logistics of paying off house vs financing

[Suz D]

I'm a frugal person and understand a lot of basic things about being financially smart, but when it comes to investing I'm a bit of a dunce. Here's my situation and I'd love to read people's thoughts about the pros and cons of paying off our house.

We owe $175000 on a house that is currently valued at $235000. I will be receiving a substantial inheritance that is enough to pay off the house plus quite a bit left over. The $$ is currently invested through Charles Schwab and will stay with them. It is earning around 7-10% right now (it's invested pretty aggressively).

Our interest rate is 4.62%. So my feeble mind reasons that if I can earn 7-10% on my $$ then why take $175000 of it to pay off $$ that I'm paying just 4.62% on. Doesn't keeping the house financed earn me an extra 2.5-5.5%?

Help me understand this because I always hear "pay off your house ASAP".

 

[amylevan]

Count me in the group who thinks you should leave the money invested. You're earning the extra 2.5-5.5% and don't forget the tax deduction from the mortgage interest.

We were in a similar position and left the money invested. We lost a bit during the recent recession, but it's starting to come back. We view the fund as a retirement/emergency/home improvement fund. In other words, we don't touch it unless we are doing something that will increase our home's worth (redoing kitchen, building a new deck...). It's there if there is ever an emergency, otherwise it will be there for retirement. (And we continue to invest in our 401ks as if we didn't have this fund.)

 

[BellePrincessBelle]

For me, I'd rather have my house paid off. To me there is security knowing that I'll always have a place to live god forbid something happens. Investing is a tricky beast. I know too many people who have lost their life savings in the stock market.

 

[2disneyboys]

my disclaimer... I am NO FINANCIAL EXPERT.. one thing I do know....

when you owe on a house, you are taking a risk... if something happend where you lost your income, you are now at risk of now having a home. In addition, when you own on a house, you are not able to deduct 100% of your mortgage payment so I would never keep a loan on a house simply for the reason of having a tax deduction... If I needed the tax deduction, I 'd rather make a pyment to the charity of my choice where that same amt of $ would be 100% deductible... KWIM?

in all honesty, in cases of getting in excess of 100,000 in inherterance, I would spend some money to speak to a (or some) professionals to ensure I am aware of effects (tax wise) of any choice I was going to make. Good luck to you!

 

[punkin]

Count me in the group who thinks you should leave the money invested. You're earning the extra 2.5-5.5% and don't forget the tax deduction from the mortgage interest.

We were in a similar position and left the money invested. We lost a bit during the recent recession, but it's starting to come back. We view the fund as a retirement/emergency/home improvement fund. In other words, we don't touch it unless we are doing something that will increase our home's worth (redoing kitchen, building a new deck...). It's there if there is ever an emergency, otherwise it will be there for retirement. (And we continue to invest in our 401ks as if we didn't have this fund.)

This.

It is simple math. Emotions shouldn't enter into it.

 

[disneymomto5]

I'm going to have to agree with the poster that told you to get some financial advice. I resisted going to a financial planner for years but was finally talked into it by my spouse. It does cost a bit, but they can give you sound advice on what works best for you. In addition our planner has consistently made us 10-14% profits each year, way better than we could do ourselves and it more than pays for his services.

 

[jedijill]

Definitely get professional advice. Remember, if you pay off your house, your money is no longer liquid. By keeping your money in investments, you will have easier access to your funds in case of emergency, etc.

Jill in CO

 

[timmac]

I'd agree with talking to an expert, given the amount of money you're dealing with.

That said, if I had to pick one of the two options, I'd certainly go with leaving it invested; this assumes a decent investment strategy where it's not all high risk investments, but rather a good balance. While I understand the emotional side of "house paid off = security", if **** hits the fan, then the more liquid assets (your investments) are far more valuable (as in, useful), since cash is king.

 

[seashoreCM]

Don't pay off this mortgage loan all at once early.

If you lost your job then the chunk of money sitting around will last a long time making the payments.

Now you could add a hundred dollars to each mortgage payment and this will cut the number of years it takes to pay it off. If you should lose your job you can drop back to the regular mortgage payment.

 

[tlbwriter]

when you owe on a house, you are taking a risk... if something happend where you lost your income, you are now at risk of now having a home.

The OP would have enough money sitting around in investments to pay off the house if that happened, or to keep making mortgage payments.

In addition, when you own on a house, you are not able to deduct 100% of your mortgage payment so I would never keep a loan on a house simply for the reason of having a tax deduction...

No one is ever able to deduct 100% of their mortgage payment, so I'm assuming you mean mortgage interest. But really, it makes no sense to pay interest simply so you can have a tax deduction. Financially it simply doesn't work out.

 

[DawnM]

Personally I would pay off the house, but we are in pay off the house mode at the moment.

If you will have enough left over to have a substantial emergency fund to cover 6-12 months of living expenses as a back up, I would do it. And, your emergency fund can be lower as you won't have to cover house payments.

Since house interest is front loaded, that 4% isn't exactly 4% per year....amoritized it is far greater in the first half or more of the loan.

Look at BankRate.com to see how much interest you will save over the long haul.

And if you are really worried about the investments amount, put your current mortgage amount into savings each month as it will build up far faster with no interest taken out first

Dawn

 

[dhuba]

Are you planning on staying in your house for the long term? If so, I would pay off the house or put a chunk down on your mortgage. I never understood people who say to keep the mortgage for a tax break. You are still paying thousands in interest and only getting a percentage of that in a form of a break, so you are still paying interest.

 

[Suz D]

OP here...I'm definately planning on using the investment person that was used by my father (who left me the inheritance). They've done very well and were wonderful to work with through my father's illness.

I guess I'm just wondering what other people would do in my shoes as far as the house (because of the "security" of having your house paid off). I was thinking that 175000 at 7% (and it has earned more than 7%) would bring in around $12000/year and I would pay about 8000 in interest on my loan for one year-now to May 2012 (using the amortization calculator). That's 4000 cleared. The tax savings from our mortgage interest add about 1000 so I'm still ahead by about 3000.

So would I talk to someone in addition to the investment person at Schwab? Because I don't see him telling me to take the $$ and pay off my house. I'm sure he'd rather have me leave it invested with them.

 

[Suz D]

Count me in the group who thinks you should leave the money invested. You're earning the extra 2.5-5.5% and don't forget the tax deduction from the mortgage interest.

We were in a similar position and left the money invested. We lost a bit during the recent recession, but it's starting to come back. We view the fund as a retirement/emergency/home improvement fund. In other words, we don't touch it unless we are doing something that will increase our home's worth (redoing kitchen, building a new deck...). It's there if there is ever an emergency, otherwise it will be there for retirement. (And we continue to invest in our 401ks as if we didn't have this fund.)

Amy, that was kind of what I was thinking but there are so many knowledgable people here on the Dis that I thought I'd run it by you all. I've gotten lots of food for thought here.

 

[Suz D]

Sorry, OP here again. The other thing that I hadn't factored in is that if we pay off our mortgage early we will be investing at least 2/3 of that house payment in our retirement fund. Our payment is about $950 right now (I don't have the exact amount since our HO insurance and taxes are included plus an extra $90.00/month towards the principal). That means we'd probably put another $700.00 in retirement each month.

It will be several weeks before I'm able to talk to the advisor and wanted to have an idea of what I'd like to have happen before I talk to him. I do have to say that I'm so grateful that my father planned so well and thus our retirement is likely very secure now as we continue to contribute to that. What a blessing he has been to my family!

 

[Swimalie]

Count me in the group who thinks you should leave the money invested. You're earning the extra 2.5-5.5% and don't forget the tax deduction from the mortgage interest.

As long as you feel you won't lose any money with your investments, I'd agree with the above.

 

[kimara]

The math says to keep the $ in investments.

Yes, that is what the numbers say. No, that isn't what I would do. I would pay off the mortgage. Get rid of the debt. Be completely clear of all debt and keep the rest in investments. That kind of peace of mind is far beyond the numbers. Put the rest of your inheritance into your investments as well as the amount you have been paying on your mortgage.

When it comes to my home, more than numbers matter.
Hugs to you and yours as you think about your Dad

 

[CouponAngie]

I'm a frugal person and understand a lot of basic things about being financially smart, but when it comes to investing I'm a bit of a dunce. Here's my situation and I'd love to read people's thoughts about the pros and cons of paying off our house.

We owe $175000 on a house that is currently valued at $235000. I will be receiving a substantial inheritance that is enough to pay off the house plus quite a bit left over. The $$ is currently invested through Charles Schwab and will stay with them. It is earning around 7-10% right now (it's invested pretty aggressively).

Our interest rate is 4.62%. So my feeble mind reasons that if I can earn 7-10% on my $$ then why take $175000 of it to pay off $$ that I'm paying just 4.62% on. Doesn't keeping the house financed earn me an extra 2.5-5.5%?

Help me understand this because I always hear "pay off your house ASAP".

First, I'd like to say I'm very sorry for the loss of your father. I have been thru it myself, and know that it is not easy.

I'm a die-hard Dave Ramsey fan. Again, this is just someone else's opinion and a good financial planner is recommended. We went thru Dave's Financial Peace University just over a year ago, and it has changed our life. We are out of debt except for our house, and if I had the money, I would pay it off in a minute! Just knowing that I no longer owed anyone here one this earth would be so completely freeing. I was looking on DR's website, and here's what he has to say about something similar:

Question: Lisa in Vancouver and her husband want to know if they should sell all of their stock investments to pay off their house. What they have in investments is just about equal to their $380,000 mortgage. Their household income is about $175,000 a year. Dave tells Lisa he'd pay it off tomorrow.

Dave Ramsey's advice: Here's the way I figured out how to answer that question years ago for myself. Let's pretend for a second that your house is paid for and you don't have any money at your brokerage account. Would you go borrow $400,000 against that home to invest in single stocks with your broker? It's the same thing. Effectively, on your balance sheet, that's what you've done.

There's no way I'd borrow on my home to invest with a broker, so there's no way I'd leave a brokerage account open another 20 minutes with a home mortgage. Would I pay off my home and take my old $4,000-a-month house payment and automatically start investing that into good mutual funds? Sure! It's what I did when I paid my home off years ago. I pay myself a house payment in one particular account, and I like to just see what not having a house payment in that one mutual fund is worth, and it's already over $1 million.

If I'm wrong and you wake up next spring and you hate having your house paid for and no money in your brokerage account, go get you a mortgage. You can always undo this. When you pay off your house and burn the mortgage, take off your shoes and walk through the backyard. The grass feels different under your feet. The borrower is slave to the lender is deeper than just a mathematical discussion. It frees you up in places you don't even know you're stressed in until you don't have the stress anymore.




Everyone will have a different opinion of course, But having felt the difference that being out of almost all debt in my life, I know that the grass will definitely feel different under my feet when I make that last mortgage payment!!!

Good luck with your decision. You are very fortunate to have had a father who planned so well. He has literally changed your family tree!

 

[hopemax]

While I agree that, as long as the investment earnings are greater than your interest rate, that the math says keep the loan. And if the total money that you would be receiving was about equal to your loan, I would say keep the loan, because if an emergency were to happen, it would be better to have a lot of cash than a paid off house. But since you say that there would be quite a lot left over, then that's not a concern.

However, there are always concerns more than math. Math would dictate that we should never take a vacation while we have a mortgage because spending the money on it is just increasing the time that we have to have a mortgage. I'm not sure how confident I am in the stock market right now. I think a correction is coming, so I'd rather pay off debts, than have the market drop and still have the mortgage. If the market drops 10% are you going to be a person that frets about it, "Argh, we could have used that money for the mortgage!"

Also, I consider inheritance as "found money" and so incremental differences don't really make that much of a difference to me in the long run. If I were to win $100,000 vs $125,000, its still a heck of a lot more than I had yesterday. I'm not sure an extra $3K-$5K a year when I have just received a couple hundred thousand, will trump the positive feeling of owning a house free and clear. I know that after 30 years, of compound interest can be a lot of money, but again, the $3-$5K we spend on our vacation annually could also be a lot of money if invested too.

The good thing is, I don't think there is a wrong answer. It's just a matter of your personality. And I would probably throw in proximity to retirement and the health of your current retirement savings. If you need money for retirement, I would squirrel this away. If you are doing well, then back to it doesn't really matter.

And my condolences for the loss of your father.

 

[mb_uh]

I would pay off the mortgage. Investments can change you could lose the money and still have the debt (lose money because of stock market, or even theft- it does happen). I agree with the poster that says the inheritance is found money you will not miss the extra interest- if there is some. Plus since you state your money would go in to a retirement about much of that would be tax sheltered and reduce your taxable income while still giving you an investment for the future. If the time ever came that you needed your could get another mortgage.

I am sorry your father passed but it is nice that he left you this problem, instead of so many of us that worry how we will afford to bury our parents.