Should we use large portion of retirement savings to pay off mortgage?
July 24, 2015 11:24 AM Subscribe
The problem: We built a cob (monolithic adobe) house 15 years ago which we initially financed and refinanced. It is a one of a kind house and there are no other adobe homes in the area. Since the big mortgage debacle, underwriting guidelines have changed with regard to comparable homes and we cannot refinance our own home, nor could anyone else secure financing to purchase it.
The "breadwinner" of the household is 69 years old and when he retires we will not be able to maintain our current standard of living. Paying the house off would take approximately 1/3 to 1/2 of our savings. I am inclined to want to pay it off, then figure out how to live on what we have left, along with social security. If we keep making the mortgage payment, our savings will also be drained rather quickly. Eventually we may need to try to find a cash buyer anyway, but we are not quite ready to give up our very special home. Any advice as to how to proceed? We are paralyzed with confusion!
The "breadwinner" of the household is 69 years old and when he retires we will not be able to maintain our current standard of living. Paying the house off would take approximately 1/3 to 1/2 of our savings. I am inclined to want to pay it off, then figure out how to live on what we have left, along with social security. If we keep making the mortgage payment, our savings will also be drained rather quickly. Eventually we may need to try to find a cash buyer anyway, but we are not quite ready to give up our very special home. Any advice as to how to proceed? We are paralyzed with confusion!
I know that "Check with a financial advisor" is the equivalent of "Seek therapy," but given the importance of the decision and your unusual housing situation, I think that would be worth your time and money.
That said, a few comments:
Continuing to make monthly mortgage payments will give you more flexibility than paying off the mortgage all at once. If you continue to make payments, you will have money in the bank that will allow you to pay it off if you choose. But if you pay it off, it will be difficult or impossible to get another mortgage to free up cash. The only reason I can think of to pay it off would be if you had an extremely high interest rate on the current mortgage.
How sure you are that you cannot refinance and that potential buyers cannot get a mortgage? You should ask at least 3 or 4 banks and/or mortgage brokers. Similarly, have you looked into a reverse mortgage? You might not be able to get one, with your unusual housing situation, but it's worth considering. But definitely get outside advice before finalizing any reverse mortgage.
posted by Mr.Know-it-some at 11:37 AM on July 24, 2015 [1 favorite]
That said, a few comments:
Continuing to make monthly mortgage payments will give you more flexibility than paying off the mortgage all at once. If you continue to make payments, you will have money in the bank that will allow you to pay it off if you choose. But if you pay it off, it will be difficult or impossible to get another mortgage to free up cash. The only reason I can think of to pay it off would be if you had an extremely high interest rate on the current mortgage.
How sure you are that you cannot refinance and that potential buyers cannot get a mortgage? You should ask at least 3 or 4 banks and/or mortgage brokers. Similarly, have you looked into a reverse mortgage? You might not be able to get one, with your unusual housing situation, but it's worth considering. But definitely get outside advice before finalizing any reverse mortgage.
posted by Mr.Know-it-some at 11:37 AM on July 24, 2015 [1 favorite]
I assume you have a floating-rate mortgage loan and not a fixed-rate one at a high rate? If so, your mortgage rate is low. Right now you have optionality. That is, you have both the loan, and all your savings. If you pay off the loan, you reduce your savings substantially and may lose the chance--the option--of borrowing again in the future. You are probably better keeping your options open. Keep the loan for now. Who knows, maybe in the future you (or a future buyer) will be able to refinance. The economy is getting better, and bank lending conditions are getting looser.
If you are able to pay off the entire loan with your current savings, then your current monthly payments won't drain those savings quickly because of the low interest rate. I understand that, emotionally, it might feel better to just pay the damn thing off and have done with it. But financially, keeping the loan is probably the better course.
posted by mono blanco at 11:40 AM on July 24, 2015 [1 favorite]
If you are able to pay off the entire loan with your current savings, then your current monthly payments won't drain those savings quickly because of the low interest rate. I understand that, emotionally, it might feel better to just pay the damn thing off and have done with it. But financially, keeping the loan is probably the better course.
posted by mono blanco at 11:40 AM on July 24, 2015 [1 favorite]
Instead of paying it off outright, consider paying ahead on the principal. Adding an extra amount to each monthly payment will reduce the length of the loan and could save a considerable amount of interest.
Here's a calculator you can play with.
posted by Johnny Wallflower at 11:44 AM on July 24, 2015 [2 favorites]
Here's a calculator you can play with.
posted by Johnny Wallflower at 11:44 AM on July 24, 2015 [2 favorites]
Knowing at least your mortgage interest rate would be helpful, even if you don't want to share the other information.
posted by alms at 11:51 AM on July 24, 2015
posted by alms at 11:51 AM on July 24, 2015
I think you should seek a fee-only financial advisor.
I know that building codes were recently changed to allow cob houses (but this may be just in my local area). I don't know when was the last time you tried to refinance, but depending on how it's built and where you are, I would doublecheck again.
Also, make sure to ask mortgage *brokers* and not just lenders. Brokers work with multiple banks and have access to more products. As an example, Chase refused to give me a mortgage twice (one FHA and one conventional). Yet I have had no problems getting mortgages from small local banks.
If you cash out retirement and it's all pre-tax accounts, it'll all count as income, right? So you'll be paying more income tax by cashing it all in one year than if you cash out some over the multiple. Obviously, whether this is the right thing to do also depends on your interest rate, and whether you can take mortgage interest deduction (i.e., if you're itemizing your deduction) and a whole slew of other variables.
It also depends on what your expenses are and how much you have in savings. For example, retirement savings are legally protected from bankruptcy. So there are definite advantages to keeping cash in retirement accounts for as long as possible, especially if you're in a potentially financially precarious situation.
So I think this is definitely something you want to decide on a case by case basis. Either give us more (all) details or seek a fee-only financial advisor.
posted by ethidda at 11:56 AM on July 24, 2015 [2 favorites]
I know that building codes were recently changed to allow cob houses (but this may be just in my local area). I don't know when was the last time you tried to refinance, but depending on how it's built and where you are, I would doublecheck again.
Also, make sure to ask mortgage *brokers* and not just lenders. Brokers work with multiple banks and have access to more products. As an example, Chase refused to give me a mortgage twice (one FHA and one conventional). Yet I have had no problems getting mortgages from small local banks.
If you cash out retirement and it's all pre-tax accounts, it'll all count as income, right? So you'll be paying more income tax by cashing it all in one year than if you cash out some over the multiple. Obviously, whether this is the right thing to do also depends on your interest rate, and whether you can take mortgage interest deduction (i.e., if you're itemizing your deduction) and a whole slew of other variables.
It also depends on what your expenses are and how much you have in savings. For example, retirement savings are legally protected from bankruptcy. So there are definite advantages to keeping cash in retirement accounts for as long as possible, especially if you're in a potentially financially precarious situation.
So I think this is definitely something you want to decide on a case by case basis. Either give us more (all) details or seek a fee-only financial advisor.
posted by ethidda at 11:56 AM on July 24, 2015 [2 favorites]
You have not provided enough information for us to give you a studied answer. First, we need to know what you have in savings, securities, etc. Second, how much is the existing mortgage?
I would recommend you check into the website "Bogleheads." It is a forum that operates somewhat like AskMeFi, except all the questions pertain to personal finances, and it is populated by thoughtful financial minds at all levels of expertise.
posted by zagyzebra at 11:57 AM on July 24, 2015
I would recommend you check into the website "Bogleheads." It is a forum that operates somewhat like AskMeFi, except all the questions pertain to personal finances, and it is populated by thoughtful financial minds at all levels of expertise.
posted by zagyzebra at 11:57 AM on July 24, 2015
As everyone say, expert advice, if you can find it, is .... expert.
From a straight financial perspective, compare the interest rate you pay on your mortgage to the interest/dividend rate you are earning on your savings. If you have cash in a savings bank, still earning about nothing, and your mortgage is 6%, it may well make sense to pay off the mortgage. OTOH, if you are earning good money on your savings, keeping the mortgage may be better.
If the savings are in a 'qualified plan' (IRA, 401K, etc) then taxes are big factor. You have to pay taxes on plan withdrawals. That makes the analysis more complicated, and expert advice even more important.
posted by SemiSalt at 12:22 PM on July 24, 2015
From a straight financial perspective, compare the interest rate you pay on your mortgage to the interest/dividend rate you are earning on your savings. If you have cash in a savings bank, still earning about nothing, and your mortgage is 6%, it may well make sense to pay off the mortgage. OTOH, if you are earning good money on your savings, keeping the mortgage may be better.
If the savings are in a 'qualified plan' (IRA, 401K, etc) then taxes are big factor. You have to pay taxes on plan withdrawals. That makes the analysis more complicated, and expert advice even more important.
posted by SemiSalt at 12:22 PM on July 24, 2015
Expert - you need one. It's totally normal to be paralyzed by confusion because these decisions are huge. An adviser can help you identify and evaluate the trade-offs you are making.
I will comment on the house. How is your home from an accessibility standpoint - are doorways, hallways, bathrooms big enough to accommodate a walker or wheelchair? Are there steps into the house?
Here is why that's relevant to your question. As you age, accidents and injuries are debilitating. I've gone through this with my in-laws who refused to sell their home, but are now stuck in a location and home that doesn't work for them because the property is very difficult to sell. When they couldn't sell, they did some very expensive construction to make it safe as their mobility declined very rapidly (moving bedrooms/bathrooms downstairs). It's not an isolated case. We've had other family members who had to move out of their home and into an accessible hotel room during an illness that required a wheelchair and modified bathroom. If you want to stay in your home as you age it will likely need modifications for one or both of you. That requires cash.
Since you believe your house will be a difficult sale it's important to have additional cash available to deal with accessibility issues which may be a part of the aging process. That alone makes me think the depleting your cash account to keep the house is a risky choice.
A financial adviser can help you sort through this.
posted by 26.2 at 12:30 PM on July 24, 2015 [1 favorite]
I will comment on the house. How is your home from an accessibility standpoint - are doorways, hallways, bathrooms big enough to accommodate a walker or wheelchair? Are there steps into the house?
Here is why that's relevant to your question. As you age, accidents and injuries are debilitating. I've gone through this with my in-laws who refused to sell their home, but are now stuck in a location and home that doesn't work for them because the property is very difficult to sell. When they couldn't sell, they did some very expensive construction to make it safe as their mobility declined very rapidly (moving bedrooms/bathrooms downstairs). It's not an isolated case. We've had other family members who had to move out of their home and into an accessible hotel room during an illness that required a wheelchair and modified bathroom. If you want to stay in your home as you age it will likely need modifications for one or both of you. That requires cash.
Since you believe your house will be a difficult sale it's important to have additional cash available to deal with accessibility issues which may be a part of the aging process. That alone makes me think the depleting your cash account to keep the house is a risky choice.
A financial adviser can help you sort through this.
posted by 26.2 at 12:30 PM on July 24, 2015 [1 favorite]
This doesn't seem like a good idea. If you were to go bankrupt, retirement savings and primary residences both enjoy some protections. If you use your retirement money to pay off your primary residence and then still go bankrupt, you're in even worse shape.
I don't think paying off the mortgage would solve any of your problems (unless the interest rate is very high). Your net worth is the same whether you have $100,000 in a retirement account and a $100,000 mortgage or whether you have $0 and a paid-off house. But having money in the retirement account gives you a lot more flexibility than having all your money in a house that you know will be very difficult to sell. You would be giving up a lot of liquidity for no obvious gain.
posted by mskyle at 1:17 PM on July 24, 2015
I don't think paying off the mortgage would solve any of your problems (unless the interest rate is very high). Your net worth is the same whether you have $100,000 in a retirement account and a $100,000 mortgage or whether you have $0 and a paid-off house. But having money in the retirement account gives you a lot more flexibility than having all your money in a house that you know will be very difficult to sell. You would be giving up a lot of liquidity for no obvious gain.
posted by mskyle at 1:17 PM on July 24, 2015
The "breadwinner" of the household is 69 years old and when he retires we will not be able to maintain our current standard of living.
Since your family's breadwinner is at retirement age, you can expect to make major lifestyle changes relatively soon. It's not a good idea to tie up your money right now by paying off the loan -- when things are in flux, you should be as liquid as possible so that you're as flexible as possible.
Once he retires, and your family has settled into your new lifestyle, you can assess whether or not to pay off the mortgage. It might be a good idea, or it might not. But there's no way to know now, when you're just at the precipice of your finances changes so drastically.
posted by rue72 at 1:48 PM on July 24, 2015 [2 favorites]
Since your family's breadwinner is at retirement age, you can expect to make major lifestyle changes relatively soon. It's not a good idea to tie up your money right now by paying off the loan -- when things are in flux, you should be as liquid as possible so that you're as flexible as possible.
Once he retires, and your family has settled into your new lifestyle, you can assess whether or not to pay off the mortgage. It might be a good idea, or it might not. But there's no way to know now, when you're just at the precipice of your finances changes so drastically.
posted by rue72 at 1:48 PM on July 24, 2015 [2 favorites]
You really need to have the talk. You know that one where you find a fee-only financial planner who specializes in retirement planning. There are more factors here than just cash flow. IRAs 401Ks Pensions, and Social Security all have very specific tax rules. Taking cash out can be considered income, and could for example impact Social Security or Medicare or taxes. You need professional help. I would start with contacting Whoever manages your retirement accounts and asking if they can provide a list of fee only advisors.
posted by Gungho at 1:57 PM on July 24, 2015
posted by Gungho at 1:57 PM on July 24, 2015
Cob houses are generally built so that you don't have to pay a mortgage for 30 years. I'm confused that 15 years after building your cob house you are still paying it off.
posted by GregorWill at 3:33 PM on July 24, 2015
posted by GregorWill at 3:33 PM on July 24, 2015
The first thing I would note is that there are more ways to borrow money than from a conventional bank. A buyer who really wants your house may as you noted have all cash or perhaps access to a family loan to pay for it. Some home buyers take a mortgage (usually with a large down payment) from the seller. Put all that in your future plan. I think johnnywallflower and ethida gave you good advice. Don't put yourself in the position of having to pay income tax on your retirement money especially while still earning a full time salary. wallflower's suggestion to pay down principal is a good strategy. Clearly you won't be able to do this for many years but if you can pay double the principal every month you will accelerate by one extra month the payoff each month - a year of this reducing outstanding debt by two years. So if you have a few years to work before having to retire you can reduce the amount you would need to pay off the mortgage by many thousands or make the risk of holding a loan for a buyer less of a burden.
Lastly a home way be moved via a 1031 exchange rather than a sale. If yours is monolithic and you down size you should be able to take at least some cash to reduce the mortgage. Again talk to that financial planner.
posted by Jim_Jam at 6:37 PM on July 24, 2015
Lastly a home way be moved via a 1031 exchange rather than a sale. If yours is monolithic and you down size you should be able to take at least some cash to reduce the mortgage. Again talk to that financial planner.
posted by Jim_Jam at 6:37 PM on July 24, 2015
Response by poster: Hi all. I'm amazed at the immediate and thoughtful responses to my question. Thank you.
In the interests of providing more detailed information, we currently owe about $140K and our interest rate is fixed at 6%. Our savings are mostly in 401K and IRA accounts, around $300K, with less than $20K in cash. We haven't got a good handle on how much income we'll need in retirement, figuring we'll just have to make do with whatever we have. We have no debt other than the house, and two adult children with very limited income (one still in college).
We've contacted lenders and brokers but the persistent problem with refinancing has been the lack of comparables, even though the appraised value is around $250K.
Seeing a financial advisor is certainly good advice but we haven't had the requisite initiative and don't know how to choose one. Maybe getting on here is the first step in that process.
As to how we got into this situation with an ostensibly inexpensive cob home, it has to do with escalating scale and an expected windfall that never materialized. No regrets, though. We just have to figure out how to deal with it. Thanks again for the input.
posted by lzw at 7:07 PM on July 24, 2015
In the interests of providing more detailed information, we currently owe about $140K and our interest rate is fixed at 6%. Our savings are mostly in 401K and IRA accounts, around $300K, with less than $20K in cash. We haven't got a good handle on how much income we'll need in retirement, figuring we'll just have to make do with whatever we have. We have no debt other than the house, and two adult children with very limited income (one still in college).
We've contacted lenders and brokers but the persistent problem with refinancing has been the lack of comparables, even though the appraised value is around $250K.
Seeing a financial advisor is certainly good advice but we haven't had the requisite initiative and don't know how to choose one. Maybe getting on here is the first step in that process.
As to how we got into this situation with an ostensibly inexpensive cob home, it has to do with escalating scale and an expected windfall that never materialized. No regrets, though. We just have to figure out how to deal with it. Thanks again for the input.
posted by lzw at 7:07 PM on July 24, 2015
Another missing piece of information is how much of your home's value is in the house and how much is in the land. If you are in an area where the largest cost component is in the land, I don't see why someone wouldn't help you refinance if you got the L:V ratio down to a favorable enough level based on the value of the land alone (i.e. value the house at the worst case, $0, or even subtract the cost of demolishing it; either way you'll be left with some value in the land that you could borrow against). You might not need to pay off the loan completely, just pay it down, though perhaps substantially, in order to refinance.
Others are correct when they say you absolutely need a fee-based retirement planner. You can find one here.
posted by Kadin2048 at 9:41 PM on July 24, 2015
Others are correct when they say you absolutely need a fee-based retirement planner. You can find one here.
posted by Kadin2048 at 9:41 PM on July 24, 2015
If the $140K you still owe is making you more than 6% annually where it's invested now, then pulling it out of there in order to pay off the mortgage will cost you.
posted by flabdablet at 10:51 PM on July 24, 2015
posted by flabdablet at 10:51 PM on July 24, 2015
We haven't got a good handle on how much income we'll need in retirement, figuring we'll just have to make do with whatever we have. We have no debt other than the house, and two adult children with very limited income (one still in college).
Seeing a financial advisor is certainly good advice but we haven't had the requisite initiative and don't know how to choose one. Maybe getting on here is the first step in that process.
I'm glad you are now dealing with this but to date you've been too passive and you need to step up now!
I would suggest going to CFP.net to find a Certified Financial Planner. Pop your ZIP into the CFP Finder in the upper right corner. In the results, on the right hand side, you can add further criteria. IMHO you want someone who a) deals with $0 Investible Assets 2) has a declared Speciality in Elder Care and 3) is Fee Only. I am suggesting Elder care as this is going to be a significant issue for you that practice very often encapsulates the Social Security, real estate and budgetary problems on your plate.
You can contact 3 or 4 of them. You need to interview them. I would do this by providing each one in advance with a financial précis and asking if they'd be interested in setting an appointment with you. Choose one who you're comfortable with, who can provide references, and who seems like they are going to deliver the degree of hand-holding you feel you're going to need, particularly with regard to setting up a budget and savings plan both pre-and post retirement that addresses your reality.
posted by DarlingBri at 6:55 AM on July 25, 2015
Seeing a financial advisor is certainly good advice but we haven't had the requisite initiative and don't know how to choose one. Maybe getting on here is the first step in that process.
I'm glad you are now dealing with this but to date you've been too passive and you need to step up now!
I would suggest going to CFP.net to find a Certified Financial Planner. Pop your ZIP into the CFP Finder in the upper right corner. In the results, on the right hand side, you can add further criteria. IMHO you want someone who a) deals with $0 Investible Assets 2) has a declared Speciality in Elder Care and 3) is Fee Only. I am suggesting Elder care as this is going to be a significant issue for you that practice very often encapsulates the Social Security, real estate and budgetary problems on your plate.
You can contact 3 or 4 of them. You need to interview them. I would do this by providing each one in advance with a financial précis and asking if they'd be interested in setting an appointment with you. Choose one who you're comfortable with, who can provide references, and who seems like they are going to deliver the degree of hand-holding you feel you're going to need, particularly with regard to setting up a budget and savings plan both pre-and post retirement that addresses your reality.
posted by DarlingBri at 6:55 AM on July 25, 2015
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If you don't want to post that information, you can hunt around for a fee-based financial planner. You are probably best advised to do that anyway, to be honest.
posted by DarlingBri at 11:35 AM on July 24, 2015 [8 favorites]