Aside from that, the money isn’t there if you want to use it on something else in retirement, like a down payment on a snowbird condo or helping put your grandkids through college.Leverage is when your expected rate of return on an investment exceeds financing costs. If you can borrow money for less than an amount you can reasonably expect to earn by investing the funds instead, then it makes sense to keep the loan.
For example: a homeowner has a mortgage with a 3% interest rate. Their long-term average expected return is 5%. They’re using leverage to achieve a better financial outcome., most savvy homeowners refinanced. With an ultra-low cost of borrowing, retiring with a mortgage can be the best choice financially. Especially when in today’s rising rate environment, investors can earn over 4% annually buying a 2-year risk-free Treasury .
It’s also worth considering the after-tax cost of debt and net return on an opportunity cost investment.The net cost of a mortgage with a 3% rate is 2.28% for taxpayers in a 24% tax bracket who itemize their deductions. The cost remains 3% for those who do not itemize. The after-tax return on a 5% investment is 3.8% assuming short-term capital gains in a 24% tax bracket, increasing to 4.25% using a 15% long-term capital gains tax rate.
As illustrated above, the hurdle rate is pretty low for homeowners in this situation, meaning paying off a mortgage before retirement might mean leaving money on the table. The breakeven investment return to compare to someone with a 3% borrowing cost is 3.53% or 3.95% for short-term
Yes.
What if I decided to rent houses for a lifetime? Because I don’t have enough $ for downpay and don’t have a stable income to support loan repayment. Also, any advice in my case that I can invest to make myself richer?
Do everything possible to pay it off in 15 years or sooner. Game changer.