OT: Not Paying Off Your Mortgage

[Peter P.]

My friend and I were on a bike ride today and he tells me his financial advisor is recommending that he refinance his mortgage.

Jim is 61, married with two incomes, and has a 3.25% mortgage rate. The F.A. suggests taking out a 30 year mortgage at the current rate (which is higher) at 3.6%.

When I told him he'd be paying on his mortgage until he was 91, Jim said the F.A. told him to not worry about it. The idea is to lower the monthly payments and use the excess funds formerly going to the mortgage, to put into retirement accounts.

I countered that, when either spouse dies, the widow(er) is stuck with a mortgage at 1/2 income.

Is this the new normal?

[CNY rider]

Starting with when Jim realistically expects to retire.

[Ken Robb]

My cynical side wonders if the FA gets paid based on the value of the funds he manages for your pal.

[vqdriver]

how many years left to pay off the current mortgage?

[dbnm]

Current mortgage is paid off when?

Does he and spouse have life insurance?

How much is currently in his retirement fund?

How much is total current debt?

[Burnette]

What's the goal and what's the biggest drag for Jim?

There's too many unanswered questions to say.

How much is the home worth? How much is left on the home mortgage? Is Jim's home in a booming housing market or in a poor home selling market? Does Jim plan on moving when he retires? How much money is in these retirement accounts now? How much more will they grow with the added amount gained from the refi? How much will Jim get on pension money (if he gets one), 401k or similar and does he have an after tax Roth account? And as asked above, when does Jim expect to retire?

[echappist]

Originally Posted by Ken Robb

My cynical side wonders if the FA gets paid based on the value of the funds he manages for your pal.

almost most likely the case

a lot of "Financial Advisors" (in air quotes because there's no certification needed to become one, nor does the title imply the person has the client's best interest in mind) are worse than vermin carrying the plague

as with most situations, ask cui bono, and follow the money

[zzy]

Yeah unless the FA has a fiduciary obligation to the client (unlikely), the only person whose interests they really look after are his employer's. Well worth sitting down with a real fiduciary to get a second opinion.

[buddybikes]

To be free from a mortgage is HUGE. What if one dies, gets sick, etc, the stress on the other would grow. Of course it depends on massive number of factors, so of course I am talking generalities.

Wife and I paid off long time ago, we bought our house on the ocean (small) and I am focusing on getting my back in shape, not about who is paying the mortgage. Good friends of ours have remortgaged every chance they could, sitting on 2700 mth payment, with both retired. They want to move to smaller place near the water but don't have enough equity. They had the financial ability to unsaddle themselves years ago. Their choice...

[prototoast]

This seems like terrible advice. Refinancing at a higher interest rate to move some extra money into the stock market might lead to a higher long-term expected return, but for someone approaching retirement, there is a huge premium on risk-free returns, and the imputed rental return of owning your own home is much higher than other risk-free rates (10 year Treasury yield is under 2% right now).

[Spaghetti Legs]

I agree, that sounds like horrible advice to me. Only way it comes close to making sense is if your friend has an ARM or some balloon mortgage with a gigantic payment change coming or if he lied to you and he’s actually 30 years old. I assume he has a 15 year mortgage or some such and his monthly payment is higher at his current lower rate.

The mortgage broker I had for my home purchase last year pushed a 30 year mortgage hard, arguing that most people stay in their home for about 10 years. Also pushed hard not saving my for my kids college.

[Ralph]

I've had a mortgage free home for over 20 years. Have recently been kicking around (in my mind) the idea of taking out a big mortgage. I'm 78 now. I can make the case.....invest the money, withdraw 4% per year of invested funds.....sill own the home and have more money invested. Deduct the interest, etc.

And withdrawing 4% from balanced investment funds has stood the test of time since WW11. Principal has been more than maintained. So on paper.....not a bad idea. The FA is correct.....in theory.

But....I'm not going to do it. Like having a paid for home. Don't need more money to spend. Don't want the risk of something happening no one is thinking about. Being debt free is not all about money.

[Tickdoc]

This is Jim. Don’t be like Jim.

[djg]

It's the sort of thing that could work out, or not -- it's not obviously good advice and it's certainly not the safest course of action. I don't expect the market to tank any minute now, but it's been sort of wiggly the past half year or so and I've no particular confidence that next year or the year after will be as good as the two that came before this flattish-variable patch. And what do I know?

Plus . . . well, the standard deduction is much better than it was, so the deduction for mortgage interest is a less obvious subsidy than it once was.

At 61, your friend might be thinking that he'll have money in the market for 20 years or more. And he might. Still . . . trading a lower interest rate for a higher one so that he can borrow money to invest at risk is doing just that. And at 61 (a couple of years off for me, but I'm getting there), I might be looking for more predictable streams of income and at least a skew towards safety. That's me, not the friend, of course, and I've no idea what else is going on with his finances, so there's that. Personally, I wouldn't follow the advice that was mentioned.

[saab2000]

Sounds like the advisor might steer the friend into high cost investments. I’d look at all the details. Probably would not do it.

Everyone I know with a paid-off house is happy it’s paid off.