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I’m planning a new home build as I head into retirement, and I’m considering carrying a mortgage and keeping the payment at no more than 18%-20% of my total retirement income floor, with a term of 10 years or less (with an early payoff).
For those who’ve done something similar (or chose not to), does that sound like a reasonable plan in real life—and what should I stress-test or watch out for?
Jeff
My mortgages have increased in retirement. My residence has a very low interest mortgage that has 10 more years to run. I live in a rural area and over time I have purchased parcels surrounding my residential acreage. The most recent purchase filled in a hole between 2 other parcels. I had enough equity holdings to pay for it, but decided against the tax consequences of liquidating highly appreciated stock. After much research I transferred stock to a self-directed account that allowed for a portfolio line of credit, now at 4.64%. (It adjusts with the Effective Federal Funds Rate “EFFR”). Because I hold the property as an investment, I can deduct the interest. I plan to pay off my loan when I dispose of a different parcel in a couple of years. If I were to die before completing my financial and real estate maneuvers, my appreciated stock can more than cover my mortgage debts. That being said, I still experience worry when making large purchases and hope to be mortgage free in 10 years.
I’ve always seen mortgages as a personal finance decision, and the keyword there is personal. I preferred keeping the mortgage and investing the money for higher returns instead of paying off low-interest debt. My wife disagreed—she wanted it gone. We paid it down, and honestly? I’m really happy we’re mortgage-free now.
The discussion is good, but the focus has been all about the financial aspects of the decision. There’s also a behavioral or, if you will, emotional aspect to the decision. For us, we derived a lot of comfort from owning a home debt free as retirement approached. And in retirement, we also appreciate the simplicity of being debt free. Being in my mid 70s, simplicity becomes increasingly important.
I paid my mortgage off when I retired in 2000. I had refinanced to 15 years (at 7.75% from 10%) in year three, and made extra principal payments. The balance was around $12,000 or $15,000, I think. If I had had a mortgage payment I would not have retired that early. I lived in that house “rent” free for another twenty-plus years.
We built our house and took a 2.65% mortgage almost 5 years ago. Our combined mortgage payment, insurance and property taxes amount to about 10% of our income. Sleep very well at night.