Millionaires: do they pay off their mortgages?

[honobob]

Year 6: After one year of economic downturn in Happyville, Villagers accuse Brother B of witchcraft and ciphering and is burned in the Town Square, ironically at the ceremonial mortgage burning altar.


Alex, I agree 100% with you but understand the "urge" to pay off a property. I refi'd a couple of properties a few years ago to get the 15 year rate and partly because I felt the need to pay down. I'll retire with over $400K in mortgages because it makes financial sense. Sometimes it may make sense to pay off a mortgage, but most people do so even when it does not make economic sense. I wonder if those same people argue that you are wrong to retire as a renter?

 

[2B]

I was Brother A on two occasions where I lost my job. The liquidity and cash flow issues are very true and I will avoid it until I am retired where I will be financially independent by definition. At that point, my tax rate will be at the marginal 15% rate by our current laws (unlikely to remain this low for much longer) even though I'll be living heavily out of my IRA. At that point, the lower cost of living will probably have more impact on my withdrawl rate and taxes since I'll get the full $10,000 standard deduction (guessing at the exact amount) and not have to withdraw the mortgage payment at the 15% or higher marginal tax rate. Currently, I'm at the marginal 25% rate so the tax deduction is worth more.

 

[deserat]

Yes, this is an argument all the time - right now I could pay off my mortgage, but have decided to just pre-pay some of the principal - I want the other money to be working for me in my investments. I actually re-fi'd to a low rate last year on a 10 year payoff - if I keep at the rate I'm pre-apying now, I'd probably have it paid off in 5 years.

To me, the peace of mind that I have a roof over my head paid for is worth any arbitrage I might wish to play - again, YMMV.

 

[Khan]

I am incredibly lazy, and one less thing to worry about is always a good idea.

Paid off 10 or so years ago.

 

[ZMAN]

We had a 6.75% mortgage at a time when bond funds were paying in the low 4% range. We wanted more bond investments and thought that paying off the mortgage was the best 6.75% "bond" investment we could make. So that is what we did and, even with less in mortgage tax deductions, we have ever been sorry.

 

[Alan]

We had a 6.75% mortgage at a time when bond funds were paying in the low 4% range. We wanted more bond investments and thought that paying off the mortgage was the best 6.75% "bond" investment we could make. So that is what we did and, even with less in mortgage tax deductions, we have ever been sorry.

Ditto. about 7 years out from #1 child going to college we upped our payments so that mortgage (7.25% back then) ended as she went to college.

 

[JustCurious]

I'd never pay off a mortgage as long as we have the current tax laws in place. In fact, I am only paying interest. Why pay off a home? It actually costs you money to pay off a mortgage. It shocks me to see so many on this forum who find hundreds of ways to save money, but cling to the idea that being mortgage free is a good thing. Its old school thinking that costs you serious money. The higher your tax bracket the more important it is to have a mortgage. Even the lowest tax brackets would be far better off with a mortgage. Here is an example. I'd rather be brother B...... When I retire I will still have a mortgage. When they change the tax laws, then I'll change my strategy.

Alex, both you and Ric Edelman make a critical assumption that is false....that all of the mortgage interest is tax deductible. In many cases, this is simply not true at all. (See my posts in the other thread called "Not permitted to deduct mortgage interest.....").

The bottom line is that most people (including me) do not itemize, therefore, we get zero, that's right... zero tax benefit from the mortgage interest that we pay. And even for those people who itemize, the benefit is often less than the full amount of interest paid, because the benefit only accrues to the extent that total amount of itemized deductions exceeds the standard deduction.

When you base your argument on flawed assumptions, the conclusion is usually flawed.

 

[maddythebeagle]

Alex, both you and Ric Edelman make a critical assumption that is false....that all of the mortgage interest is tax deductible. In many cases, this is simply not true at all. (See my posts in the other thread called "Not permitted to deduct mortgage interest.....").

The bottom line is that most people (including me) do not itemize, therefore, we get zero, that's right... zero tax benefit from the mortgage interest that we pay. And even for those people who itemize, the benefit is often less than the full amount of interest paid, because the benefit only accrues to the extent that total amount of itemized deductions exceeds the standard deduction.

When you base your argument on flawed assumptions, the conclusion is usually flawed.

What I think might gets lost in these ever ending arguments is that some folks are living in areas with huge housing costs (east and west coasts) and those in the middle probably see this all differently....why the heck would I carry a mortgage on a 150-200k house in the midwest into retirement...on the contrary, if I was Nords with a 400-500k mortgage, I probably would take the tax deduction rather than reducing my portfolio....

 

[heyyou]

Agree with Khan and deserat. Been on both sides and I slept better in a paid off house while working a risky job. I lost money in leveraged RE in the 80's using money that could have gone to paying down mortgage. I was lucky since my job in Phoenix was not in the RE industry.
I can control my debt, my expenses, and my risk. Leverage assumes your career is not tied to an industry that can fail. I've seen real estate and banking, defense and aerospace, IT and communications, steel, automotive, and most natural resources boom and bust with devastating effects on Los Angeles, Seattle, Denver, Houston, Phoenix, Detroit, and Pittsburg. How many IT workers are laid off in their 50's who can't get another 10 years of work to finish off the mortgage? It is not all blue sky, there is risk embedded somewhere although the math is impeccable.
Joe

 

[honobob]

Maddy tTB
You make an excellent point. But I think you can also include all those people in Texas and other low value areas that I read here that are paying astronomical property taxes! I can't imagine paying $9-12K property each year in taxes and NOT itemizing!

Plus.........LEVERAGE. If I have 100K in a 600K property that is appreciating 11% a year aren't I better off with a 5.25% loan ( with the 500K invested at 6.25%) than if I had $600K sitting in my home?

Plus.........INFLATION. 2024 thru 2034 I'll be paying off $300K in installments that will be equivalent to cable bills.

But I do understand the midwest mindset. I sold my Dad's home in Indiana for $65,000 at a time when my home was appreciating that much in 6 months.

Location, loction, location.

As a single high earner, by national standards, give me the deduction!

 

[Alex]

Alex, both you and Ric Edelman make a critical assumption that is false....that all of the mortgage interest is tax deductible. In many cases, this is simply not true at all. (See my posts in the other thread called "Not permitted to deduct mortgage interest.....").

The bottom line is that most people (including me) do not itemize, therefore, we get zero, that's right... zero tax benefit from the mortgage interest that we pay. And even for those people who itemize, the benefit is often less than the full amount of interest paid, because the benefit only accrues to the extent that total amount of itemized deductions exceeds the standard deduction.

When you base your argument on flawed assumptions, the conclusion is usually flawed.

I can only speak for my own situation. I have a large mortgage (partly by choice) and more than the income needed to carry it. So for me, it does not make sense to eliminate a very large deduction.

Now, If I had a house in Michigan or Ohio that was worth 150-250k, I might see things differently.

 

[JustCurious]

I can only speak for my own situation. I have a large mortgage (partly by choice) and more than the income needed to carry it. So for me, it does not make sense to eliminate a very large deduction.

Now, If I had a house in Michigan or Ohio that was worth 150-250k, I might see things differently.

Alex, the value of your "very large deduction" is probably less than what you think it is. I agree that if your property taxes are high, and you pay a large amount of mortgage interest so that the combined total of both is well in excess of your standard deduction, then the mortgage interest tax deduction certainly has some marginal benefit to you.

However, as I said before, it is a fact that most people do not itemize their deductions. (This is not my opinion, this is a fact reported by the IRS). Therefore, most people (including me) do not deduct their mortgage interest. Yet some so-called financial experts like Ric Edelman just assume that everyone can deduct all of their mortgage interest, and then they go on to argue that this "fact" justifies always having a mortgage! I can understand how the average Joe gets fooled and blindly follows the popular misconception that all mortgage interest is tax deductible, but it's really ridiculous that financial advisors like Ric Edelman actually publish books and mislead people. Ric Edelman either doesn't understand what he is talking about, or, he knows better and he is simply ignoring it because it gets in the way of his argument and he knows that the average Joe doesn't understand anyway. Either way, he has zero credibility with me.

 

[2B]

Alex, the value of your "very large deduction" is probably less than what you think it is.

I can understand how the average Joe gets fooled and blindly follows the popular misconception that all mortgage interest is tax deductible, but it's really ridiculous that financial advisors like Ric Edelman actually publish books and mislead people.

Scott Burns has a mortgage deduction calculator to tell you what your mortgage, property tax, etcetera are all worth.

 

[maddythebeagle]

I can only speak for my own situation. I have a large mortgage (partly by choice) and more than the income needed to carry it. So for me, it does not make sense to eliminate a very large deduction.

Now, If I had a house in Michigan or Ohio that was worth 150-250k, I might see things differently.

If you lived in Michigan or Ohio, you probably wouldnt live next to a bunch of fools that use interest only, etc. to drive up housing costs faster than wage growth but hey, I have seen enough posts from folks like you that want to rationalize their situation....just keep on saying that it is different this time...

 

[ZMAN]

I am pretty new on the board, but the Maddy and Alex posts raised a question for me. We are in western new york where housing values have been dead in the water for ever. By way of example my home bought in 1989 is maybe worth maybe 40% to 50% more than what we paid for it, and that is a very recent development. MIL house bought in a nearby city in 1949 for 10K was sold in 2003 for 22K (gasp!) and we were glad to get it, How's that for some odd reality check.

So DW and I knew that we were not going get rich on home equity.

What is it like in those areas where you can get rich on home equity. Does it influence the mortgage decision. Do you move down in property class to bank the equity, or use it to buy more. Does it influence spending and savings patterns. I am sure this has been discussed before, but it seems related to the thread.

 

[2B]

What is it like in those areas where you can get rich on home equity. Does it influence the mortgage decision. Do you move down in property class to bank the equity, or use it to buy more. Does it influence spending and savings patterns. I am sure this has been discussed before, but it seems related to the thread.

I've been through the big energy boom-bust of the Gulf Coast of the late 70's and 80's. When it was all over, house pricing got back to inflation minus depreciation.

I have a SIL/BIL that own a home in California. They have seen their house go up and then go down. I don't know if they are still above water or not but they haven't been there that long so they might be.

People will look at mortgages differently if they are buying into a rapidly inflating market. They want all the house they can afford and then some to get in on all the big gains. They can then get killed when the market falls. California has gone through some wild rides but it has consistently maintained the highest overall markets in the country. California taxes keep getting manipulated and the speculators find new suckers. I've seen articles that say 70% of the people that own homes in California couldn't afford to buy them at the current valuations. Wages are not higher in California (overall) but property stays high.

I'm a big chicken and won't do things that look suicidal. I wouldn't buy a house at the current prices in California and the other vastly inflated markets. I'd rent (and throw my money away and pay my landlords mortgage) until the next good old fashion recession. Then, the pickings will improve.

 

[Craig]

There is another factor, for so-called high earners ... they lose a portion of their itemized deductions due to the limits imposed by Congress.

You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $150,500 ($75,250 if you are married filing separately). Your AGI is the amount on Form 1040, line 38.

So, the supposedly deductible mortgage interest expense needs to be watched closely relative to what is truly deductible ... both relative to the standard deduction, and true itemized deductions. Affects all itemized deductions. Frustrating.

Note Scott Burns' Homeownership Tax Benefit Calculator doesn't appear to take into account this phaseout of itemized deductions.

What is it like in those areas where you can get rich on home equity. Does it influence the mortgage decision. Do you move down in property class to bank the equity, or use it to buy more. Does it influence spending and savings patterns. I am sure this has been discussed before, but it seems related to the thread.

It is amazing, the differences between regions, isn't it? For those who are, generally, young, and have never seen a real downturn ... they tend to keep trading up and up, until they get nailed in a downturn. For awhile, they have a McMansion, love the lifestyle, and have great appreciation, afforded by big time leverage. For those who have been through painful readjustments ... sometimes they trade out of the McMansion while times are good, and roll some of that equity into multiple homes, pay off some, and life in a home 1/2 to 1/4 of what they can really afford. Then, when hard times hit again, they can weather the storm. [We nearly went bankrupt in 1988 due to recession, job loss and a real estate depression in the works ... frankly, saved by having had a home equity credit line in place, before the job loss. Then we bought a foreclosure at the tail end of that depression, in 1991, and later turned it into a few paid off rental properties, using 1031 exchanges to avoid income taxes on the transaction. We are trainable, following a 2x4 course in economics. ]

All of this definitely affects spending patterns ... there is a wealth effect. When home prices were going wild, many folks bought cars, boats, motorcycles, etc. with home equity loans. When the downturn hits, reality forces the spending to stop.

We used to live in western NY, and in northern OH. Good fortune and my father's courage took us to AZ, where we experienced a wonderful real estate climate. Now we see a mini boom in TN. I recognize many folks stay in depressed areas due to family, and financial circumstances ... but for those who are able and willing to move out, it can pay off. Then I've known those poor folks who move with their companies from state to state, and keep buying at the top, and selling at the bottom of the markets. Life can be unkind.

Check out http://www.ofheo.gov/HPIMSA.asp ... put some different locations (MSA's) in the boxes at the bottom ... like Buffalo, Phoenix, San Diego. Note those are annualized appreciation rates. Pretty amazing. Some folks make a ton of money on their homes, and it is just being literally in the right place at the right time. Consider how they do by mortaging their homes to the hilt, and investing the "excess" cash elsewhere ... totally different situation if you're in a low-appreciation market.

 

[JustCurious]

There is another factor, for so-called high earners ... they lose a portion of their itemized deductions due to the limits imposed by Congress. So, the supposedly deductible mortgage interest expense needs to be watched closely relative to what is truly deductible ... both relative to the standard deduction, and true itemized deductions. Affects all itemized deductions. Frustrating.

Note Scott Burns' Homeownership Tax Benefit Calculator doesn't appear to take into account this phaseout of itemized deductions.

Charles, that is a very good point. For someone to be able to deduct all of their mortgage interest, they must:

1. Itemize their deductions,
2. Have itemized deductions, excluding mortgage interest deduction, that equal or exceed the standard deduction, and
3. Have income that falls below the threshold at which itemized deductions begin to phaseout.

I know for a fact that the number of people who meet the first qualification is in the minority of all taxpayers, and I am sure that those who meet all three qualifications are a small minority indeed. Very, very few people get a marginal tax benefit for all of their mortgage interest.

 

[Alan]

I can attest to having my deductions limited by being a high earner. It has been 8 years since I had a mortgage, but before that state, local and property taxes always were higher than the standard deductions before mortgagae interest so I always itemized but Turbo Tax always told me that me deductions had been reduced because I had exceeded the limits.

I now live in a state with no income tax and very high property taxes, but in fact we started renting almost 3 years ago so we don't need to itemize

 

[LOL!]

Charles, that is a very good point. For someone to be able to deduct all of their mortgage interest, they must:

1. Itemize their deductions,
2. Have itemized deductions, excluding mortgage interest deduction, that equal or exceed the standard deduction, and
3. Have income that falls below the threshold at which itemized deductions begin to phaseout.

I know for a fact that the number of people who meet the first qualification is in the minority of all taxpayers, and I am sure that those who meet all three qualifications are a small minority indeed. Very, very few people get a marginal tax benefit for all of their mortgage interest.

The IRS has stats on all this. Let me find them ... ah, here they are: http://www.irs.gov/taxstats/index.html
Let's see, in 2004 there were 132 million returns, 46 million with itemized deductions. 37.7 million returns with home mortgage interest deductions.
I know when I rented, I itemized because state income tax was more than the standard deduction.

Perhaps some excel guru can even show what percentage of high income folks deducted mortgage interest. It looks pretty high for the $200K to $500K AGI slot.

 

[JustCurious]

I forgot to add a fourth qualification. In order for someone to deduct ALL of their mortgage interest, they must:

1. Itemize their deductions,
2. Have itemized deductions, excluding the mortgage interest deduction, that equal or exceed the standard deduction, and
3. Have income that falls below the threshold at which itemized deductions begin to phaseout,

AND

4. Not be affected by the AMT (alternative minimum tax).

 

[Alex]

If you lived in Michigan or Ohio, you probably wouldnt live next to a bunch of fools that use interest only, etc. to drive up housing costs faster than wage growth but hey, I have seen enough posts from folks like you that want to rationalize their situation....just keep on saying that it is different this time...

I've lived in Michigan. the people there were exactly the same as the people in California, only fatter.

 

[Delawaredave]

Our society has this "mortgage debt is good" mentality - I think for a lot of people it is "spending a dollar to save 50 cents" logic

If you have a high AGI, the deduction reductions can be significant - around 30%.

So if a "high AGI" person had a $130,000, 30 year, 6% mortgage - they pay about $10,000/year in interest.

This gets reduced to $7,000 of deductions because of high AGI. Let's say they avoid 35% taxes -- so that's $2,450. So "using some else's $130,000" cost $7,550 per year cash-out-of-pocket.

So to make the mortage worthwhile, you gotta make (after tax - right ?) more than $7,550 on the $130,000 you have invested elsewhere.

That's 5.75%, after tax - and theoretically to compare should have the same risk level as holding equity in your house (low). That's tough.

There's a lot of things in life I don't understand - add "desireable mortgage interest deductions" to the list.

Also on the list: Day spas, Logarithms, SUVs, $4 lattes, and car detailing..............

 

[Callie]

We have about 11 years left on a 15 year 4.875% loan. We will not likely pay it off early (well at least now) even though we have the cash.

The payments are high (2275 with everything) but we can use the deductions. When we get ready to ER, we may pay it off. Will depend. It's such a great rate!

 

[Alan]

We have about 11 years left on a 15 year 4.875% loan. We will not likely pay it off early (well at least now) even though we have the cash.

The payments are high (2275 with everything) but we can use the deductions. When we get ready to ER, we may pay it off. Will depend. It's such a great rate!

I think this case is a "no brainer". With such a low rate, and CD's and MM accounts paying over a 1% higher, then regardless of deductions advantages I can't see why you would not keep it, even after RE.