Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Mortgage principle is basicly savings account
Old 01-15-2008, 05:47 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Mortgage principle is basicly savings account

I just realized that the principle part of our mortgage payments don't have to be considered as bills in our monthly budget because they are basicly a savings account that we don't get interest on. That should give us a little more spending money this year .
__________________

__________________
Lsbcal is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-15-2008, 06:00 PM   #2
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
Oh, no. You do realize that you've just spawned another "pay off your mortgage" thread, right?

Of course, a mortgage is a wonderful thing. It's a forced savings plan. It's a tax break. It's an inflation hedge. And it comes with a free put (i.e., you can pay it off whenever you like regardless of prevailing market rates). Everybody should have one.
__________________

__________________
twaddle is offline   Reply With Quote
Old 01-15-2008, 06:06 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
well you still have to pay the same amount though monthly yes? regardless where its getting allocated to you still need to make the ful payment
__________________
mathjak107 is offline   Reply With Quote
Old 01-15-2008, 06:28 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by mathjak107 View Post
well you still have to pay the same amount though monthly yes? regardless where its getting allocated to you still need to make the ful payment
I do?

Just kidding. What I mean is that if you are retired you may have set up a monthly spending limit based on something like X% withdrawal rate plus inflation increases. Not having the mortgage principle in there helps us quite a bit. Since I've been doing this for about 5 years it was a Eureka moment.

Twaddle -- I herebye declare posters are not allowed to talk about "paying off your mortgage" on this thread .
__________________
Lsbcal is offline   Reply With Quote
Old 01-15-2008, 07:24 PM   #5
gone traveling
 
Join Date: May 2006
Posts: 1,036
Quote:
Originally Posted by lsbcal View Post
I just realized that the principle part of our mortgage payments don't have to be considered as bills in our monthly budget because they are basicly a savings account that we don't get interest on. That should give us a little more spending money this year .

Smart, grasshopper! Now zen in a third party paying your principle. Then another. Now you're a effing real estate mogul!

Quick, take the rock from my palm.
__________________
honobob is offline   Reply With Quote
Old 01-15-2008, 09:47 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Quote:
Originally Posted by twaddle View Post
It's a forced savings plan. It's a tax break. It's an inflation hedge.
Aww, its none of those things to a lot of people.

For someone retired with significant investments, its not a savings plan...you're just moving money from one place to another.

Its not a tax break if you cant deduct the interest because you arent paying enough in income taxes.

And the inflation savings on the loan are offset by inflations equal weight on the money in your portfolio.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 01-15-2008, 10:37 PM   #7
Recycles dryer sheets
 
Join Date: Aug 2007
Location: Midwest
Posts: 109
I disagree with most of what you said.

You think the principal part of your payment is not a bill? Try not paying it and see what happens.

You think it's like a savings account? Try withdrawing your money. Means you have to sell your home to get it.

You don't get interest? Well, yes, you do. Sort of. Increasing the amount of principal you pay reduces the amount of interest you pay in the future. Which may tend to hurt your cash flow short term to the extent it reduces your tax deductions. So if anything it gives you less spending money this year, not more. Only way it increases your spending money is if you make your last payment.
__________________
Engineering My Finances Blog
EngineeringMyFinances is offline   Reply With Quote
Old 01-16-2008, 03:10 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
the tax deduction is like spending an extra dollar over and above the cost of the house to get back .30 cents if you are lucky and do get to take it on your taxes. remember you are paying the interest so the deduction isnt a savings you spent the extra money
__________________
mathjak107 is offline   Reply With Quote
Old 01-16-2008, 09:09 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by EngineeringMyFinances View Post
You think the principal part of your payment is not a bill? Try not paying it and see what happens.

You think it's like a savings account? Try withdrawing your money. Means you have to sell your home to get it.
In our case we could pay off the mortgage easily (let's not get into whether I should or should not). If I pay it off then no more mortgage bill but I have to spend capital to do this. That capital will not be there to finance my retirement at my withdrawal rate.

So here is the math for our case. Have a mortgage that's $191k left in principle with monthly payments of $1148. If I'm withdrawing 5.5% until SS kicks in then by paying off the mortgage I will have to reduce spending by 5.5% X $191k / 12 = $875/mo. So the "savings" in reduced bills is 1148 - 875 = $273 per month. This savings is going to depend on (1) the interest rate on the mortgage, (2) the amount of principle left on the mortgage, (3) the withdrawal rate on your portfolio.

So now that I've actually done the math I guess it's not really the principle that I can deduct from spending but rather a number as calculated above. In our case this number is very close to the principle payments which I think is because our mortgage rate is almost equal to our withdrawal rate.
__________________
Lsbcal is offline   Reply With Quote
Old 01-16-2008, 09:56 AM   #10
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 316
I have a hunch that the mortgage tax deduction days are numbered. For one, I expect that the U.S. gov't may start to see that owners with some equity in their abode are less likely to default. That would take away an incentive to keep that mortgage high. The other reason is to help pay for the upcoming universal health care (or whatever they choose to call it).

I certainly don't think that the housing bubble was fully caused by people wanting a big tax break, but I suspect that it played a small part. In Canada we have no housing bubble or the ability to deduct our mortgages, but we do have universal health.

I just paid off my mortgage. If I were American, I might have had to think harder about doing that.
__________________
Grizz is offline   Reply With Quote
Old 01-16-2008, 01:59 PM   #11
Moderator
Walt34's Avatar
 
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 16,525
Admittedly, math never was my strong point and perhaps I'm being overly simplistic.

But if someone in a 30% tax bracket pays $10K/year in mortgage interest, the deduction makes the interest payment "only" $7K - right?

The way I see it, that's $7K that they still don't have to use on other things, and it only works to advantage if that $7K is generating more than the loan interest rate to justify keeping the mortgage.

If not, what am I missing?

Then there's the intangible value of "not owing anybody anything" but that's a whole different issue.
__________________
I heard the call to do nothing. So I answered it.
Walt34 is online now   Reply With Quote
Old 01-16-2008, 02:07 PM   #12
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
Quote:
Originally Posted by Walt34 View Post
The way I see it, that's $7K that they still don't have to use on other things, and it only works to advantage if that $7K is generating more than the loan interest rate to justify keeping the mortgage.
Yup, you've nailed it. For example, let's say the bank gave us a loan for $100,000 at 5%.

Let's pretend it's an IO, and then we don't have to consider the principal payments and amortization.

So, you're paying $5000/year in interest. And after the tax break, you're paying $3500/year. Fixed rate. For, say, 30 years.

But you still have that $100,000 the bank gave you. So, your job is to invest that and make more than 3.5% per year over 30 years.

Everybody should have one, I tell you.
__________________
twaddle is offline   Reply With Quote
Old 01-16-2008, 03:08 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,178
Wow, I'd be really careful not calling it an expense if this is your primary residence.

At some point are you going to tap into your home equity to pay your expenses? In other words, is your home equity part of your nest egg you are withdrawing on? If that's the case, you'll probably be looking at a reverse mortgage, or selling your home late in life to tap into that part of the nest egg. If not, then you're putting some of your income into a non-liquid asset.

It just doesn't seem right to me to not consider it an expense.

If it's not an expense, it seems to me that the income generated by the capital you are investing rather than paying off the mortgage isn't really income.

Put it this way:
If you have $1M in investments and a $1M personal residence paid off, and you got 8% on your investments, you'd have $80K in income.

If you decided to take out a $1M mortgage at 6% on that house, so now you have $2M to invest, you'd make $160K in income, and have $60K in mortgage payments. Did you really double your income with no new expenses? Of course not. You have a 60K expense. You netted $100K, not $160K. It's better than the 80K because your investment is getting a higher rate than your mortgage (but that's probably not guaranteed), but you can't ignore that 60K mortgage expense.

If it were a rental, of course you'd have rental income to offset the expense, but it's still an expense, in my opinion.
__________________
RunningBum is offline   Reply With Quote
Old 01-16-2008, 03:24 PM   #14
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
I have a mortgage on a 2 family house and get $1500 a month in rent out of it, which is $300 more than my monthly interest and escrow payments. Now that's a savings plan.....
__________________
nun is offline   Reply With Quote
Old 01-16-2008, 04:00 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by twaddle View Post
But you still have that $100,000 the bank gave you. So, your job is to invest that and make more than 3.5% per year over 30 years.
IMO you are right as long as you add the proviso that the investment must make 3.5% after taxes return.

Of course, the situation is really more complicated. For instance, you borrow the money and get to use the tax writeoff at the marginal income tax rate. Then the invested money is taxed at the lower capital gains rate which this year is 0% if you are in the 15% or under bracket. Or is the invested money really in your IRA which is not taxed until you pull it out many years later -- it got to stay in the IRA because you didn't have to pull it out to pay off the mortgage. We could go on and on as this situation can really get complex with all the factors to consider.

In our case we have a 5 3/8% fixed mortgage and have not had any trouble so far investing the money at a higher return.
__________________
Lsbcal is offline   Reply With Quote
Old 01-16-2008, 04:13 PM   #16
Thinks s/he gets paid by the post
 
Join Date: Nov 2005
Location: North of Montana
Posts: 2,753
Quote:
Originally Posted by Grizz View Post
In Canada we have no housing bubble
What planet is your Canada on?

See Housing inflation kicker
or
reportonbusiness.com: Homes in Edmonton, Saskatoon most overvalued
or
The Daily, Thursday, January 10, 2008. New Housing Price Index

Of course we have a housing bubble. It just hasn't popped yet.
__________________
There are two kinds of people in the world: those who can extrapolate conclusions from insufficient data and ..
kumquat is offline   Reply With Quote
Old 01-16-2008, 04:14 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by RunningBum View Post
It just doesn't seem right to me to not consider it an expense.
It is an expense. The interest is definitely an expense but not the amount you are paying toward principle. In the last year of your mortgage almost everything is going towards principle ... and then in the next year the expense completely disappears. The mortgage (interest) expense does not go from full mortgage to zero in one year. When the last payment is made you get to call it the last one because you paid back all the principle the bank gave you (plus interest).

Maybe an accountant could do a better job of explaining this.
__________________
Lsbcal is offline   Reply With Quote
Old 01-16-2008, 04:16 PM   #18
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by lsbcal View Post
It is an expense. The interest is definitely an expense but not the amount you are paying toward principle. In the last year of your mortgage almost everything is going towards principle ... and then in the next year the expense completely disappears. The mortgage (interest) expense does not go from full mortgage to zero in one year. When the last payment is made you get to call it the last one because you paid back all the principle the bank gave you (plus interest).

Maybe an accountant could do a better job of explaining this.
In my case the rent more than pays for the interest and escrow so it the mortgage an expense for me?
__________________
nun is offline   Reply With Quote
Old 01-16-2008, 04:58 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Quote:
Originally Posted by Walt34 View Post
Admittedly, math never was my strong point and perhaps I'm being overly simplistic.

But if someone in a 30% tax bracket pays $10K/year in mortgage interest, the deduction makes the interest payment "only" $7K - right?

The way I see it, that's $7K that they still don't have to use on other things, and it only works to advantage if that $7K is generating more than the loan interest rate to justify keeping the mortgage.

If not, what am I missing?

Then there's the intangible value of "not owing anybody anything" but that's a whole different issue.

remember everyone gets the standard deduction anyway whether you have a mortgage or not so start your calculations after subtracting out the standard deduction from your interest payments
__________________
mathjak107 is offline   Reply With Quote
Old 01-16-2008, 05:01 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by nun View Post
In my case the rent more than pays for the interest and escrow so it the mortgage an expense for me?
Let's see, I could rent out the 2 extra bedrooms we now have and make the situation cash flow positive too. But my wife would kill me.
__________________

__________________
Lsbcal is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
CD or Savings Account Question ChemEng Young Dreamers 4 10-18-2007 10:39 AM
5.5% savings account brewer12345 FIRE and Money 17 01-17-2007 07:49 PM
Which Money Market Savings Account is doing best out there? xmanz3 Young Dreamers 3 12-13-2006 09:20 AM
Yet another online savings account over 5% - Etrade Complete Savings maddythebeagle FIRE and Money 0 11-28-2006 01:53 PM
Health Savings Account MooreBonds Other topics 3 12-30-2004 05:19 AM

 

 
All times are GMT -6. The time now is 05:04 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.