Should I pay off my mortgage, or...

[bmcar]

Hello - I need TSPTalk member's input. Reading the different forums, I realize that TSPTalk members are so diverse with various expertise. I hope to catch the attention of somebody skilled in giving me some input with my situation. Do I pay off mortgage or do I just accelerate payments?

I am FERS, will be 60 years old soon and I am planning to retire at the end of the year, 2018. My dilemma is I refinanced my house in 2016 for $163K due to my parents’ and parents in laws medical and funeral expenses. Current Mortgage balance is $153K.

I did some math (not sure if it’s correct) and it looks like I am better off accelerating payments rather than paying it off right away. My current monthly payment is $754 (principal and interest only), with taxes and insurance is a total of $1603. Mortgage Rate is 3.75%.
With the TSP calculator and amortization schedule, I did 2 scenarios:

1. Scenario 1 – Pay off Mortgage
a. Lump Sum Withdrawal of $200K to give me a net of approximately $155K @24% tax, more than enough to pay the mortgage.
b. From the balance of $300K at a conservative 4% interest and a monthly payout of $1400, I would have $187K and $135K at 75 years old and 80 years old respectively.
c. $98K - Interest saved for the 28 years left with mortgage

2. Scenario 2 – Accelerate Monthly Payment:
a. If I accelerate my monthly mortgage payment by putting an extra $1000 monthly, I would be paying off my home in approximately 8.5 years -9 years. To do this, I would need to do a TSP monthly withdrawal of $2500 from the $500K @ 4%. At 69 (+/-) years old, my home will be fully paid, and I have $387K left in my TSP.
b. After fully paying the mortgage, and from the balance of $387K, I can reduce my monthly withdrawal to $1400.00 and my TSP Balances will be $373K and $355K at 75 years old and 80 years old respectively.
c. $64K – Interest saved with Payment Acceleration.

Thanks in advance for any input.

 

[Whipsaw]

Re: BMCAR's Account Talk

I'm working to accelerate my mortgage to be paid off close to when I retire. One benefit to accelerated pay off vs. lump sum is the tax deductible interest. A third approach would be to set aside the money going to the advance payment, if you can beat the interest rate on the note, and then pay off lump sum from that account when the balances match, or are at least close.

 

[Mcqlives]

Re: BMCAR's Account Talk

IMO accelerate. Caveat to that is if you own (or want to own) rental properties and plan on moving once you retire. Then don't accelerate and keep house as rental for the write offs.

And look at Whipsaw's comment seriously. If you can manage your money well, that would be the Dave Ramsey way of doing it for sure.

 

[bmcar]

Re: BMCAR's Account Talk

Thanks. I guess my potential problem is if I have the discipline to save and not touch the money. I checked around and the highest interest rate is 2%-3%.

I'm working to accelerate my mortgage to be paid off close to when I retire. One benefit to accelerated pay off vs. lump sum is the tax deductible interest. A third approach would be to set aside the money going to the advance payment, if you can beat the interest rate on the note, and then pay off lump sum from that account when the balances match, or are at least close.

 

[uscfanhawaii]

Re: BMCAR's Account Talk

Don't take this the wrong way, I am not trying to be critical, but....why would you want to pay it off, or accelerate payments even?
Maybe you need to talk to a financial planner that can look over your entire situation.
But things to consider:
1. Interest is tax deductible. So your effective interest rate is much less than 3.75%. What other deductibles will you have?
2. Retiring at 60? I assume you are still in good health. So you can expect to live quite a while in retirement. You should NOT be planning to only get 2-3% returns. At least some stock exposure should enable you to double that fairly easily.
3. 3.75% !! That's a historically low rate! No where to go but up from there. If you later want to get a loan for a big expense (assuming you could still qualify), you will be regretting giving up that 3.75%.

The previous suggestions are also very valid. Except again, I would urge you to consider just keeping your payments as is.

I have a very similar situation to yours. Of course similar is not the same, hence suggesting the visit to a financial planner. But I am retiring end of this year, I refinanced my house in 2012 for 30 yrs (payoff in 2042), at 3.875%. Will I live long enough to pay it off? Who knows, but what does it matter? I get to keep a loan for under 4%, guaranteed for 24 more years, and I don't ever expect we will see these low rates again in my lifetime. I plan to continue to invest my TSP and IRA accounts at higher than 4% per year, and pocket the difference for travel, gifts to grandkids, etc. And most likely also leave a pretty good legacy for my heirs.

So, consider Scenario #3, leave mortgage payments as is.
Good Luck in your retirement!!

 

[bmcar]

Re: BMCAR's Account Talk

Don't take this the wrong way, I am not trying to be critical, but....why would you want to pay it off, or accelerate payments even? .....

...So, consider Scenario #3, leave mortgage payments as is......

Thanks for your suggestion. Actually, thst's what wifey said, too. Just let it be and enjoy retirement. Her contention is that our heirs would prefer cash rather than a house that needs to be sold.

/bmcar

 

[Scout333]

Re: BMCAR's Account Talk

Don't take this the wrong way, I am not trying to be critical, but....why would you want to pay it off, or accelerate payments even?
Maybe you need to talk to a financial planner that can look over your entire situation.
But things to consider:
1. Interest is tax deductible. So your effective interest rate is much less than 3.75%. What other deductibles will you have?
2. Retiring at 60? I assume you are still in good health. So you can expect to live quite a while in retirement. You should NOT be planning to only get 2-3% returns. At least some stock exposure should enable you to double that fairly easily.
3. 3.75% !! That's a historically low rate! No where to go but up from there. If you later want to get a loan for a big expense (assuming you could still qualify), you will be regretting giving up that 3.75%.

The previous suggestions are also very valid. Except again, I would urge you to consider just keeping your payments as is.

I have a very similar situation to yours. Of course similar is not the same, hence suggesting the visit to a financial planner. But I am retiring end of this year, I refinanced my house in 2012 for 30 yrs (payoff in 2042), at 3.875%. Will I live long enough to pay it off? Who knows, but what does it matter? I get to keep a loan for under 4%, guaranteed for 24 more years, and I don't ever expect we will see these low rates again in my lifetime. I plan to continue to invest my TSP and IRA accounts at higher than 4% per year, and pocket the difference for travel, gifts to grandkids, etc. And most likely also leave a pretty good legacy for my heirs.

So, consider Scenario #3, leave mortgage payments as is.
Good Luck in your retirement!!

Good thoughts USC! Also, at age 70 1/2 you will have to start withdrawing from the TSP account. This could be used to continue paying the mortgage payments. Usually cheaper to withdraw smaller amounts over a longer period of time. i.e. keep income in a lower tax bracket if possible. Depending on your tax situation you may even want to start withdrawing before age 70 1/2. I started at aged 62 and have been able to keep tax rate under 15% so far.