better approach.

So although it is highly unlikely I could ever convince my wife to remortgage our property, I see it as an option to aid in our early retirement goal.

[disneysteve]

3. Peace of mind of being debt free.

How is there any peace of mind of being debt-free if as soon as I pay off the house, I borrow against the equity?

[DaveInPgh]

How is there any peace of mind of being debt-free if as soon as I pay off the house, I borrow against the equity?

Really Steve? That is the one aspect of my post that you chose to reply to?

[LivingAlmostLarge]

I understand it doesn't make much sense to take out equity from your paid off house at retirement age to invest..time is just not working in your favor and the risk is really high.

What I am saying is..you can pay off a mortgage aggressively, getting rid of it in 5-10 years and then do the reverse..taking out home equity to invest when the opportunity hits. You are still just in your mid to late 30s or early 40s which means you can take a few market crashes.

It doesn't work that way. Disneysteve hit it dead on. Why would you take more risk pulling out money and have less time it's invested?

Second more IMPORTANTLY is for most people, obviously not you since you had lots of income, losing out on the tax benefits of a 401k/Roth IRA means you can never go back 10 years and say I want to contribute now to them. You can't.

So for us we maxed out the 401k/IRAs the moment we had a real job and could. That was in tune with having paid off our student loans. Then we focused on cash savings and taxable investments. The house is only a hedge against inflation. Like I said we use ARMs because we like the risk and minimize our interest and if we got into trouble because we save the difference between a 30 year fixed and ARM we can easily afford to pay more and refinance at anytime. The floating rate buys us flexibility.

So we would never focus on paying off our house to remortgage it. It's stupid. It takes away the time needed to manage risk in investing so aggressively.

We'll likely always be aggressively investing until it's time to retire. Then we'll minimize our monthly debt because we'll be drawing from retirement instead of our income.

Also unlike you had student loans, car loans, no help in house down payment. So we had to do everything ourselves which meant a lot more risk in putting a DP then savings in parallel.

Another point is we've always lived in HCOLA. Paying off a $600k home takes a lot longer than 5-10 years with everything else. Our down payment is probably the equivalent to many people's entire homes. So it's not the same game depending on where you live.

When you have many baskets to feed and no parental EF then things are a lot different for how you manage risk and debt payoff. I have to add that our strategy has allowed us to have a year sabbatical, we can save not a penny more for retirement and we'd be set for life to retire easily at 62. It also means we're on the path to be FI completely by age 45. IF we were really mustachian we have enough to retire now, but not by our standards. We could move to a LCOLA and easily be done at 36 and 38. But we've chosen not to and if it means working another 5 years so be it.

The most important thing about our money is the flexibility.

[disneysteve]

Really Steve? That is the one aspect of my post that you chose to reply to?

Sorry. Busy at work. Didn't read the whole thing in detail. That just jumped out at me.

[Nutria]

Really Steve? That is the one aspect of my post that you chose to reply to?

It jumped out at me, too, FWIW.

[DaveInPgh]

It jumped out at me, too, FWIW.

Well nowhere in the OP did I mention anything about remortgaging "as soon I pay off the house." Also, Singuy's post that Steve responded to stated "taking out home equity to invest when the opportunity hits."

I get and respect many of the points being made against the idea. I just found it disappointing (and still do) that Steve chose to take a tiny snippet of my long & detailed post to try to make his point.

I also feel that I made a pretty strong case for how it might make sense for our particular circumstances.

[Nutria]

Well nowhere in the OP did I mention anything about remortgaging "as soon I pay off the house."

In the comment that you replied to, Steve wrote, Then, you want me to turn around and take that money back out.

That's where he go the idea of what you meant.