Why pay off your house?
Why pay off your house?
Isn't housing a life-long cost? IF you factor it as a constant cost into retirement, do you need to rush to pay it off now?
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
Re: Why pay off your house?
Home ownership has a variety of costs including upkeep, taxes, initial capital outlay, mortgage interest and insurance. Some of these costs should change over the years of ownership. One should hope that the interest cost goes to zero when any loans are paid off.
As far as I know there is no tax deduction for upkeep and capital outlay (principal) nor insurance. Taxes can still be deducted on Schedule A in many (but not all cases) even if the home is paid off.
As for "rush to pay off", I guess this will depend on a number of things, but I would only consider the deduction for interest as a small part in this. Many folks use the after-tax cost of the loan versus what they can earn on the money elsewhere.
I think there is also a valuable option to keep the loan in force, but each person has to place there own price on that option. Many folks ignore that option or put no value on it. Those are usually the same folks who put a high value on "peace of mind" (as opposed to "piece of mind") for having no mortgage debt. They think they own their home free and clear while seemingly ignoring the ongoing costs of taxes, insurance, and maintenance.
Does anybody lose sleep at night thinking about the toilet that leaks, the roof that leaks, the driveway that needs repair, the high cost of property taxes, the broken kitchen appliances? I don't know.
As far as I know there is no tax deduction for upkeep and capital outlay (principal) nor insurance. Taxes can still be deducted on Schedule A in many (but not all cases) even if the home is paid off.
As for "rush to pay off", I guess this will depend on a number of things, but I would only consider the deduction for interest as a small part in this. Many folks use the after-tax cost of the loan versus what they can earn on the money elsewhere.
I think there is also a valuable option to keep the loan in force, but each person has to place there own price on that option. Many folks ignore that option or put no value on it. Those are usually the same folks who put a high value on "peace of mind" (as opposed to "piece of mind") for having no mortgage debt. They think they own their home free and clear while seemingly ignoring the ongoing costs of taxes, insurance, and maintenance.
Does anybody lose sleep at night thinking about the toilet that leaks, the roof that leaks, the driveway that needs repair, the high cost of property taxes, the broken kitchen appliances? I don't know.
Last edited by livesoft on Sat Apr 05, 2014 12:34 pm, edited 1 time in total.
Re: Why pay off your house?
I would prefer to have a mortgage and cash in the bank. Why? Liquidity. It is sure tough to sell a room in time of need.
Also, will a bank be willing to write you a loan against your home equity if you are suddenly laid off, taken sick or the real estate market crashes?
Holding a mortgage and cash/CEQs seems to me to be the prudent person approach. Not all debt is bad. In this case you have shifted some of the downside risk to the mortgage holder assuming you have taken precautions such as a low fixed rate and available cash to make your payments.
~Moshe
Also, will a bank be willing to write you a loan against your home equity if you are suddenly laid off, taken sick or the real estate market crashes?
Holding a mortgage and cash/CEQs seems to me to be the prudent person approach. Not all debt is bad. In this case you have shifted some of the downside risk to the mortgage holder assuming you have taken precautions such as a low fixed rate and available cash to make your payments.
~Moshe
My money has no emotions. ~Moshe |
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- SC Hoosier
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Re: Why pay off your house?
The bank keeps the title until you pay it off. Until then, it's theirs...
No mortgage payment. Free up monthly income to invest.
Lower bills. Need less emergency fund.
No interest expense. I hate making money for banks!
If you can't make the payment, they take it away!
You don't have risk of getting upside down so that you can't sell it.
If you don't care about these things, just rent your whole life and make money for your landlord.
I've never regretted paying off my house and being free of debt. Building wealth is easy now.
Hoosier
No mortgage payment. Free up monthly income to invest.
Lower bills. Need less emergency fund.
No interest expense. I hate making money for banks!
If you can't make the payment, they take it away!
You don't have risk of getting upside down so that you can't sell it.
If you don't care about these things, just rent your whole life and make money for your landlord.
I've never regretted paying off my house and being free of debt. Building wealth is easy now.
Hoosier
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.
Re: Why pay off your house?
Non-interest costs of a house aren't going to change whether or not you have a mortgage. The question is whether or not you want a large collateralized loan against your property, when said loan is not necessary.
The loss of a tax deduction? I would rather keep 100% of my money, than pay a bunch of it out and get 25-30 cents returned to me on the dollar. You might not even get 25 cents back if your mortgage is smaller and/or you don't pay much in state taxes or donate gobs of money to charity. I'd be perfectly happy to pay minimal interest and taxes, while receiving the standard deduction.
Liquidity is a valid argument, but you're paying a price for that. Leveraging your portfolio by using a mortgage (when you don't have to) is that case where I agree with the mortgage-as-a-negative bond camp in terms of needing to adjust your retirement asset allocation. Your bond yields are likely going to be lower than your mortgage, unless you happen to have locked in a low rate and yields have since risen. Of course, if you have a paid off mortgage, you can still access that liquidity - again for a price - if you want to open a HELOC, or take out a HEL.
The loss of a tax deduction? I would rather keep 100% of my money, than pay a bunch of it out and get 25-30 cents returned to me on the dollar. You might not even get 25 cents back if your mortgage is smaller and/or you don't pay much in state taxes or donate gobs of money to charity. I'd be perfectly happy to pay minimal interest and taxes, while receiving the standard deduction.
Liquidity is a valid argument, but you're paying a price for that. Leveraging your portfolio by using a mortgage (when you don't have to) is that case where I agree with the mortgage-as-a-negative bond camp in terms of needing to adjust your retirement asset allocation. Your bond yields are likely going to be lower than your mortgage, unless you happen to have locked in a low rate and yields have since risen. Of course, if you have a paid off mortgage, you can still access that liquidity - again for a price - if you want to open a HELOC, or take out a HEL.
Retirement investing is a marathon.
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Re: Why pay off your house?
Nothing much to add to the points already discussed and the views already expressed.
Personally, I am not afraid of properly managed debt, as long as I'm not joking myself into living on the payment. I could pay off my mortgage today and I did not need a second mortgage to pay for the renovations we are doing right now, but my primary mortgage is (pre-tax) 2.75% fixed and my HELOC is 2.75% variable. At those rates, I prefer the liquidity, can make more with the cash elsewhere, and have my mortgage as an inflation hedge should things get out of control. I sleep just fine at night even though I have the mortgage payment to make every month, but that is probably b/c I also know that if I wanted to write a payoff check next week, I could. Goodness forbid I ever lose my job or run into serious emergencies, I rather have the funds ready to spend than not have a bill to pay.
That said, I would NOT think anyone is "wrong" for valuing not having the payment "over their heads" more than I do and instead opt to pay it off. I also do NOT think it is wrong if a person looks at the "big picture" of their lifestyle AND WHERE THEY WANT TO LIVE and decide that renting is best for them. The devil is in the details you know!
Personally, I am not afraid of properly managed debt, as long as I'm not joking myself into living on the payment. I could pay off my mortgage today and I did not need a second mortgage to pay for the renovations we are doing right now, but my primary mortgage is (pre-tax) 2.75% fixed and my HELOC is 2.75% variable. At those rates, I prefer the liquidity, can make more with the cash elsewhere, and have my mortgage as an inflation hedge should things get out of control. I sleep just fine at night even though I have the mortgage payment to make every month, but that is probably b/c I also know that if I wanted to write a payoff check next week, I could. Goodness forbid I ever lose my job or run into serious emergencies, I rather have the funds ready to spend than not have a bill to pay.
That said, I would NOT think anyone is "wrong" for valuing not having the payment "over their heads" more than I do and instead opt to pay it off. I also do NOT think it is wrong if a person looks at the "big picture" of their lifestyle AND WHERE THEY WANT TO LIVE and decide that renting is best for them. The devil is in the details you know!
Re: Why pay off your house?
If you already have a large enough emergency fund then pay off the mortgage but i personally would not rush to do so.SC Hoosier wrote:The bank keeps the title until you pay it off. Until then, it's theirs...
No mortgage payment. Free up monthly income to invest.
Lower bills. Need less emergency fund.
Based on low interest rates of today you very well might do much better investing the additional monies above and beyond your mortgage payments in a prudent asset mix.
Payments against principal do nothing for you in time of crisis. Personally, i do a bit of both.
My money has no emotions. ~Moshe |
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Re: Why pay off your house?
This debate gets played out regularly here. As with most cases, I think it depends on your situation. Our priority right now, with 25 years to retirement, is to take advantage of tax-advantaged accounts and have our money compound in the stock market. Paying off our very-low interest rate mortgage is a lesser priority, and the probabilities suggest going this route would be a bad idea in terms of overall wealth accumulation.
We're also less concerned about the notion that we'd lose our house than most people. If we both lost our jobs tomorrow and struggled to find comparable work, we would sell our house and move into a lower-cost living situation to preserve our cash flow. If keeping your house is your first priority above all else, you may approach this differently.
We're also less concerned about the notion that we'd lose our house than most people. If we both lost our jobs tomorrow and struggled to find comparable work, we would sell our house and move into a lower-cost living situation to preserve our cash flow. If keeping your house is your first priority above all else, you may approach this differently.
Re: Why pay off your house?
Does anybody lose sleep at night thinking about the toilet that leaks, the roof that leaks, the driveway that needs repair, the high cost of property taxes, the broken kitchen appliances? I don't know.[/quote]
Yes, I do.
Yes, I do.
Re: Why pay off your house?
I always had the goal of paying off my mortgage, and finally achieved it in 2000. I lost my Silicon Valley tech job in 2001 and was only able to work part-time doing contracting work thereafter. Not having a mortgage was an incredible benefit to surviving the loss of predictable income. I was lucky enough to receive 8-months of severance pay, and was able to come up to speed in the contracting market during that time. In the 13 years since losing my job, I only matched my previous salary in one of those years. The worst year I only made $5,000. Largely because I had no debt, I was able to manage (and even thrive) in the years since without tapping into any of my retirement savings because I didn't have to pay a mortgage or rent. It made a huge difference in my financial independence. In the interests of full disclosure, I also married in 2005 and combining households (he had also paid off his mortgage) gave me a lower expense base and I was able to reinvest half of the money from my home sale.
My husband retired 3 years ago at 55 and I fully retired in February of this year at the age of 59. We're traveling and enjoying life, spending conservatively but not pinching pennies. We both credit lack of debt as the primary reason we don't have money worries at this stage of life.
There are lots of reasons not to buy a house or pay one off, but the peace of mind was definitely worth it for me.
My husband retired 3 years ago at 55 and I fully retired in February of this year at the age of 59. We're traveling and enjoying life, spending conservatively but not pinching pennies. We both credit lack of debt as the primary reason we don't have money worries at this stage of life.
There are lots of reasons not to buy a house or pay one off, but the peace of mind was definitely worth it for me.
Re: Why pay off your house?
Thank you all so much. Such sound reasoning.
It seems to be about peace of mind. Either:
1. Pay off your house and rejoice with the lack of payment. Still knowing that home ownership always costs ... taxes, insurance, upkeep.
2. Create enough wealth to have the choice to pay off your house.
Personal comfort. I am of the latter group.
Again, thank you.
It seems to be about peace of mind. Either:
1. Pay off your house and rejoice with the lack of payment. Still knowing that home ownership always costs ... taxes, insurance, upkeep.
2. Create enough wealth to have the choice to pay off your house.
Personal comfort. I am of the latter group.
Again, thank you.
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Re: Why pay off your house?
You can only create enough wealth, if you have a job or profession that provides you with enough disposable income to invest. Many folks make enough just to get by either by paying the rent or paying the mortgage. Paying off the mortgage is a big event for them because suddenly they do have disposable income. Count yourself fortunate if you have enough after expenses to do whatever you want with it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Why pay off your house?
If you have the means to pay it off, you will also have saved paying 30 years of interest.
On a $300,000 mortgage, 30 years at 4.5%, you will pay $247,000 in interest.
On a $300,000 mortgage, 30 years at 4.5%, you will pay $247,000 in interest.
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Re: Why pay off your house?
Not that simple I am afraid. $247,000 of what time frame dollars? Today's dollars? Money you pay tomorrow is worth less than money you pay today because of inflation.Dave55 wrote:If you have the means to pay it off, you will also have saved paying 30 years of interest.
On a $300,000 mortgage, 30 years at 4.5%, you will pay $247,000 in interest.
Also, you get a tax shield on interest payed when you figure your taxes. That deduction also needs to be taken into account based on your tax bracket at the time of payment.
Isn't finance fun?
~Moshe
My money has no emotions. ~Moshe |
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Re: Why pay off your house?
I travel a lot for work, and get paid quite a bit for it. I have two children now that I didn't have as a single man starting out in the maritime industry. I need to plan on a 50 to 60% pay cut when transitioning to a shore based job that has me home with my family. A paid-for home is one less thing to worry about about when I change jobs.
My wife stays home with the kids. A paid for home gives her the freedom to get by with a part time job if necessary should something happen to me. By paying off the house, I don't have to buy a life insurance policy sized for that possibility. My basic FEGLI is sufficient to keep my family comfortable.
What if I got RIF'd? It is speculation, but it would allow me to stretch my dollar that much further with no payment but the semi-annual property tax due to the town.
I thought about getting a mortgage, I just didn't see enough of an upside for my particular situation.
My wife stays home with the kids. A paid for home gives her the freedom to get by with a part time job if necessary should something happen to me. By paying off the house, I don't have to buy a life insurance policy sized for that possibility. My basic FEGLI is sufficient to keep my family comfortable.
What if I got RIF'd? It is speculation, but it would allow me to stretch my dollar that much further with no payment but the semi-annual property tax due to the town.
I thought about getting a mortgage, I just didn't see enough of an upside for my particular situation.
Went from 14 funds to 4 Funds - TSM, TISM, F, and G!
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Re: Why pay off your house?
Not really.SC Hoosier wrote:The bank keeps the title until you pay it off.
You own the home on the day of settlement. The title (deed) to the land (and all improvements - e.g. the house) is immediately registered as your property.
The "mortgage" is the document that the bank places a claim upon your property as collateral for the note (the actual loan) that you signed for.
When you pay it off, the mortgage is released. There is no deed transfer at the end of the payoff. Of course, you do want to have that claim/release recorded (county court house, normally) to remove that encumberance against the property which may show up on a title insurance search if you ever sell your property.
As for the OP's question. We paid off (all four) of our notes early, along the way, over 40+ years of home ownership. In the early years, it was to ensure that we had a home regardless of loss of jobs (went through a few layoff's back in the 80's). This also means you don't have to have quite as large an emergency fund to cover those possible times of making payments due to loss of a job.
As for tax credit? We could never see making a $1 payment in order to get back $.25 in taxes. Our current (retirement) home had a 30-year 6.875% note. We paid it off in 5.5 years, "saving" over $120k in "foregone interest" (interest we never had to pay).
Just one other thing. In our case, we paid off the note in late 1999 and then took our monthly payment and invested it. If anybody remembers what happened over the next few years, you know we purchased a lot of funds at a discount. One of the results of this was that we were able to move up our planned retirement from our mid-60's to the late 50's. This was all to a bit of luck on our part, but we would not have had the opportunity if we still were making those payments.
As you can tell, we're for paying it off - and as soon as possible.
FWIW,
- Ron
Re: Why pay off your house?
Another option is if you are currenlty not sure, double your payments for 1 year and see how you feel about it. This way you are decreasing the length of your loan, but not dropping everything all at once. dollar cost averaging your loan so to speak. Over the coarse of the year, you can decide if that peace of mind is worth it. I forsee one of few things happening.
1) Your cash reserve grows making it even easier to pay it off.
2) Something comes up decreasing that cash reserve and you will be glad you had it
3) Nothing changes and your in the same boat as you are now except you knocked off over a year off your mortgage payments.
to me all three are good scenarios
-Beck
1) Your cash reserve grows making it even easier to pay it off.
2) Something comes up decreasing that cash reserve and you will be glad you had it
3) Nothing changes and your in the same boat as you are now except you knocked off over a year off your mortgage payments.
to me all three are good scenarios
-Beck
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- stevewolfe
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Re: Why pay off your house?
Why should I factor housing as a life long cost when I can eliminate a large chunk of that cost (e.g., principal and interest) prior to retirement?Rufus608 wrote:Isn't housing a life-long cost? IF you factor it as a constant cost into retirement, do you need to rush to pay it off now?
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
What tax deduction? Not everyone that buys a home gets a deduction, we didn't as we didn't pay enough in interest on the mortgage to itemize.
I have assets other than my home that are liquid.
Confused.....
- TheTimeLord
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Re: Why pay off your house?
Send me $100 and I will send you $20 back. It will be the same as getting the " tax deduction"Rufus608 wrote:Isn't housing a life-long cost? IF you factor it as a constant cost into retirement, do you need to rush to pay it off now?
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
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Re: Why pay off your house?
As you get older your asset allocation gets more like “your age in bonds”. By the time you are 50 half or more of the money that you could use to pay down the house would be invested in bonds if you don't pay it off, so it becomes harder to make the investments outperform the mortgage rate. A significant amount of your portfolio could actually be invested in mortgage bonds by then.
Using a mortgage for leverage increases the amount of leverage you are using so a 25% stock market decline may have a larger affect. When you are retired and paying your mortgage out of your investments it is harder to wait for the market to recover so your investments will actually outperform the mortgage.
Using a mortgage for leverage increases the amount of leverage you are using so a 25% stock market decline may have a larger affect. When you are retired and paying your mortgage out of your investments it is harder to wait for the market to recover so your investments will actually outperform the mortgage.
- TomatoTomahto
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Re: Why pay off your house?
To further complicate it, you might find yourself benefitting from the standard deduction, especially if the lion's share of your itemized deduction was the mortgage (eg low state and property taxes, medical expense below threshold, etc).moshe wrote:[snip...]
Also, you get a tax shield on interest payed when you figure your taxes. That deduction also needs to be taken into account based on your tax bracket at the time of payment.
I get the FI part but not the RE part of FIRE.
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Re: Why pay off your house?
Yes, and money you pay tomorrow can be worth more to you in the future, if you a)take a paycut, b)lose your sole source of income, c) receive a wage increase that is less than the rate of your own personal inflation rate (see "a" if you don't understand what is meant by that) and d)provides more emotional comfort to you having it in the bank or any other income producing asset.moshe wrote:Not that simple I am afraid. $247,000 of what time frame dollars? Today's dollars? Money you pay tomorrow is worth less than money you pay today because of inflation.Dave55 wrote:If you have the means to pay it off, you will also have saved paying 30 years of interest.
On a $300,000 mortgage, 30 years at 4.5%, you will pay $247,000 in interest.
Also, you get a tax shield on interest payed when you figure your taxes. That deduction also needs to be taken into account based on your tax bracket at the time of payment.
Isn't finance fun?
~Moshe
Isn't understanding human behavior even more enlightening?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
- BrandonBogle
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Re: Why pay off your house?
Ron, given the economics of the time (what safer investments were paying), a 6.875% note would have been something I would have paid off as well. That said, you statement of "forgone interest" implies that you would not have done anything with the money for the mortgage had you not paid it off. In my case, the money I have right now to pay off my mortgage is making more than the rate of my mortgage. If someone has the persona as me, that is not worried about having the payment b/c they have the money backing it up, why would someone exchange a higher paying asset for a lower paying asset? Now, if one has the persona that puts value to that "peace of mind", that value might be higher than the difference between the higher and lower paying assets. But with that peace of mind value being zero, to me it does not make sense.Ron wrote: As for tax credit? We could never see making a $1 payment in order to get back $.25 in taxes. Our current (retirement) home had a 30-year 6.875% note. We paid it off in 5.5 years, "saving" over $120k in "foregone interest" (interest we never had to pay).
Just one other thing. In our case, we paid off the note in late 1999 and then took our monthly payment and invested it. If anybody remembers what happened over the next few years, you know we purchased a lot of funds at a discount. One of the results of this was that we were able to move up our planned retirement from our mid-60's to the late 50's. This was all to a bit of luck on our part, but we would not have had the opportunity if we still were making those payments.
As you can tell, we're for paying it off - and as soon as possible.
FWIW,
- Ron
Re: Why pay off your house?
This wasn't necessarily a benefit. If you had kept the mortgage and invested the money, you would still have owed the mortgage payments, but you would have had the money to make them.JaneyLH wrote:I always had the goal of paying off my mortgage, and finally achieved it in 2000. I lost my Silicon Valley tech job in 2001 and was only able to work part-time doing contracting work thereafter. Not having a mortgage was an incredible benefit to surviving the loss of predictable income.
Paying off the mortgage was a better move than spending all the money, which is how you probably viewed it. But it may or may not have been better than investing the money, depending on how your investments would have compared.
Re: Why pay off your house?
I think most folks already made good points both for and against it.
To me its just personal choice, I paid cash for my last house, I think of it as a bond the amount it saves me (equivalant rent - property taxes - maintenance). So I allocate more of my money into stocks and other investments.
I use the standard deduction nearly all the time, so I never would have missed the 25% cut off the mortgage interest anyhow.
Had I lived in CA, maybe I would have taken the banker up on his offer to loan me 1 million for a house, since I could have stopped paying and walked away free and clear. So some states are such that having a mortgage does put more of the risk on the bank, and there I could see more arguement for having a mortgage.
To me its just personal choice, I paid cash for my last house, I think of it as a bond the amount it saves me (equivalant rent - property taxes - maintenance). So I allocate more of my money into stocks and other investments.
I use the standard deduction nearly all the time, so I never would have missed the 25% cut off the mortgage interest anyhow.
Had I lived in CA, maybe I would have taken the banker up on his offer to loan me 1 million for a house, since I could have stopped paying and walked away free and clear. So some states are such that having a mortgage does put more of the risk on the bank, and there I could see more arguement for having a mortgage.
Re: Why pay off your house?
Yes and no. In CA, we have trust deeds. The trust holds the deed to your house. When you pay off your mortgage, there is a deed transfer, called a reconveyance of the deed of trust. In essence, there are two simultaneous owners.Ron wrote:Not really.SC Hoosier wrote:The bank keeps the title until you pay it off.
You own the home on the day of settlement. The title (deed) to the land (and all improvements - e.g. the house) is immediately registered as your property.
The "mortgage" is the document that the bank places a claim upon your property as collateral for the note (the actual loan) that you signed for.
When you pay it off, the mortgage is released. There is no deed transfer at the end of the payoff.
Legal title to one, equitable title to the other. So who actually owns the property?In real estate in the United States, a deed of trust or trust deed is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan (debt) between a borrower and lender. The equitable title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the deed of trust.
It ain't you.At common law equitable title is the right to obtain full ownership of property, where another maintains legal title to the property. Legal title is actual ownership of the property.
(But it ain't the bank either. It's the trust.)
Re: Why pay off your house?
P.S. That's why there are two types of foreclosures in CA. Judicial, where the lender goes before a judge, and non-judicial, where the lender calls up the trustee and says, "Joe hasn't made his mortgage payments. I would like my house now." And the trustee will give the house to the lender, just like that (or sort of).
Re: Why pay off your house?
Liquidity is important so I wouldn't leave myself short to pay off the mortgage. With a paid off house you have freed up years of extra monthly income to invest and protected yourself somewhat from losing your home in a bad economy/job loss. Having debt just to maintain a tax deduction for the interest doesn't make sense to me. I'd rather have more monthly income to save, invest or enjoy.
When I was in my early 50's I lost my job with one in college and another ready to go. I was fortunate to have some savings but not having to pay a monthly mortgage tab was a big relief as I scrambled to readjust my life and economics. I always had a HELOC available if I needed it as part of my money management tool box and it provided some tax relief when used.
When I was in my early 50's I lost my job with one in college and another ready to go. I was fortunate to have some savings but not having to pay a monthly mortgage tab was a big relief as I scrambled to readjust my life and economics. I always had a HELOC available if I needed it as part of my money management tool box and it provided some tax relief when used.
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Re: Why pay off your house?
Lots of good thoughts in this thread. Regarding the tax deduction, the economics are the same between a mortgage interest deduction and a charitable donation deduction. You can give your mortgage lender $100 of interest and deduct $25, or you can give $100 to your favorite charity and deduct $25. Despite what realtors would like you to believe, there's no reason to favor some bank over your favorite charity.
Regarding taxes and upkeep, I wonder if it's really the case that you avoid those by renting. Isn't the market rate of the lease going to reflect those costs which nominally belong to the landlord? So the landlord pays them but builds them into the rent you pay him? Is it fundamentally different than the question of who bears the burden of employment taxes (I believe there is consensus around the fact that the employee bears the cost of both the employee and employer portion of FICA)?
Regarding taxes and upkeep, I wonder if it's really the case that you avoid those by renting. Isn't the market rate of the lease going to reflect those costs which nominally belong to the landlord? So the landlord pays them but builds them into the rent you pay him? Is it fundamentally different than the question of who bears the burden of employment taxes (I believe there is consensus around the fact that the employee bears the cost of both the employee and employer portion of FICA)?
Re: Why pay off your house?
It is a simple financial calculation - even if the inputs to that calculation may be a little fuzzy.Rufus608 wrote:Isn't housing a life-long cost? IF you factor it as a constant cost into retirement, do you need to rush to pay it off now?
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
What it comes down to is what is your interest rate on the mortgage versus what you earn on other uses of the same money. If you want to take into account any emotional considerations like 'being mortgage free' you can but I personally don't find much value in it and you should at least recognize that it may come at a cost.
Loss of a tax deduction is one reason not to be considered at all (other than for calculating the true interest rate).
Re: Why pay off your house?
The title is in your name, it is yours not theirs.SC Hoosier wrote:The bank keeps the title until you pay it off. Until then, it's theirs...
At the expense of having the money tied into the house instead of other investments that may earn more than the house+interest expenseNo mortgage payment. Free up monthly income to invest.
With less cash on hand because you used it to payoff the mortgage so you have less of an emergency fundLower bills. Need less emergency fund.
And greater opportunity costs by not having the money to invest elsewhere. Seems you hate making money for yourself too.No interest expense. I hate making money for banks!
Or rent because it carries less financial risk than owning and can very easily end up being cheaper over ones lifetime. Sometimes, both you and the person you are helping to make money benefit from the arrangement - who knew.If you don't care about these things, just rent your whole life and make money for your landlord.
And I've never regretted carrying my mortgage with a ridiculously low interest rate. Building wealth is easy now.I've never regretted paying off my house and being free of debt. Building wealth is easy now.
Hoosier
Re: Why pay off your house?
What avalpert says is what I believe - it comes down to what you would otherwise do with the same money. Assume a 4% mortgage. If your choice is prepaying the mortgage or going on a shopping spree, prepay the mortgage. If your alternative is parking the money in a savings account or CD at today's rates, prepay the mortgage. If your alternative is maxing out a Roth IRA or 401k that will be invested for 20+ years, then don't prepay the mortgage.avalpert wrote:It is a simple financial calculation - even if the inputs to that calculation may be a little fuzzy.Rufus608 wrote:Isn't housing a life-long cost? IF you factor it as a constant cost into retirement, do you need to rush to pay it off now?
If yes, what about the loss of a tax deduction?
Don't you want your money more liquid than dependent on the real estate market?
Confused.....
What it comes down to is what is your interest rate on the mortgage versus what you earn on other uses of the same money. If you want to take into account any emotional considerations like 'being mortgage free' you can but I personally don't find much value in it and you should at least recognize that it may come at a cost.
Loss of a tax deduction is one reason not to be considered at all (other than for calculating the true interest rate).
- BrandonBogle
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Re: Why pay off your house?
Agreed with me here too. Works out even better for me as my mortgage is less than 4%, making today's rates more attractive than my mortgage. With Vanguard's Long Term Muni (average maturity and duration 7 years), I'm earning an SEC yield of 3.1% (distribution yield of 4.15%) fed tax free (I'm in the 25% fed bracket currently since I max out my Traditional 401k) while paying 2.75% on my mortgage. I itemize and qualify to take my property tax deduction -- but even if I couldn't, the numbers make sense for me to not pay off my mortgage and earn "on the spread" to compensate for the additional risk of Vanguard's Muni fund (low risk) vs. my mortgage payoff (risk-free). Given that I am NOT one of those worried about having a mortgage (I sleep just fine ), it is an acceptable risk premium to me.NorCalDad wrote: What avalpert says is what I believe - it comes down to what you would otherwise do with the same money. Assume a 4% mortgage. If your choice is prepaying the mortgage or going on a shopping spree, prepay the mortgage. If your alternative is parking the money in a savings account or CD at today's rates, prepay the mortgage. If your alternative is maxing out a Roth IRA or 401k that will be invested for 20+ years, then don't prepay the mortgage.
Re: Why pay off your house?
And that's how I see it as well. My mortgage is 15 years at 2.625% (I paid 2.75 points to get that low a rate, but that's money already gone, so it is irrelevant to the decision whether to pay it off), which is 1.89% after 28% federal tax. I could earn 3.10% after tax if I invested the money in Long-Term Tax-Exempt, and that's good compensation for the slight credit risk. (I actually chose not to do it that way; my taxable account is all stock, and I have a bond allocation equal to my mortgage balance in my employer plan.)BrandonBogle wrote:Agreed with me here too. Works out even better for me as my mortgage is less than 4%, making today's rates more attractive than my mortgage. With Vanguard's Long Term Muni (average maturity and duration 7 years), I'm earning an SEC yield of 3.1% (distribution yield of 4.15%) fed tax free (I'm in the 25% fed bracket currently since I max out my Traditional 401k) while paying 2.75% on my mortgage.NorCalDad wrote: What avalpert says is what I believe - it comes down to what you would otherwise do with the same money. Assume a 4% mortgage. If your choice is prepaying the mortgage or going on a shopping spree, prepay the mortgage. If your alternative is parking the money in a savings account or CD at today's rates, prepay the mortgage. If your alternative is maxing out a Roth IRA or 401k that will be invested for 20+ years, then don't prepay the mortgage.
Re: Why pay off your house?
I love how people talk about losing the property tax deduction like its a big deal. Uh, I'd rather not pay interest in the first place.
Re: Why pay off your house?
I'm not sure how many people still favor age in bonds these days. At 50, I was 70/30 stocks/bonds. But I am definitely in favor of having a paid off mortgage at retirement. OTOH, I think those folks who proudly announce they paid (or will pay) their mortgage off at 35 or 40 are ignoring the opportunity costs! Especially anyone who was able to lock in a recent ridiculously low 30-year fixed interest rate.Watty wrote:As you get older your asset allocation gets more like “your age in bonds”. By the time you are 50 half or more of the money that you could use to pay down the house would be invested in bonds if you don't pay it off, so it becomes harder to make the investments outperform the mortgage rate. A significant amount of your portfolio could actually be invested in mortgage bonds by then.
Using a mortgage for leverage increases the amount of leverage you are using so a 25% stock market decline may have a larger affect. When you are retired and paying your mortgage out of your investments it is harder to wait for the market to recover so your investments will actually outperform the mortgage.
IMO, moderation is the key.
- If paying off your mortgage will leave you with 90% of your net worth in illiquid real estate, then it is definitely a bad idea. The more liquid assets you will still have after paying off the mortgage, the more sense it makes to reduce your mortgage aggressively.
- If doubling up on mortgage payments means you aren't currently taking full advantage of your employer plan it is likely a bad idea (depending on how high the plans fees are). Having a sizable nest egg in a tax-advantaged plan at an early age is priceless. When you take into account that your contribution is capped, you may never be able to make up the difference with your freed up cash flow.
- If you are sacrificing the company match in your employers plan to double up, it is definitely a bad idea.
However, if none of the above are true, you should consider it. If the assets needed to pay off the mortgage are already sitting in conservative investments then go for it. You'll be getting your "peace of mind" at a lower cost.
- BrandonBogle
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Re: Why pay off your house?
David, much of my plan for the "mortgage equivalent" came from discussions with you in other threads! I had the money to pay off my mortgage already, but I'm also at a (slight) surplus per month. I was tempted to start prepaying my mortgage b/c of 'lack' of something with the right risk level (and premium) for me. Thanks to advice you provided elsewhere, I was attracted to VWLUX and that is where my excess is going (after maxing out the retirement accounts available to me).grabiner wrote:And that's how I see it as well. My mortgage is 15 years at 2.625% (I paid 2.75 points to get that low a rate, but that's money already gone, so it is irrelevant to the decision whether to pay it off), which is 1.89% after 28% federal tax. I could earn 3.10% after tax if I invested the money in Long-Term Tax-Exempt, and that's good compensation for the slight credit risk. (I actually chose not to do it that way; my taxable account is all stock, and I have a bond allocation equal to my mortgage balance in my employer plan.)BrandonBogle wrote:Agreed with me here too. Works out even better for me as my mortgage is less than 4%, making today's rates more attractive than my mortgage. With Vanguard's Long Term Muni (average maturity and duration 7 years), I'm earning an SEC yield of 3.1% (distribution yield of 4.15%) fed tax free (I'm in the 25% fed bracket currently since I max out my Traditional 401k) while paying 2.75% on my mortgage.NorCalDad wrote: What avalpert says is what I believe - it comes down to what you would otherwise do with the same money. Assume a 4% mortgage. If your choice is prepaying the mortgage or going on a shopping spree, prepay the mortgage. If your alternative is parking the money in a savings account or CD at today's rates, prepay the mortgage. If your alternative is maxing out a Roth IRA or 401k that will be invested for 20+ years, then don't prepay the mortgage.
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Re: Why pay off your house?
One answer is answered mathematically. If the interest rate is low enough (after taxes are considered), then carry a mortgage. The rest of it is purely an emotional answer. The emotional one usually carries the day. I am in the pay it off category, since I spent too much time going back and forth. I had enough cash in a very low risk environment for a long time until I pulled the trigger and paid it off. I have zero regrets.
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Re: Why pay off your house?
Assuming you have decent liquidity and are on track for retirement savings having a mortgage rather than paying it off is not always logical. Sure you can invest the money and it may or may not grow. Paying off the mortgage is a sure thing. There are no safe "investments" that pay more than most mortgages I'm aware of. Unfortunately, paying off a substantial part of your mortgage just shortens the term and doesn't lower the monthly payment. So you reduce your liquidity but don't get the benefit of lower monthly payments immediately.
Agree that low mortgage interest rates tend to tip the scales a bit. But, how many people that have paid off their mortgage are willing to take out a low interest mortgage loan and invest it? It is a great feeling not to have a monthly mortgage payment. During the recent crisis I'm guessing people with no mortgage didn't lose their homes at a rate compared to people who did carry a mortgage. If you lose your home you probably lose much if not all of any built up equity since it will be sold with a price to reimburse the bank's exposure.. You have relocation expenses and plenty of emotional adjustments for you and your family. So you can make it a pure mathematical exercise or bring in other factors.
If you don't have much liquidity and/or are not able to fund your retirement each year then a low interest mortgage payoff is not as high a priority.
Agree that low mortgage interest rates tend to tip the scales a bit. But, how many people that have paid off their mortgage are willing to take out a low interest mortgage loan and invest it? It is a great feeling not to have a monthly mortgage payment. During the recent crisis I'm guessing people with no mortgage didn't lose their homes at a rate compared to people who did carry a mortgage. If you lose your home you probably lose much if not all of any built up equity since it will be sold with a price to reimburse the bank's exposure.. You have relocation expenses and plenty of emotional adjustments for you and your family. So you can make it a pure mathematical exercise or bring in other factors.
If you don't have much liquidity and/or are not able to fund your retirement each year then a low interest mortgage payoff is not as high a priority.
Re: Why pay off your house?
Because banks don't foreclose on houses that have been paid off.
Having said that, if I had high property taxes I would move. I like having a paid off house with low property taxes. It is more money I have each month and less money I will need in retirement. I own a townhome and my upkeep is very minimal. Besides, I can always take out another mortgage if I decide I hate being debt free. So far (since last) year, I don't see any reason why I would ever take out a mortgage again. Ric Edelman is against having a paid-off home and I have listened to his arguments, but in the end I rather not have one. It really comes down to splitting hairs when it comes to this topic.
There is a nice feeling knowing the bank is not your partner.
Having said that, if I had high property taxes I would move. I like having a paid off house with low property taxes. It is more money I have each month and less money I will need in retirement. I own a townhome and my upkeep is very minimal. Besides, I can always take out another mortgage if I decide I hate being debt free. So far (since last) year, I don't see any reason why I would ever take out a mortgage again. Ric Edelman is against having a paid-off home and I have listened to his arguments, but in the end I rather not have one. It really comes down to splitting hairs when it comes to this topic.
There is a nice feeling knowing the bank is not your partner.
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- BrandonBogle
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Re: Why pay off your house?
Until last year, I had 6% CDs at PenFed while having a 2.75% mortgage, also from PenFed. Currently, I have some 3% CDs at PenFed (bought in December 2013 and January this year), some 2-2.5% Stable Value Funds in 401ks, and 3.10% SEC yield (4.15% distribution yield) Vanguard LT Muni fund (which, at my 25% Fed tax rate is tax equivalent yield of 4.13% SEC). So far so with keeping safe investments above my mortgage. And I get the "bonus" of the tax deduction of my mortgage (I don't consider that when decided to keep versus pay off, but it is "bonus" when I keep it), making it equivalent to 2.1%.Dandy wrote:Assuming you have decent liquidity and are on track for retirement savings having a mortgage rather than paying it off is not always logical. Sure you can invest the money and it may or may not grow. Paying off the mortgage is a sure thing. There are no safe "investments" that pay more than most mortgages I'm aware of.
That said, as you alluded to, it depends on the rates you can get and the emotional value you put on being debt-free.
Re: Why pay off your house?
+1 Same here. Thanks David!! I was in Long-term tax exempt. In 2013 I harvested losses and jumped over to high-yield tax exempt.BrandonBogle wrote:David, much of my plan for the "mortgage equivalent" came from discussions with you in other threads! I had the money to pay off my mortgage already, but I'm also at a (slight) surplus per month. I was tempted to start prepaying my mortgage b/c of 'lack' of something with the right risk level (and premium) for me. Thanks to advice you provided elsewhere, I was attracted to VWLUX and that is where my excess is going (after maxing out the retirement accounts available to me).grabiner wrote:And that's how I see it as well. My mortgage is 15 years at 2.625% (I paid 2.75 points to get that low a rate, but that's money already gone, so it is irrelevant to the decision whether to pay it off), which is 1.89% after 28% federal tax. I could earn 3.10% after tax if I invested the money in Long-Term Tax-Exempt, and that's good compensation for the slight credit risk. (I actually chose not to do it that way; my taxable account is all stock, and I have a bond allocation equal to my mortgage balance in my employer plan.)BrandonBogle wrote:Agreed with me here too. Works out even better for me as my mortgage is less than 4%, making today's rates more attractive than my mortgage. With Vanguard's Long Term Muni (average maturity and duration 7 years), I'm earning an SEC yield of 3.1% (distribution yield of 4.15%) fed tax free (I'm in the 25% fed bracket currently since I max out my Traditional 401k) while paying 2.75% on my mortgage.NorCalDad wrote: What avalpert says is what I believe - it comes down to what you would otherwise do with the same money. Assume a 4% mortgage. If your choice is prepaying the mortgage or going on a shopping spree, prepay the mortgage. If your alternative is parking the money in a savings account or CD at today's rates, prepay the mortgage. If your alternative is maxing out a Roth IRA or 401k that will be invested for 20+ years, then don't prepay the mortgage.
Re: Why pay off your house?
With a low mortgage rate, tax deduction, and inflation taken into account, a lot of mortgages are effectively zero anyway. I see no reason to pay them off when there are better investments to be had.
Re: Why pay off your house?
Why not, i would ask of you. It's a sure thing for whatever the interest rate your home was financed at.
Are we really that greedy? Can we not live debt free and be happy? To really feel free, one must not own debt, so pay off loans, and stop being owned by banks. Have fun friends, and enjoy what you've got. Work hard and be honest.
PS. Best thing I ever did with my boys, was to cut off the tie to cable TV before they came along. Learning to read makes a big difference in a childs life.
We don't miss, what we've never enjoyed. Both love reading, and do well in school situations. It effectively gives then an advantage over many others for fewer jobs of the future. I hope I'm wrong about that, but we just don't really know the future that well.
I'm adding that we now recieve over 34 channel of HDTV over public networks. Very nice programs from all decades.
Are we really that greedy? Can we not live debt free and be happy? To really feel free, one must not own debt, so pay off loans, and stop being owned by banks. Have fun friends, and enjoy what you've got. Work hard and be honest.
PS. Best thing I ever did with my boys, was to cut off the tie to cable TV before they came along. Learning to read makes a big difference in a childs life.
We don't miss, what we've never enjoyed. Both love reading, and do well in school situations. It effectively gives then an advantage over many others for fewer jobs of the future. I hope I'm wrong about that, but we just don't really know the future that well.
I'm adding that we now recieve over 34 channel of HDTV over public networks. Very nice programs from all decades.
Last edited by rustymutt on Tue Dec 23, 2014 10:40 am, edited 5 times in total.
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Re: Why pay off your house?
For context, OP Rufus 608 has a "new house 30 year mortgage about 245k at 4.375% interest ", and is thinking about spouse retiring in 6 years and OP retiring in 15 years. "Are we saving too much or too litte?"
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Re: Why pay off your house?
I could earn 3.10% after tax if I invested the money in Long-Term Tax-Exempt, and that's good compensation for the slight credit risk.
Bonds and bond funds have credit and interest rate risk. Agreed not necessarily lose your shirt risk. Paying off a mortgage has no risk. Why not take out more loan and invest in muni bond funds?
It isn't a dumb decision to pay off or not to and invest. It relates to whether you want to lower risk or go for growth or tax free income with some risk. While there is some emotional satisfaction to being debt free - it isn't all about emotion.
Bonds and bond funds have credit and interest rate risk. Agreed not necessarily lose your shirt risk. Paying off a mortgage has no risk. Why not take out more loan and invest in muni bond funds?
It isn't a dumb decision to pay off or not to and invest. It relates to whether you want to lower risk or go for growth or tax free income with some risk. While there is some emotional satisfaction to being debt free - it isn't all about emotion.
Re: Why pay off your house?
I one time read a quote from a financial advisor that said (paraphrasing) - It doesn't make sense but the people that come into my office and ask if they can retire in their 50s and I initially think no way looking at them, and then look at their portfolio and realize they can - most of them paid off their mortgage early.
This is purely anecdotal but it struck me.
I think it's a behavior thing. You just get used to living below means and not having access to the money.
I don't see a lot of people that pay off mortgage at the expense of investing. I think most forgo expensive things to do it and that's where the payoff comes. Pretty soon your 401k is stocked and the mortgage is gone.
This is purely anecdotal but it struck me.
I think it's a behavior thing. You just get used to living below means and not having access to the money.
I don't see a lot of people that pay off mortgage at the expense of investing. I think most forgo expensive things to do it and that's where the payoff comes. Pretty soon your 401k is stocked and the mortgage is gone.
Re: Why pay off your house?
Assuming all tax advantaged space is filled:
Prepay mortgage (4.5%) or fund taxable account?
Prepay mortgage (4.5%) or fund taxable account?
Re: Why pay off your house?
How long do you plan to hold the taxable investments? How risk averse are you?IMD801 wrote:Assuming all tax advantaged space is filled:
Prepay mortgage (4.5%) or fund taxable account?
Re: Why pay off your house?
Indefinitely on the taxable - I will use it to fund retirement before I can access accounts that are restricted at younger ages.
Risk: I don't know how to quantify this. Currently have about 80:20 stocks:bonds.
Risk: I don't know how to quantify this. Currently have about 80:20 stocks:bonds.