Why pay off mortgage?

[Desnik]

I would focus on paying off the car since none of that interest is deductable. I would also focus on getting a 9 to 12 month emergency fund before I start putting money into a house.

The interest on the car is only 0.9%. 9-12 months? Wow, that's the first I heard about that long of an emergency fund but I guess more is better!

Here is an explanation of tax brackets:

http://www.obliviousinvestor.com/2011-tax-brackets/

It is often very confusing and I hear people say, "Oh, I got a raise and now I am in a higher tax bracket so I am not making any more $$" without seeing that the higher tax bracket isn't for ALL of their $$.

Dawn

Thanks for that link! We are not in the 25% bracket, we are in the 28% bracket according to that chart. I don't really know what that means for us as far as interst on our mortgage versus the savings on claiming it on our taxes.

 

[Svhadden]

The idea of purposefully carrying debt is absurd to me. Nothing toward you personally or the FA's who advised you, but debt is debt. You're over a barrel for as long as you owe. There is no tax deduction or tax advantage that I'd value more than being debt free, period. As long as you carry that note, you're paying interest, even if it's low. Over the life of the loan, even 4.5% (for example) interest is a big chuck of money. Hang on to that??? No thanks.

We have become a society that is so used to living even beyond our means (living on credit), that when you DON'T carry a mortgage, it's very unusual. Yeah, well, I'd love to stick out in that way lol.

We have no credit cards, don't do consumer or revolving debt, have no car payments, and are paying off our mortgage as quickly as possible. We do NOT want to be beholden to a bank. I do agree, though, with a PP that the mortgage comes after emergency savings, and retirement.

 

[DawnM]

Yes, but how MUCH of your income is actually taxed at 28%? You don't have to answer that publicly, but according to this chart, if you make $150K AFTER taxes (remember your tax bracket is based on your NET income, not your GROSS), then you would pay 10% on the first $17K, 15% on the next amount up to $69K, 25% on anything above 69K but under $139,350 and then you would only pay 28% on the remaining $10,650.

Does that make sense?

Here is the chart for married filing jointly.

Married Filing Jointly 2011 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$17,000 10%
$17,000-$69,000 15%
$69,000-$139,350 25%
$139,350-$212,300 28%
$212,300-$379,150 33%
$379,150+ 35%

The interest on the car is only 0.9%. 9-12 months? Wow, that's the first I heard about that long of an emergency fund but I guess more is better!



Thanks for that link! We are not in the 25% bracket, we are in the 28% bracket according to that chart. I don't really know what that means for us as far as interst on our mortgage versus the savings on claiming it on our taxes.

As for what it means for you, that would depend on your standard deduction vs. write offs. If your standard deduction for your family is $13K but your interest amount per year is only $6K and you have nothing else to write off, you can't take ANY of the taxes paid as a write off. You won't be paying enough interest.

Dawn

 

[Jeff_G]

Thanks for that link! We are not in the 25% bracket, we are in the 28% bracket according to that chart. I don't really know what that means for us as far as interst on our mortgage versus the savings on claiming it on our taxes.

For every $100 you spend in mortgage interest you save $28 in taxes. So its costing you $72 in interest.

Being in the 28% I would make sure you are putting 15% into 401ks. This will lower your taxable income plus increase your retirement accounts. I'm sure there are calculators online that you can use to determine where that sweet spot is between increasing your 401k contribution and lowering your taxes. If your are on the edge of the 28% bracket you could lower yourself down into the 25% bracket and end up with more take home...

 

[DawnM]

I can tell you what WE did. We sat down and ran some numbers on BankRate.com's calculators and played around for a while with different scenarios.

We finally decided to refi to a 15 year loan. Not only is the interest rate lower with a 15 year, but it saved us over 150K in interest over the life of the loan without paying any more than regular payments.

For example: A $250K loan over 30 years for 4.37% means interest paid of $144K plus the $250K for the actual house. This, vs. 3.37% on a 15 year for the same loan and paying only $69K in interest.

Dawn

 

[Desnik]

Ok, so my plan should be, increase the emergency fund from 6 months to 12 months. Then work on the car, then the mortgage. I already mentioned we have 16% going into the 401K, have life insurance, health insurance covered, a pension for DH, and no consumer debt. Am I missing anything else? I just want to plan for our future as best as I can. Oh, we have 2 kids, 13 & 8 and are saving money for their college as well.

 

[rvchat]

Ok, so my plan should be, increase the emergency fund from 6 months to 12 months. Then work on the car, then the mortgage. I already mentioned we have 16% going into the 401K, have life insurance, health insurance covered, a pension for DH, and no consumer debt. Am I missing anything else? I just want to plan for our future as best as I can. Oh, we have 2 kids, 13 & 8 and are saving money for their college as well.

I feel that if you have the money to pay it off, do so. We did. If you have other ways to make money and are clever about it (invest?) then do that- and keep the loan. The tax deduction can't be (wasn't for us) greater than the interest, so why keep the banks fat?

I don't mean to knock the system, being able to own a home with just a down payment is great if it's an affordable, smart mortgages with a low interest. And we were very lucky to have that option when we bought our place initially. We could have never owned anything without borrowing 80% of it.

 

[bellarella]

Personally, I would have closer to 2 years of expenses in savings before I would consider accelerated mortgage payments if your interest rate is low.

People discount the risk involved in paying off a mortgage quickly. If you are able to pay the whole thing off in one chunk (from an inheritance or something), then it makes sense to look at the interest rate you are paying vs. what you are earning.

But these days unemployment can very easily last 18 mos +. If you were in that position, you would be unlikely to be able to get any money out of your house to cover the minimum on your mortgage plus all your other expenses. So in the process of paying down the mortgage faster you are making your money less liquid. That is a risk and you need to decide what that risk is worth to you.

This is the reason many financial advisors say not to pay it down too fast. The mortgage deduction doesn't off-set the interest rate you are paying, but it does lower the effective interest rate of your loan. Deductions are "last dollar" -- which means they lower your taxable income that is in the highest rate. For every $100 you spend on your mortgage interest a year, you save $28 in taxes. When you multiply that out, you can see what your effective rate is on your mortgage.

As I said before, my effective rate on my mortgage is low enough that I will pay for keeping my money liquid until I have a very, very substantial non-retirement savings. Essentially, I look at as my own unemployment insurance. I could pay off a larger chunk of my mortgage, but the money saved is not worth the liquidity risk for me.

 

[disney1990]

If you look at the tax deduction issue playing with round numbers, lets say your mortgage interest is $10,000, and you are in the 25% tax bracket. You are giving a bank $10,000 so you don't have to give the IRS $2,500. You can give $10,000 to a charity and receive the same deduction. So it doesn’t make sense to keep the mortgage from a tax deduction reason.

Look up how much interest you will be paying over the course of the life of your mortgage and you will see a very good reason to pay it off early.

 

[Halloweenqueen]

I would never pay off my house before having a sizeable savings first.

We built a very nice house with cash. My husband owned his own business and we started to have financial problems. Savings quickly disappeared.

We were fortunate that my husband was able to get a job, but it was out of state.

Our home didn't sell for over two years. During that time we faced many hardships. We ended up selling our home out of desperation to get money to relocate.

The housing market is scary. I would be cautious putting everything into a home right now.

 

[scrapquitler]

OK, in your situation I can see how it was right for you to pay off your mortgage. That makes total sense to me.

For us, we were told that the tax deduction is good. But, am I wrong thinking that we should make extra payments to shorten the length? We have 24 years left, have a low interest rate & have no plans of moving. I am a SAHM & DH is 39 and won't retire for a long time.

The tax deduction being 'good' is a load of rubbish, if you ask me. Sure, if you pay $12,000 in interest, and you get to 'deduct it' it's like getting a 25 or 30% rebate on that $12000 that you paid, but you've still paid out $8 or $9K in interest payments.

Our goal is to pay off our mortgage ASAP. We've got about 4 years left until we will be paid off.

 

[Colleen27]

I read on here all the time about people paying off their mortgage, how everyone should pay it off, etc..
But, DH and I have spoken to 3 different financial advisors and 2 accountants and ALL of them have told us not to pay it off. Is it an age thing, an income thing, a interest rate thing? I just don't really understand it. Why do so many say to pay it off and others say not to? Is there one right answer?

Some of everything, I think. For us, from a purely financial standpoint it was an income/interest rate thing - we're a single income family with three kids. We have little tax liability and not enough deductions to make itemizing worthwhile, even with the interest on our mortgage. So for us, mortgage interest was a cost, plain and simple, without anything to offset even a portion of it.

From a more emotional/lifestyle perspective, there were two other factors at play for us. First and foremost is the security of owning our residence free and clear. My husband is self-employed and his business took quite a hit with the housing collapse, so we simply rest easier without the pressure of having a monthly housing payment. Second and more frivolous is the lifestyle benefit; the end of mortgage payments meant more money to spend elsewhere, and while some gets saved some also gets spent. Neither of our last two Disney trips nor our upcoming trip in '12 would have been possible on our recession-era income if we were still paying on a mortgage taken out in better times.

 

[moonpie85]

The tax deduction being 'good' is a load of rubbish, if you ask me. Sure, if you pay $12,000 in interest, and you get to 'deduct it' it's like getting a 25 or 30% rebate on that $12000 that you paid, but you've still paid out $8 or $9K in interest payments.

Our goal is to pay off our mortgage ASAP. We've got about 4 years left until we will be paid off.

 

[disykat]

For us, watching our mortgage go down and seeing how much interest we had saved (we had it on a spread sheet) was a good way to balance out watching our investment portfolio take nosedives. It was just ONE of our long term savings strategies, and another way of diversifying our long term investment plans. The last 10 years have been ROUGH! It's been nice to have something steadily saving us money.

We held our first mortage on our starter home for 8 years and had paid more into it. That equity helped us have more buying power for our current home. We took out a 30 year loan on this house, but paid off in 12. Overall we paid 20 years on mortgage loans so it isn't like we paid it off immediately, but putting extra towards our principle saved tons of money overall.

We specifically timed paying off our house to coincide with our oldest starting college. It has worked really well for us. Our son just started and we've talked several times about our college savings plans, and of the three ways we used (investments, prepaid units, and paying off mortgage to free up cash flow) we feel that paying off the mortgage was our best strategy. Because of the freed up cash flow we can pretty much pay out of pocket without noticing. We'll use our prepaid units, but will probably save other undesignated investments for other uses.

 

[prncess674]

The interest on the car is only 0.9%. 9-12 months? Wow, that's the first I heard about that long of an emergency fund but I guess more is better!

If your only option for additonal savings is pay down the mortgage or build up the emergency fund, then I would pick the E fund. Getting liquidity out of house used to be easy with all the HELOC loans, but those are long gone. It is taking people longer and longer to sell a home so if you were in an emergency situtation, then your cash is not available since it is sitting all in your house.


No one every thingks the worst things are going to happen to them, but what happens if your husband becomes disabled. Navigating the disability insurance program is long and hard. My Dad fought the system for two years before he started getting his payments.

 

[thomas998]

If your only option for additonal savings is pay down the mortgage or build up the emergency fund, then I would pick the E fund. Getting liquidity out of house used to be easy with all the HELOC loans, but those are long gone. It is taking people longer and longer to sell a home so if you were in an emergency situtation, then your cash is not available since it is sitting all in your house.


No one every thingks the worst things are going to happen to them, but what happens if your husband becomes disabled. Navigating the disability insurance program is long and hard. My Dad fought the system for two years before he started getting his payments.

The emergency fund is the only reason I can think of not to pay it off as soon as possible. I know people claim you only need 6-9 months... being overly cautious I would say you need at least 3 years. That's always been out plan... we make sure we have savings that would give us the ability to live for 3 years with no other sources of income, then we put all out money into paying off all the debt we had.

But people thinking it has some tax benefit are simply idiots. I've had that discussion with my cousin and it took me hours to walk him through the math to show him that he was NOT saving money by having interest he could deduct. It is one of those great myths like a house is an investment, the land is an investment because it doesn't wear out, but a home requires continual upkeep and will eventually waste away to nothing... Not much of an investment in the long term.

 

[puffkin]

My parents use a very reputable financial advisor and have really made some good moves over the years. They still have a mortgage and no plans to pay it off early (the re-fied to a 15 year at 3.5% earlier this year). They plan to retire in another 5 years or so.

They easily have enough in their retirement accounts to pay off their house if needed. Right now they have about 50% equity in the house. They have a fair amount of liquid cash if an emergency arises. Right now their extra income goes into their retirement investments.

My mom would love to have it paid off and not worry about it, but no matter how you look at the numbers it makes zero sense for them to do so. My parents are not wealthy people at all (my dad is a factory worker and my mom is a legal secretary) but they have relied on good/solid professional advice for years and are in a really good place and riding out the current economic climate pretty well.

 

[thomas998]

My parents use a very reputable financial advisor and have really made some good moves over the years. They still have a mortgage and no plans to pay it off early (the re-fied to a 15 year at 3.5% earlier this year). They plan to retire in another 5 years or so.

They easily have enough in their retirement accounts to pay off their house if needed. Right now they have about 50% equity in the house. They have a fair amount of liquid cash if an emergency arises. Right now their extra income goes into their retirement investments.

My mom would love to have it paid off and not worry about it, but no matter how you look at the numbers it makes zero sense for them to do so. My parents are not wealthy people at all (my dad is a factory worker and my mom is a legal secretary) but they have relied on good/solid professional advice for years and are in a really good place and riding out the current economic climate pretty well.

My only question in a situation like this is why do they want to owe money?

Granted a 3.5% mortgage is very low, but there really isn't any place you are going to get a guaranteed return on your money great than 3.5%. I know people love to throw about the average return on stocks of around 8%... but when you look at the actual returns from time to time... there can be some very long times where the return on the market is well below 8% and often well below 3.5%. That 3.5% mortgage is not moving it will continue to suck money at the same rate... I only wonder why a couple that seem so close to retirement would choose not to eliminate the mortgage, as it would seem they are opting for putting more money into riskier things like the stock market at a time when a sure things even the elimination of 3.5% would seem the wiser choice.

 

[puffkin]

My only question in a situation like this is why do they want to owe money?

Granted a 3.5% mortgage is very low, but there really isn't any place you are going to get a guaranteed return on your money great than 3.5%. I know people love to throw about the average return on stocks of around 8%... but when you look at the actual returns from time to time... there can be some very long times where the return on the market is well below 8% and often well below 3.5%. That 3.5% mortgage is not moving it will continue to suck money at the same rate... I only wonder why a couple that seem so close to retirement would choose not to eliminate the mortgage, as it would seem they are opting for putting more money into riskier things like the stock market at a time when a sure things even the elimination of 3.5% would seem the wiser choice.

They are averaging well over 5% return over the last few years. They have been a few quarters they have been in 2-2.5% range but those were horrible for everyone. They just are making a better return on their money by keeping the mortgage. They have an excellent advisor and she is very conservative while my dad is a little more of a risk taker (my mom is uber conservative) so I think they have a good fit.

They also have a fairly large property. My Dad would love to stay there awhile after retirement but if something would happen to him there is no way my mom could maintain the property. So she would sell anyway (and while she loves it there now, she would want to if something happened to my dad and none of us kids want the property). I have run the numbers with them too and it makes more sense for them to continue their current investment strategy.

 

[momto2girls]

The emergency fund is the only reason I can think of not to pay it off as soon as possible. I know people claim you only need 6-9 months... being overly cautious I would say you need at least 3 years. That's always been out plan... we make sure we have savings that would give us the ability to live for 3 years with no other sources of income, then we put all out money into paying off all the debt we had.

I agree. I cringe when people talk about paying things off once they hit 6 months in savings. That might be okay during a good economy, but it seems really dangerous in these times. Three years sounds much safer!

This is why we aren't paying our mortgage off right now. We feel that it is more prudent to have a larger amount of easily accessible cash. Once you pay off your house, the money is "trapped" in the house. You can sometimes get home equity loans, of course, but that is based on the whim of your bank. In this day and age, I wouldn't want to count on it.