A new debate on paying off the mortgage (or not).

[gerrym51]

if your house is paid off- its one more potential asset if you need it.

my home has been paid off for several years. my wife and i only take
the standard dedution on taxes. without mortgage interest we
no longer itemize.


keep it paid . use if needed


gerry

[hankster]

Originally Posted by ziggy29

Well, here's another way to look at it.

Let's say you have the ability to pay off a $100,000 mortgage at (say) 6%. You ask whether or not you should pay off the mortgage. A lot of people would say no because you can likely invest it at a higher long-term return, plus potential tax breaks for keeping the mortgage.

Now ask the same people: If you owned your home free and clear, would you borrow $100K against it at 6% to invest?

A lot of the people who would NOT pay off the home with a $100,000 lump-sum windfall would also NOT go $100K into debt to invest.

But these are essentially identical situations; the choice is whether you prefer to have $100,000 and a $100K mortgage or you have a paid-off home. But sentiment often changes depending on which way you approach it.

I've asked people this question and the answer is invariably "Hell no!" It causes them to consider the risk aspect of owing money on the home to invest. Call me simple, but they can have their "spread" between the mortgage interest rate and investment return. I have no intention of carrying a mortgage into retirement.

[dgalbraith100]

Originally Posted by hankster

I've asked people this question and the answer is invariably "Hell no!" It causes them to consider the risk aspect of owing money on the home to invest. Call me simple, but they can have their "spread" between the mortgage interest rate and investment return. I have no intention of carrying a mortgage into retirement.

I did "borrow" money and put it into the market, not quite as directly as having a paid off house and borrowing against it, but darn close.

When I bought my current home, I could have paid cash for it. I didn't do that, instead I took the biggest mortgage I could get with favorable terms. I then invested all my "extra" cash from selling the previous home into the market. It does make a difference that I am still in the accumlation phase, not the retired phase. What will I do when I retire, I don't know for sure. I'll think hard about it when I reach that point.

Being able to borrow money at 5.25% is pretty cheap money. So far, since I did this, I'm "winning" from the decision.

Laters,
-d.

[cute fuzzy bunny]

Hmm, I paid of my 6% mortgage in 2000. Avoided losing half of what I spent doing that if I'd have left it in the market. Then avoided being paid <5% rates on fixed income interest over the last 8 years. Avoided paying taxes almost every year by having a small annual withdrawal amount. Had a simpler tax preparation by not itemizing. Avoided any concerns about market volatility because I dont have to liquidate any assets into a down market.

So...I guess it depends a bit on your timing and strategy.

A lot of the "solid math" that goes into these calculations presumes a 30 year stay in the home and all the numbers run on a 30 year basis. Given brass balls and an unwavering focus on leaving things alone, that works great. All 20+ year numbers show a greater equity return than the same period mortgage rates. For significantly less than 100% equity holdings the numbers close up a bit.

Taken on a 7-10 year basis, which is greater than the standard time the vast majority of people hold a single mortgage, the average period gains vs period mortgage rates produces a losing proposition about half the time.

Sleep at night factors also vary wildly.

Its simple investing on margin. Playing with the rates and time frames are just convenient excuses. The bottom line is that people are cultured to accept a mortgage debt as reasonable, ordinary and standard. Margin debt or taking a loan to invest is not so well inured.

[Alan]

Originally Posted by donheff

But in the early years of a loan almost everything you pay is interest and thus deductible (AMT is a danger here). If you are a big wage earner that could mean that you get back 36 cents for every dollar you pay from the Feds plus whatever from the state. That can make a mortgage seem a lot easier to live with.

You need to do your analysis on the tax break as you may not get back as big as a break as you think. For example, if you live in a state with no income tax and have few or no other deductions then your deductions probably add up to less than the standard deduction ($10,700 for married filing jointly in 2007). Suppose your itemized deductions add up to $5,000 and your mortgage interest is $6K then you are only getting a tax break on $300. (AMT is also a big concern as donheff points out)

[Ronnieboy]

I am willing to make this offer to anyone who believes that the mortgage interest deduction is a good deal. You send me $10k and I will be more than happy to send you back $3k. In fact I will go one step further - I am feeling the need for economic stimulus - I will send back $5k. Please email me for more details....

[cute fuzzy bunny]

I'll be glad to bankroll you in this business endeavor at the usual rates. I'll supply the $5k, you send me the 10k, and I'll kick you back a $1k finders fee for each customer.

[walkinwood]

Here's a link to the article.
Finance: Should You Prepay Your Mortgage?

I'm having a hard time understanding it. can someone help?

Say I want a 60/40 equity to bond asset allocation & have a $1M portfolio ($600K equity, $400K bond). I also have $400K house with a $200K mortgage.

Treating this as purely an asset allocation problem (ie. If I assume that the after-tax mortgage rate is the same as the after-tax rate of a treasury bond) Is she saying:

a) my effective portfolio is $800K with $600K in equity, $200K ($400k - $200K mortgage) in bonds, so effectively a 75/25 asset allocation.

b) So, if I want a 60/40 allocation with the mortgage, I really should have $480k (60% of $800K) in stock and 520K in bonds?

Thank you.

[aenlighten]

Possibly, if the interest rate were low, taxes were high, and I had stable income streams such as annuities or pensions to cover it. Trading a non-indexed pension for a deflating mortgage would reduce inflation risk. Otherwise, not likely.

[cute fuzzy bunny]

I think the good question around asset allocation is to note that your risk profile changes substantially without a mortgage, and your spending risk goes down substantially.

So while your portfolio is smaller, you could take on more investing risk (say 75/25 or 80/20) for perhaps an even higher return than you could have achieved with a more staid 50/50 or 60/40. Or since you dont need that enormous upside because you dont have much in the way of payment risk, you could reduce your portfolio risk, shoot for a bit more cheap income, and improve your sleep at night factor.

If your spending is slashed by 30-50%, shouldnt that change other aspects of your financial life?

[blessed]

Pete,

I'm one of the people quoted in the "Ordinary People,Extraordinary Wealth"; and I still have a mortgage and my DH and I are retired.

[aenlighten]

There are not only financial and real assets, but values of income streams. The larger the latter compared to expenses, the more risk one could tolerate. I would also consider these as part of ones portfolio.

As people age they can lower their risk due to a shorter time horizon, but I think many do not because their portfolio becomes large enough that they feel no need to. Their spending may increase but their portfolio increases faster and they may feel they can trim their expenses more easily in a downturn.

[slazenger]

Originally Posted by ziggy29

Now ask the same people: If you owned your home free and clear, would you borrow $100K against it at 6% to invest?

A lot of the people who would NOT pay off the home with a $100,000 lump-sum windfall would also NOT go $100K into debt to invest.

I believe putting the question this way potentially puts someone in the wrong frame of mind because it sounds more drastic than what it really is. Case and point:

I've never really looked into the costs of a home equity loan and don't imagine I'll ever get one, but I suspect without knowing that there are fees associated with it. I also suspect the interest rates are likely even higher than ~ 6% that a lot of us have on our homes. In short, would I get a fee free, 6% margin loan with no catches, and the ability to tax-deduct all of the interest on my federal return? Maybe. Would I get a home equity loan. No.

............

I have one more kicker in the equation that causes me to fall on the keep the mortgage side. In addition to the near equal returns of bonds over very long periods as compared to a 6% mortgage, and the fact that I can (and do) deduct the interest on the home loan, is this fact: At the moment, I can barely afford to max out all of my IRA options. If i shift money to paying off a mortgage early, then there's an IRA that's not going to get fully funded. I doubt I have to convince many of you guys and gals here just how powerful IRA's are.

Would I borrow money at 6% with a loan that I could deduct the interest on to fund an IRA if I couldn't afford to fund it otherwise? Heck yeah!

I will say this though; I would recommend paying off a mortgage if the only alternative one has is a taxable account (of any kind, be it bonds or stocks). I'm just not at that level of savings yet though.

[cute fuzzy bunny]

Many home equity loans are fee free, can often be had at rates under 6% (penfed has had several offerings quite recently), and in some cases the interest may be tax deductible.

It DOES create a frame of mind issue. Many people accept having a mortgage as being "normal" without doing an analysis of the issues.

In this instance, there is very little difference between margin investing with your house as collateral and holding a mortgage to improve the size of your investment portfolio.

Look at it from this perspective. You hold a mortgage, invest the money...but you invest it a little more conservatively because...well...cant have your investments take a dive and have to be selling off depreciated assets to pay the mortgage. And then you set aside 2-5+ years of cash or equivalents to fully insulate you from market swings. And then maybe you eke out a percent or two after costs. Now subtract the reduced investment gains from the more conservative portfolio. Now subtract the weak returns you got on all that cash.

Doesnt it seem like you've just created a series of problems and then spent potential returns solving them and reducing the risk you created?

I've always been big on not making problems, and hence not having to jump through hoops to solve them.

[Nords]

Originally Posted by slazenger

Would I borrow money at 6% with a loan that I could deduct the interest on to fund an IRA if I couldn't afford to fund it otherwise? Heck yeah!
I will say this though; I would recommend paying off a mortgage if the only alternative one has is a taxable account (of any kind, be it bonds or stocks). I'm just not at that level of savings yet though.

Since we've debated this issue a couple thousand times on this board, let me point out a couple things that others have previously mentioned:
1. The deduction advantage is only to the extent that it exceeds one's standard deduction. I pay over $18K/year in mortgage interest now so that's no problem this year, but in another 10 years the lines may cross as the deduction is adjusted for inflation and the interest payments drop.

2. It makes no sense to own bonds earning less than the mortgage rate.

[hogwild]

Paying off the mortage is a cash flow issue in my case. I only owe about 70k and my PI pmt is 1168/mo. This means, using the 4% rule (or the reciprical 25x) I would need $350,000 just to support the payments. To me, the 70k payoff makes sense.

[slazenger]

Originally Posted by cute fuzzy bunny

Look at it from this perspective. You hold a mortgage, invest the money...but you invest it a little more conservatively because...well...cant have your investments take a dive and have to be selling off depreciated assets to pay the mortgage. And then you set aside 2-5+ years of cash or equivalents to fully insulate you from market swings. And then maybe you eke out a percent or two after costs. Now subtract the reduced investment gains from the more conservative portfolio. Now subtract the weak returns you got on all that cash.

Doesnt it seem like you've just created a series of problems and then spent potential returns solving them and reducing the risk you created?

I've always been big on not making problems, and hence not having to jump through hoops to solve them.

If i understand the perspective you just described, it doesn't include a situation where there is earned income (my job) supporting and paying for the mortgage. If I'm recalling correctly, you are retired and don't have earned income anymore. Though there are no guarantees, my job (and its associated income) is extremely stable.

[slazenger]

Originally Posted by Nords

Since we've debated this issue a couple thousand times on this board, let me point out a couple things that others have previously mentioned:
1. The deduction advantage is only to the extent that it exceeds one's standard deduction. I pay over $18K/year in mortgage interest now so that's no problem this year, but in another 10 years the lines may cross as the deduction is adjusted for inflation and the interest payments drop.

I only pointed it out once earlier in the thread (not a thousand times, granted ), but I specifically mentioned I take this deduction. To be clear, I've passed the standard deduction before I even consider the mortgage interest so every dime of my mortgage interest is deducted for the time being.

2. It makes no sense to own bonds earning less than the mortgage rate.

In a taxable account? I agree. But gosh, you throw in all the advantages of an IRA and you've easily got a situation where you end up with more green in the end with the IRA corporate bonds pitted against just paying a mortgage note. Look at this from the perspective of a traditional IRA (though I use Roths which are arguably better). What kind of investment gives you an instant 25% return on your money AND lets that investment grow tax free for as long as you like? A traditional IRA for someone with a marginal rate of 25%. If i choose to go the route of paying more than my regular 30 year fixed payment, this is exactly the kind of account that won't get full funding.

If we're talking about mortgage vs taxable accounts, again I'm on the side of paying off the mortgage.

[cute fuzzy bunny]

Last time I checked, this is the early retirement forum, not the I'm still working and making a wage adjusted income forum.

But as I've said a hundred times...if you are still working and your company is paying a wage adjustment in excess of inflation, you ought to have a mortgage. As long as the rate is good.

Unless of course you're a nervous accumulator and have a bunch of bonds paying 3.5% while paying 6% on your mortgage, as Nords pointed out. Thats stupid.

And also for the hundredth time, this isnt about the numbers, this is about risk tolerance and a bunch of financial hairballs designed to provide data for the predetermined answer...90% of the time...