Pay off house?
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Things are different now. I had an easy decision 4 years ago when we came into some money. We paid off our 8% mortgage. We have not had to itemize since Ronald Reagan raised the standard deduction. Our state and local taxes are relative low.
Raising the standard deduction was one of the few things I have seen done right with our taxes in my lifetime. Even if you pay somebody to do your taxes, you still have to keep all the records, and dig everything up at the time. It would be a big pain now since we run around so much with service dog, church, and service club stuff, most of which would be deductible. It would also mean keeping track of every penny we spend on the dog. Much of it is nickel dime stuff, but over a year, it adds up.
Raising the standard deduction was one of the few things I have seen done right with our taxes in my lifetime. Even if you pay somebody to do your taxes, you still have to keep all the records, and dig everything up at the time. It would be a big pain now since we run around so much with service dog, church, and service club stuff, most of which would be deductible. It would also mean keeping track of every penny we spend on the dog. Much of it is nickel dime stuff, but over a year, it adds up.
I bought my house for ~$107,000 and I pay ~$965 a month.
$965 x 360= $347,400
$347,400 - $107,000= $240,400 in interest and insurance and tax!
Seems to me like a no brainer. Something like 50% or more of my monthly payment goes to the banker's pocket.....which after 30 years is something like $173,700. I would definitely pay off my house and begin investing the now extra $965 a month.
I would at least pay off half the principal and invest the rest.
EDIT: I pay 6% interest and ~3% county tax
Gotta build more highschools for disadvantaged children!
[ June 03, 2004, 07:10 PM: Message edited by: Last_Z ]
$965 x 360= $347,400
$347,400 - $107,000= $240,400 in interest and insurance and tax!
Seems to me like a no brainer. Something like 50% or more of my monthly payment goes to the banker's pocket.....which after 30 years is something like $173,700. I would definitely pay off my house and begin investing the now extra $965 a month.
I would at least pay off half the principal and invest the rest.
EDIT: I pay 6% interest and ~3% county tax
[ June 03, 2004, 07:10 PM: Message edited by: Last_Z ]
I would have to cast my vote to pay off the mortgage.If someday in the future DooDoo hits the fan and you lose you job or some other stuff happens you wont be saddled with the monthly payment.That will ease the burden some.... And if you want to save for retirement or kids college or whatever then the money you would have spent monthly can be used for all kinds of things.... And the great peace of mind knowing you are out of debt.
The key is to figure your real rate of interest? you are paying a straight 5.9% but you can take several points off through the tax deductions, and inflation.
What would you make on the 100K in the next 29 years. I would guess it would be a whole lot more than you are paying.
on 100K it only has to double 4.5 times to make 1 million. That means you would have to double your money every 7.2 years in order to make it. That would be exactly 10% in the stock market. Being conservative you can get pretty close to that and if you are aggressive you can easily to that.
If you could average 15% for 29 years. That would be just over 6 doubles. So you are talking 3.2 million dollars.
If it were me, I would pay the mortgage, but maybe add just a little every year or every payment.
That is just me. It sure would nice in 30 years to have a couple of million plus a paid off house. Whereas you pay off the house, and use all your excess income on toys and be broke in 30 years living in a house.
I had this question posed to me alot in my years as a financial advisor and one large thing to consider is the peace of mind in owning your own home regardless of the future. Future leverage is always possible in a worst case scenario. How disciplined are you to make all the math work should you not pay it off? Be wise with your diversity and allocation of the invested money regardless.
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The problem with a 30 year mortgage is that by the time its paid off ..the taxes tend to overshadow any savings in compared economic impact. My father in law had a $250 (I/P) payment in the last year of his mort ...but his taxes had matched that. That is, it was no "liberation" of any true worth.
Investment properties (I own one). Single dwelling properties are a very poor investment unless you BUY right or are otherwise prepared to wait for the value to elevate naturally (like in resort/shore properties). If you pay anywhere near real market value ..you have to charge the exact same amount that anyone who you would want to live in it can afford. You will NEVER make a profit on a single dwelling investment property right off the bat. You also need at least a 3 unit multidwelling property to see any real value. Taxes also come into the picture (property).
The typical realtor formula for ownership is that you "BUY RIGHT". That is, any true savvy realtor NEVER goes to a settlement with a check book in their pocket. If they can't leave the table with cash in their pocket ..or cash recovered from capital outlay ...they don't touch it.
The formula for the current value of an investment property is (it's been a while so bear with me).
Annual income (rents) charged against ALL expenses (today -this year). This includes taxes, maintenance, water and sewer, and ANYTHING incurred to the owner(property insurance ..liability insurance, inspections etc.). The difference is then applied to what that represents as a vitural mortgage payment. Take an 18-20 year rate of return at about 9-10% (a reasonable "average" rate of return over that period of time - for example my Exxon stock held since 1979 has only a dividend of about 3% ..but the realized value with reinvested dividends has been about 12% over that time with many fluctuations between 5% and 20% depending on inflationary conditions).
That's why a single unit or two unit investment property can't "carry itself". The difference is about 30% difference in "investment" value over "real value". Two dwellings that are totally identical in structure and square footage. One a two unit ..one a three unit. The three unit may be worth $245k (investment)..while the two unit will only figure to $165 (investment)...while the two unit can sell for around $200k (real)for owner occupied. The "formula" is to get a property to pay for itself and make you "nothing". Withdraw equity every 5-7 years and repeat the purchase process. Also any of your properties will also be for sale at the right price. This is how you build "wealth" without paying for it. Positive cash flow is nice ..but it can be viewed as under utilized investment money. This naturally requires you to be a "land lord". Not a natural act for many.
Just due to economic uncertainty I would pay off my mortgage and then use home equity loans (short term =2-5year notes) to fund any projects and to avoid some taxes. I tend to believe that aside from intermediate market trends (which require extreme disapline and on hand capital to "capitalize" upon) your reasonable rate of return, long term, is probably going to fall into 7-12% (depending on risk) ..beyond that ..it's "funny money". People were so upset when they had to cash in their certificates of deposit that were paying 10% for 3 or 4%...never figuring out that they were in a 13-18% inflationary market at the time (Carter Administration) of the purchase ...and in a 4-5% inflation rate at the cash in point.
[ June 03, 2004, 12:52 PM: Message edited by: Gary Allan ]
Investment properties (I own one). Single dwelling properties are a very poor investment unless you BUY right or are otherwise prepared to wait for the value to elevate naturally (like in resort/shore properties). If you pay anywhere near real market value ..you have to charge the exact same amount that anyone who you would want to live in it can afford. You will NEVER make a profit on a single dwelling investment property right off the bat. You also need at least a 3 unit multidwelling property to see any real value. Taxes also come into the picture (property).
The typical realtor formula for ownership is that you "BUY RIGHT". That is, any true savvy realtor NEVER goes to a settlement with a check book in their pocket. If they can't leave the table with cash in their pocket ..or cash recovered from capital outlay ...they don't touch it.
The formula for the current value of an investment property is (it's been a while so bear with me).
Annual income (rents) charged against ALL expenses (today -this year). This includes taxes, maintenance, water and sewer, and ANYTHING incurred to the owner(property insurance ..liability insurance, inspections etc.). The difference is then applied to what that represents as a vitural mortgage payment. Take an 18-20 year rate of return at about 9-10% (a reasonable "average" rate of return over that period of time - for example my Exxon stock held since 1979 has only a dividend of about 3% ..but the realized value with reinvested dividends has been about 12% over that time with many fluctuations between 5% and 20% depending on inflationary conditions).
That's why a single unit or two unit investment property can't "carry itself". The difference is about 30% difference in "investment" value over "real value". Two dwellings that are totally identical in structure and square footage. One a two unit ..one a three unit. The three unit may be worth $245k (investment)..while the two unit will only figure to $165 (investment)...while the two unit can sell for around $200k (real)for owner occupied. The "formula" is to get a property to pay for itself and make you "nothing". Withdraw equity every 5-7 years and repeat the purchase process. Also any of your properties will also be for sale at the right price. This is how you build "wealth" without paying for it. Positive cash flow is nice ..but it can be viewed as under utilized investment money. This naturally requires you to be a "land lord". Not a natural act for many.
Just due to economic uncertainty I would pay off my mortgage and then use home equity loans (short term =2-5year notes) to fund any projects and to avoid some taxes. I tend to believe that aside from intermediate market trends (which require extreme disapline and on hand capital to "capitalize" upon) your reasonable rate of return, long term, is probably going to fall into 7-12% (depending on risk) ..beyond that ..it's "funny money". People were so upset when they had to cash in their certificates of deposit that were paying 10% for 3 or 4%...never figuring out that they were in a 13-18% inflationary market at the time (Carter Administration) of the purchase ...and in a 4-5% inflation rate at the cash in point.
[ June 03, 2004, 12:52 PM: Message edited by: Gary Allan ]
The peace of mind can be abig factor, as can the pleasure of not owing money. I paid mine off about 12 years ago even though it didn't make economic sense when I crunched the numbers. One shouldn't value everything in terms of dollars, at least I don't.
Patman
Staff member
We can't claim mortgage interest on our taxes up here, so if I came into some money here is the way I'd spend it:
1. Buy new Corvette
2. Pay off house
3. If any is left, dig a big hole in my backyard, fill with money, and jump around in it like it's a big pile of leaves!
1. Buy new Corvette
2. Pay off house
3. If any is left, dig a big hole in my backyard, fill with money, and jump around in it like it's a big pile of leaves!
That statement right there says it all. It would freak me out to have 100% of my assets tied into one investment. What if they find a sinkhole in your backyard and your house starts falling apart?
Or what if the largest company in your area moves overseas, all the mid-upper income folks move away, low income folks take over, property values deflate 200% and your left holding a house worth $50,000. Sounds scary doesn't it??
I'm just trying to play devils advocate here. It's your money and your decision. So good luck with. Matter of fact I'll be faced with the same thing in about 2 months. Selling one house with a good appreciation and buying another. Should I put all of my profit from the one back into the other?? I haven't figured that out yet.
My situation is a little different though, if I roll all of the profit into another house I don't have to pay any capital gains. But on the other hand I would like to possibly buy some land for a future house when we retire.
What would I choose? Well, some explanation first . . .
Here's an issue I really haven't seen anyone address in this thread. For most taxpayers, the mortgage interest deduction becomes useless over time for two reasons: (1) they pay more and more principal and less and less interest over time, and the deduction is for interest only; and (2) the deduction is only for that amount above the standard deduction, which is roughly $10,000 for a married couple. (Don't have the exact figure handy as I key this, but that's in the ballpark.)
Some time down the road, you will have less interest than your standard deduction, so the deduction will become useless. Ten grand in interest a year is a lot, and we aren't even accounting for increases in the standard deduction with inflation. The standard deduction increases a little every year.
For many lower-income Americans, the deduction is useless for precisely these reasons. According to the US government's own figures, hardly any families earning under $50,000 a year can make use of it. As an example, my mother and stepfather have a manufactured house ("double-wide trailer") on rural land, and though they are retired with a limited income, their total house payments are perhaps $4,000 per year. The interest portion is far less than that, of course, and comes nowhere near the ~$10K standard deduction.
The deduction benefits mostly wealthy Americans buying expensive homes, not your average homeowner--at least not for long. You might get a deduction for the first few years of buying your typical $150,000 house, but eventually you'll be unable to use the deduction--but still have the payments.
Personally, for these reasons, I don't see why we can't scrap the deduction as other countries such as Canada and Australia have--if they had it in the first place. The overly favorable tax treatment in the US for mortage interest (for those who qualify) and for capital gains on home sales since 1997 have led to mass speculation in the housing market, driving the costs of housing out of the reach of many, especially younger couples whose parents were able to buy a house at the same age. The government released a little-noticed report in 1994 that referred to an "overconsumption of housing" in the US, and this was before the 1997 tax changes referred to.
Housing should be a place to live, not a speculative investment. And I see a bubble forming that will burst one day.
After all that explanation, my advice is to pay off the house now. You can use what would have been your mortgage payment to invest or build a nest egg for emergencies.
[ June 04, 2004, 10:34 AM: Message edited by: ekrampitzjr ]
Here's an issue I really haven't seen anyone address in this thread. For most taxpayers, the mortgage interest deduction becomes useless over time for two reasons: (1) they pay more and more principal and less and less interest over time, and the deduction is for interest only; and (2) the deduction is only for that amount above the standard deduction, which is roughly $10,000 for a married couple. (Don't have the exact figure handy as I key this, but that's in the ballpark.)
Some time down the road, you will have less interest than your standard deduction, so the deduction will become useless. Ten grand in interest a year is a lot, and we aren't even accounting for increases in the standard deduction with inflation. The standard deduction increases a little every year.
For many lower-income Americans, the deduction is useless for precisely these reasons. According to the US government's own figures, hardly any families earning under $50,000 a year can make use of it. As an example, my mother and stepfather have a manufactured house ("double-wide trailer") on rural land, and though they are retired with a limited income, their total house payments are perhaps $4,000 per year. The interest portion is far less than that, of course, and comes nowhere near the ~$10K standard deduction.
The deduction benefits mostly wealthy Americans buying expensive homes, not your average homeowner--at least not for long. You might get a deduction for the first few years of buying your typical $150,000 house, but eventually you'll be unable to use the deduction--but still have the payments.
Personally, for these reasons, I don't see why we can't scrap the deduction as other countries such as Canada and Australia have--if they had it in the first place. The overly favorable tax treatment in the US for mortage interest (for those who qualify) and for capital gains on home sales since 1997 have led to mass speculation in the housing market, driving the costs of housing out of the reach of many, especially younger couples whose parents were able to buy a house at the same age. The government released a little-noticed report in 1994 that referred to an "overconsumption of housing" in the US, and this was before the 1997 tax changes referred to.
Housing should be a place to live, not a speculative investment. And I see a bubble forming that will burst one day.
After all that explanation, my advice is to pay off the house now. You can use what would have been your mortgage payment to invest or build a nest egg for emergencies.
[ June 04, 2004, 10:34 AM: Message edited by: ekrampitzjr ]
Pat,quote:
Originally posted by Patman:
We can't claim mortgage interest on our taxes up here, so if I came into some money here is the way I'd spend it:
1. Buy new Corvette
2. Pay off house
3. If any is left, dig a big hole in my backyard, fill with money, and jump around in it like it's a big pile of leaves!
You need a few lessons on financial management! Your priorities are a bit out of whack!
3. If any is left, dig a big hole in my backyard, fill with money, and jump around in it like it's a big pile of leaves!
Just buy a big boat with stern drive that will eat up your extra cash flow.
Just buy a big boat with stern drive that will eat up your extra cash flow.
I had to make a similar decision in 1984 - pay off the house in 7 years or 30 years....
The guys here have already given you a pretty good balanced view of both options.
I chose 7 years.
For you this would mean:
1) Essentially a garranteed rate of return of your 5+ % mort interest because it would be a 5% that you would NOT be paying.
2) There is the security aspect - you will be living with a lower cost of living from now on. Believe me, it has been a pleasure not to have a mort payment for over a decade.
3) If you are financially conservative, you would pay off the mort and then pay yourself each month by investing the same $ that would have been going into the mort.
If you are not so conservative, more adventurous, put the money where you THINK it will make a higher rate of return than your mort rate over the next 30 years. Additional property, mutual funds etc
Good luck.
I bought this house when intrest rates were 10.250 percent in 1988. As intrest rates came down I refied and kicked in money to principle... so I refied a lower mortgage @ a lower intrest rate but still for 30 years with a no prepayment penalty loan.Did this a couple times.... Each time going out 30 years. This gave me a lower monthly payment.... But I still was makeing the same payments as before but applying the extra to principle.... If I were to lose my job or somehow find myself working at McDonalds or something then the lower payments of the 30 year loan would be easier to handle vs the higher payments of the 15 or 10 or whatever shorter loan..... This was my built in protection.... As long as things went right then make the extra payments applied to principle as well as the normal monthly payments.... But if it went bad then just the lower regular payments if my income was cut.... It did feel good to have that option if I ever needed it.
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