Millionaires: do they pay off their mortgages?

[2B]

Originally Posted by ZMAN

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]

Originally Posted by Charles

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!]

Originally Posted by JustCurious

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]

Originally Posted by Maddy the Turbo Beagle

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]

Originally Posted by 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!

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.

[DRiP Guy]

Originally Posted by 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..............

I can't help you with gyms, Jimmies, Javas, or jalopies, but the logarithm thing is easy:

anti-exponentiation


(now, explaining e ... that is a bit more tricky)

[LOL!]

It is not necessary for mortgage interest to be deductible for it to make sense to keep a mortgage and invest money that could go to pay off the mortgage elsewhere.

I'm also sure that you don't have to claim every itemized deduction that you are allowed.

What seems to be important here is that many folks are rational and run the numbers. Some are not rational and do not run the numbers because they are right no matter what.

[JustCurious]

Originally Posted by LOL!

I'm also sure that you don't have to claim every itemized deduction that you are allowed.

You would be a fool, but you're right, you could choose not to claim a deduction that you are allowed.

[macdaddy]

Originally Posted by 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"

The way the last few years have gone, it's hard to convince people not to extend themselves and buy as much house as their exotic loan product allows them to. Couples who made foolish decisions to over extend themselves on housing were largely rewarded for it, until recently.

[Craig]

However ... good to adopt a cautious attitude about what is considered an "exotic" (aka dangerous) loan product. There are some useful tools out there.

For example, we refi'ed into a 30 year, fixed rate, interest-only option loan. Rate was 5.625%, and you have the option to pay interest only the first 10 years ... after that, it is a forced 20 year amort. Of course, you can pay any amount of principal you choose in the first 10 years. We paid principal down the first year, invested and used the cash elsewhere last year, and will pay down more principal this year. Having the option is nice, and with over 40% equity, we're cool with no principal payments if we so choose.

I just point this out because some folks have a knee jerk response to a product like this, and I believe it ignores some handy products that do provide great flexibility, while also fixing the rate exposure.

[firewhen]

We could have paid cash for our house a few years ago, but took out a maximum mortgage, while still avoiding PMI (80% of purchase). Here is why:

1) Rates were very low at the time--I got 4.75% for 15 years
2) I invest almost all in stocks, and I expect to beat that rate over the long haul
3) If I did not take out the big mortgage, I would have had to sell stocks, since I am not that liquid, which would have made paying capital gains federal and ordinary income to the state (I don't think most states have a separate rate for cap gains)
4) We get a deduction so the after tax interest is even lower and meanwhile the stocks I did not sell keep growing tax deferred. I still get about 2% dividends on the stocks we held, which could go to the monthly payment if need be. But even without the deduction, I would have taken out the mortgage.
5) My way of being "conservative" was going with the 15 year, since we are getting rid of the mortgage faster. If I truly wanted more leverage, I could have gone 30 years, but figured this gave some balance.

Luckily, the past few years, especially 2006, have been great, allowing me to do so much better than the mortgage interest rate.

What would I do after ER? Harder decision. Taxes would be less of an issue either way. I would still have to sell stocks, buy the cap gains rate would probably partially be at 5%. I do not know if I could stomach the big monthly payment then when just living off investments. I would hate to see some lean or negative equity return years while still paying a big mortgage.

[cute fuzzy bunny]

A prior poll from a different slant:

http://early-retirement.org/forums/i...p?topic=6046.0

No mortgage here, and even if we had one our itemized deductions wouldnt exceed our standard ones.

Without a huge monthly payment demand we shelter most of our "income" and pay less than 4% of what we generate in total taxes...including property taxes.

With the penfed differential between cd's and 20 year mortgages I did a back of the envelope calc. We'd make a couple of grand a year in float and pay an additional ~7000 in taxes as the extra income would bump us into a higher tax bracket and from 5% to 15% on qualified dividends and capital gains, which is where most of our money comes from.

No thanks.

"Conventional thinking" and fishbowling this argument make little sense for an early retiree.

Dang I missed this discussion...

Originally Posted by El Guapo

Dang I missed this discussion...

Don't do it TH

[laurencewill]

My situation: When DW and I went from renting and taking the standard deduction to home ownership and itemizing, we reduced our taxes by about $1,500. This is in big mortgage San Diego. It's fun to throw around big numbers and say, "my tax deduction from the mortgage is 10 grand!" but that can translate into only $2,500 in actually dollars in pocket.

I waffled on this issue, we settled on a 20 year mortgage @ 5%, and will just run out of payments a few years before I can retire. So I would be disengenuous to model as if I took a stand on either side of the issue.

[Nords]

Originally Posted by El Guapo

We'd make a couple of grand a year in float and pay an additional ~7000 in taxes as the extra income would bump us into a higher tax bracket and from 5% to 15% on qualified dividends and capital gains, which is where most of our money comes from.

That might be the way taxes used to be calculated (the infamous "tax-bracket creep") but I thought that nowadays moving into a new bracket would only apply to the income/dividends above the cutoff. IOW you'd still get 5% on your dividends/cap gains until you went above the limit, and whatever's above that limit would be taxed at 15%-- not everything, just the amount above the limit.

But I could be wrong.