[USER]

I have read many times that paying off your mortgage is a bad idea. I want to share my scenario to hear your options and see what you think.

Moving next year to FL from VA. I’m selling two rental properties and my personal home before leaving. (I dont want to be a landlord from a different state) This will give me enough cash to buy a house cash for $500k.

And will also give me about $150k in emergency funds until we get going with jobs or starting our own small business.

Or I can invest $400k out of the $500k in a brokerage account, but will put me at a 7% interest on a mortgage.

To me, paying off the house cash, I’m already making 7% since I won’t be paying a mortgage at 7%.

I need reasonable opinions and not interested in hearing things such as, FL sucks, keep the properties, etc.

Thank you all.

[Michael]

I FIRE’d five or so years ago. Bought a place last year and will have expensive renovations done this year. No loans.

With these crazy times, I’d prefer owning and feeling safe than take on more risk.

If interest rates by you were 2-3% that would be a different story. Times have changed.

[Ian]

Personally, I feel more secure with $500k in my pocket than with a property that is paid off. If the #$%^ hits the fan I know I can adapt and find a good solution.

If all of my money is tied up in a property, I have zero options other than hiding in my house.

Putting that much capital into an illiquid asset that can be destroyed in 10 minutes if someone leaves a pot on the stove too long seems like a bad choice to me.

From a financial stand point, interest rates change. If you pay off the property now, you are effectively locking in a 7% mortgage rate for the next 30 years.

It would be smarter financially to take out a mortgage and lock in the 7% rate now, and then refinance if/when interest rates go down.

That way you’re only paying the 7% rate for as long as interest rates are at or above 7%.

If you pay off your house now, and in 12 months interest rates drop to 5%, you have guaranteed yourself to take a 2% loss from lost opportunity, for the next 29 years.

[Em]

First, don’t forget you will have a ton of that lost to capital gains/taxes. So $500k might be more like $350k. What you can do for the rental properties to defer taxes is a 1031 exchange (look it up).

The only problem is it only give you 90 days or so after they sell to buy something else so they would need to close around the same time.

With your primary, only lived in it more than 2 yrs in the last 5 years and the profit (not sale price but the profit) is less than $250k its tax free.

So, you might consider selling the two rentals first and buying the new home, then sell your primary home, so you can time that transition well.

I’m not an expert on 1031 exchanges but I’ve done it a few times in the past and many real estate investors use it as a tool

[Jason]

I just moved to Florida not long ago and haven’t bought a house yet, but I plan to do so for the same reason. I will say this, I don’t feel the housing options down here are nearly as good as what was available in GA.

If you really like any of your 3 houses or have low interest mortgages on them I’d consider keeping them as out of state rentals.

Just make sure you have a great manager and handyman, and screen your tenants to death.

[Dean]

If you’re not a us citizen (like me), if they make you leave I highly doubt they can come after you in your home country to get you to pay your debts I have decided not to pay off my mortgage for other reasons thouhh haha, one of them being a good interest rate

[Mindi]

By selling rental properties you will be paying a lot of capital gains tax. I would keep the rentals and hire a PM to mange them. Use the cash flow to pay the mortgage on your new house.

I never understood the “peace of mind” of not having a mortgage.

Your house can still be taken from you if you don’t pay property taxes, or it burns to the ground (or for Florida a hurricane or flood occurs) and you don’t have proper insurance coverage.

Set up auto pay for your mortgage payment and that’s “peace of mind” enough for me.

Mortgage rates will drop in the future and you can refi at 4-5% or lower, and you still have the cash flow from your rentals indefinitely and maybe even be able to semi-retire or only work part time to support yourselves and enjoy the Florida lifestyle.

[Peter]

If you pay off the mortgage what is your opportunity cost?
If you leverage a mortgage and house appreciates you are making more money then what you put in while 400k is growing in stocks additionally.

Also if you lost your job, you’re not stuck with a paid off home with no cash.

You still have to pay property tax and other maintainence for the duration of time that you get a new job

[Malik]

I’m on the side of not paying off mortgages early if option is to take a risk and invest/ start a business. However, the freedom of not having a mortgage is a huge plus.

Especially at today’s rates, I’d be tempted to buy house cash and take my time to find a job that’s the right fit.
On another note.

Finding a decent size house in a decent neighborhood in/near one of the major cities in Florida for $500k might not a easy a we would wish.

[Josh]

To me it would depend on your current age, what age you want to fire at, and your networth allocations. Basically if you have a long time horizon and need to grow your networth I’d do the low down-payment.

All of that assumes you can get a mortgage in a different state without a job there.

You could always buy with cash, which will likely get you a better price.

And then get the mortgage once your settled into jobs.

[Dave]

I would never pay off a 3% mortgage
Paying off a 7% mortgage is often going to be a good idea.
In your position, I’d pay cash.

If rates drop below 5% at some point in the future I’d likely do a cash-out “re-fi”.

[Amber]

It depends, but the peace of mind is priceless. I live in Oregon where homeowners insurance is getting more expensive, or even cancelled, due to the wildfires.

At least with the house paid off we can self- insure if needed (though not ideal).

[John]

I’m a strong supporter of paying off mortgages, especially at 7%, but given that you plan on working and/or starting a business, you would benefit from having more cushion.

So, I would finance 1/2 of the house price ($250k) and invest/save the rest.

[Christopher]

Is this your forever home? If so, I’d recommend a cash purchase. Not only are you guaranteeing a risk-free return of 7% by forgoing a mortgage (yes, the market can return more than that, but it’s not risk-free), but you’re also giving yourself a massive safety net in a situation where you’re moving to a new state with no job.

A $150k emergency fund should be plenty to hold most people over, especially with no mortgage.

Lastly, a cash purchase is more attractive to sellers, giving you leverage to buy at a discount or otherwise beat the competition.

[John]

I don’t know the difference in rate between a fixed and an ARM, but I would explore that as well. Unless you have a lot of cash, I would just make a larger down payment and then have a cushion that allows you to pay more or retain the cash.

There’s something to be said about flexibility and having options.

This is especially important if your going to start your own business. If you get great jobs and/or business is booming, then just pay extra to have the mortgage paid off sooner.

If things aren’t great, you can chip away at your cash.

What I want to know, is are there any stats that show what the NW is of cash buyers? What the cash outlay is vs their over NW, etc.

I’d have to imagine the large majority of the time, cash buyers are spending less than their 50% of their NW.

And most of the time, it’s 20% max of their NW.

[Maranda]

There is nothing better than the feeling of a paid off house! Plus, when the homeowners insurance rates shock you year after year, you’ll have the option to drop it- I prob wouldnt but I’ve heard Florida homeowners insurance is worse than Louisiana where I live, and it’s pretty terrible here

[Weber]

Taxes are important here. Any returns on investment will likely be taxable.

If the current Tax Cut and Jobs Act is extended (as many expect) you may not get much benefit for mortgage interest paid.
Not tax advice.

Consult a tax advisor.

[Jay]

Unless you lived in one of the rental properties in 2 of the past 5 years, it will be subject to capital gains tax.

You could use the capital gains tax exclusion on your current VA residence to buy your primary FL residence and buy one or more rental properties in FL with a 1031 exchange.

[David]

Lots of good advice in the comments. But one thing I haven’t seen mentioned.

7% mortgage rate is NOT the same as 7% return in the stock market. The mortgage is a flat 7% per year.

The 7% in the stock market is compounding so it is worth far more, many times more, especially over the life of a mortgage.

[Dave]

I think it really depends on your rate. If your 3% or lower it does make sense to just make the payments without throwing too much extra, because the extra could be making 10% in equities.

On the other hand it’s a fact that debt can be mentally debilitating to some people, and even on a lower level debt can lead to stress which isn’t healthy.

If you are one of those people just needing the financial freedom it’s probably worth paying off the house asap even if it means having to work a couple more years to retire

[Author]

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