Paying off the mortgage early grows in popularity

[skipro3]

What do you expect them to do? Let freeloaders mooch off the rest of the citizens who pay their property taxes?

And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.

 

[PaddyMac]

We refi'd last December at 4.00% for 30 years. Cheapest money I've *even* gotten. I'm making 7.5% dividend yield in preferred stocks, and there's no way I'd even consider paying off the mortgage early.

Ditto. We refi'd a 400K mortgage to a 20 year at 3.85%. We have $375K in a pot from selling our last home kicking off 7-8% in preferred and dividend stocks that easily pays the mortgage plus some. 35% of our mortgage interest reduces our self-employment tax due to the business use of the home deduction; our SE+Fed+State taxes total 45%.

When the mortgage is paid off, we'll still have a pot of money. It's nice to know we can pay it off at any time, but we can't see why. It's the cheapest money anyone has every given us (I remember 8% and up mortgages around ten years ago).

 

[Gumby]

And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.

Their landlords pay property tax, which is incorporated in the rent. But hey, why let a small thing like fact get in the way of a good rant?

 

[pb4uski]

And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.

Yeah, come on. THINK. Non-homeowners also pay property taxes - it is include in their rent.

 

[rayvt]

But renters have no skin in the game. Rent is determined by market conditions - supply & demand. The tax that the owner pays is just one of his costs, and is not directly reflected in the rent.

 

[REWahoo]

Maybe we should ask a few of the folks posting here who are landlords to chime in with their perspective...

 

[scrabbler1]

But renters have no skin in the game. Rent is determined by market conditions - supply & demand. The tax that the owner pays is just one of his costs, and is not directly reflected in the rent.

As someone who has owned a co-op apartment for the last 23 years after renting elsewhere for 2 years, I disagree. My monthly co-op maintenance payment reflects all the expenses related to the physical and financial upkeep of the co-op. When my property taxes (which have been close to 50% of my maintenance charges) rise, my maintenance will also rise. Just like the owners of single-family houses, I get to deduct my property taxes on my income tax return. Same for being able to collect a state school tax rebate.

A landlord will have a similar set of expenses related to the physical and financial upkeep of the building(s). If his property taxes increase, he will pass them along to his tenants in the form of a rent increase. Some people in my co-op are renters who are subletting from apartment owners, making the apartment owners de facto landlords. The subletters have the same skin in the game as the apartment owners would have had they still lived in their apartments. They just can't claim the income tax deduction.

Just as supply and demand determines rent, it also determines the price of a co-op apartment as well as what co-op apartment owners can charge someone who sublets from them. The maintenance charges of a co-op apartment will also factor into its price for prospective owners because it is a carrying cost of the apartment.

And with property taxes in general, we elect local officials to make all decisions about how our local government is run, not just those which involve levying and spending our tax dollars. Should those who don't own property be prohibited from voting in local elections?

 

[Midpack]

The biggest reason is that for the lions share of all mortgages, the bank does not hold the note, it is held in mortgage backed securities that are owned by investors.

The banks you pay are just the servicers, they do not hold the note.

Indeed, the 2008 meltdown would not have happened without mortgage backed securities. Not to say MBS were/are a bad thing, they were one of the best fixed income investment options for decades. It was only when they became more and more contaminated with subprime & alt-A loans (along with many other supporting factors) that the meltdown became inevitable. No, I did not see it coming.

I assume few banks hold mortgages any more, but I couldn't find anything on the interwebs to quantify MBS vs other...

 

[Andre1969]

What do you expect them to do? Let freeloaders mooch off the rest of the citizens who pay their property taxes?

My biggest issue with it is that you can theoretically own your home, free and clear, yet if you're unable to pay your property taxes, the gov't can simply seize it, profit greatly from it, and the homeowner is now out on the street.

Hypothetical example...some old lady who's lived on the homestead her whole life now has a home worth $1M, because of expensive development going up around her. Let's say the taxes on it are $20,000 per year, but she's only living off a meager social security, plus whatever her deceased husband might have had. She can't make her tax payments anymore, so the gov't steps in, takes it, kicks her off, and sells it to a developer for $1M. Well, they just profited to the tune of $980,000, and that little old lady is now homeless.

Now, I'm sure that's a very rare example. And you'd think that most people in that situation would simply sell and move. But then again, maybe not. Old people can be very stubborn. And, when they've lived in a place for long enough, establish their roots, they often have a bond with their home that most younger generations simply can't understand. To move them from their land could very well kill them.

Often, people like this first moved onto their land when property taxes were nominal. For instance, I found an old property tax bill to my house from 1961. It was a whopping $200. Last year, I paid $3071. Now, inflation has gone up considerably from 1961, but not to the tune of 15x! And, if it wasn't for the housing bubble burst, and plummeting assessments, it would have been worse. In 2010, my taxes would have been something like $5,000, but there was a Homestead tax credit of about $1800 applied to that, for it being my principal residence, so the bill I paid was only $3200. When assessments dropped, it ate into the credit first, which is why my actual bill didn't go down much. But, had I sold it in 2010, the new owner would have been stuck with the full $5000.

As time goes by, things do build up around them. Roads get improved, the sewer comes through and the gov't forces you to either hook up to it, or get your house condemned. They take a wide swath of your land for it, pay you a pittance, but then make YOU pay to hook up, over the course of twenty years! Then, more and more expensive homes go in, driving up property values, and assessments, so your taxes jack up even higher.

So, often, a lot of these older people get sort of the "We didn't land on Plymouth Rock, Plymouth Rock landed on US!" type of attitude.

 

[SpencerM]

I think the arguments to keeping a mortgage when you don't need to on a primary residence can be frequently sourced to not wanting to reduce consumption to pay it off early.

I don't choose to allow a bank to own part of my residence when I retire. A house is just a place to live after all. We all need that.

 

[Hamlet]

Your hypothetical example is essentially never going to happen, because there will be an army of bankers clamoring to offer this woman a reverse mortgage, or HELOC, or home equity loan.

There are many people in the world I feel are getting the shaft, but people with million-dollar homes and no mortgage generally don't make that list, IMO.

My biggest issue with it is that you can theoretically own your home, free and clear, yet if you're unable to pay your property taxes, the gov't can simply seize it, profit greatly from it, and the homeowner is now out on the street.

Hypothetical example...some old lady who's lived on the homestead her whole life now has a home worth $1M, because of expensive development going up around her. Let's say the taxes on it are $20,000 per year, but she's only living off a meager social security, plus whatever her deceased husband might have had. She can't make her tax payments anymore, so the gov't steps in, takes it, kicks her off, and sells it to a developer for $1M. Well, they just profited to the tune of $980,000, and that little old lady is now homeless.

Now, I'm sure that's a very rare example. And you'd think that most people in that situation would simply sell and move. But then again, maybe not. Old people can be very stubborn. And, when they've lived in a place for long enough, establish their roots, they often have a bond with their home that most younger generations simply can't understand. To move them from their land could very well kill them.

Often, people like this first moved onto their land when property taxes were nominal. For instance, I found an old property tax bill to my house from 1961. It was a whopping $200. Last year, I paid $3071. Now, inflation has gone up considerably from 1961, but not to the tune of 15x! And, if it wasn't for the housing bubble burst, and plummeting assessments, it would have been worse. In 2010, my taxes would have been something like $5,000, but there was a Homestead tax credit of about $1800 applied to that, for it being my principal residence, so the bill I paid was only $3200. When assessments dropped, it ate into the credit first, which is why my actual bill didn't go down much. But, had I sold it in 2010, the new owner would have been stuck with the full $5000.

As time goes by, things do build up around them. Roads get improved, the sewer comes through and the gov't forces you to either hook up to it, or get your house condemned. They take a wide swath of your land for it, pay you a pittance, but then make YOU pay to hook up, over the course of twenty years! Then, more and more expensive homes go in, driving up property values, and assessments, so your taxes jack up even higher.

So, often, a lot of these older people get sort of the "We didn't land on Plymouth Rock, Plymouth Rock landed on US!" type of attitude.

 

[Texas Proud]

I think reliance in FIRECALC is perfectly reasonable IF the future replicates the past. There have been a number of threads recently that have pointed out how exceptional the experience in the US has been. For example most industrialized countries have not been able to reliably support a 4% distribution for 30 years from a balanced portfolio. (some countries could barely manage a 1% withdrawal!) The US became the world's preeminent industrial power over the period FIRECALC's history covers plus it has been spared by and large from direct war damage. I certainly hope that economic development and the absence of war impacts at home continues into the far, far future but I'm not going to count on it. One small part of my peace of mind is paying off the mortgage. You feel better with a larger balance in the FIRECALC run - GOOD -we are both happy!

My bold above....


As one that also hopes nothing goes terribly bad in the future... but paying off the mortgage would not be my top priority IF something this bad should happen... actually feeding my family and myself would be a lot higher...

A 50% drop in the market did not change my mind, so what would must be really really bad and if that should happen, screw paying off any debt...

But, if it make you feel better that you do not owe someone when bombs are dropping around us, or the country is in anarchy, then I am happy for you... short of these things happening.... it does not make a difference either way to me like ERD says...

 

[ERD50]

I think the arguments to keeping a mortgage when you don't need to on a primary residence can be frequently sourced to not wanting to reduce consumption to pay it off early.

Pay off or not would not affect my consumption. When we talk about the pay-off debate, we are generally talking about people with a portfolio that is large relative to mortgage amount.

I don't choose to allow a bank to own part of my residence when I retire. A house is just a place to live after all. We all need that.

I fail to see the issue.

If you fell on very hard times, what would happen?

A) Own house outright - you burn through all your cash. Then sell house to raise more cash and go rent a room.

B) Hold mortgage - you have more cash, more cushion. If things got really bad and you burned through all of that too, you sell the house and pay off the mortgage with the proceeds, and go rent a room.

Were not talking big debt/equity ratios in retirement. The home value isn't going to drop below the mortgage amount.

So exactly what is the downside to having the ' bank to own part of my residence when I retire'? I don't see it. I'm living in my mortgaged house just the same as if I was living in my paid-off house, I'd just have a higher % of my money tied up in a not-very-liquid asset. I don't see the advantage at these low rates.

-ERD50

 

[Andre1969]

Your hypothetical example is essentially never going to happen, because there will be an army of bankers clamoring to offer this woman a reverse mortgage, or HELOC, or home equity loan.

There are many people in the world I feel are getting the shaft, but people with million-dollar homes and no mortgage generally don't make that list, IMO.

I wonder what the circumstances usually end up being, when it gets to the point that the gov't seizes a home for non-payment of taxes? I only have experience with one example, and what I have to go on is second-hand knowledge. One of my friends has a co-worker who was able to get a townhouse really cheap, because the gov't had seized it for non-payment of taxes. Apparently, the owner passed away, and the heirs all fought over who got to have it, but nobody wanted to pay the taxes on it. I think this went on for several years, until the gov't finally took it.

Realistically, I'd imagine most cases of government seizure are the result of something like that. But I always worry about the gov't abusing their power.

 

[Texas Proud]

My biggest issue with it is that you can theoretically own your home, free and clear, yet if you're unable to pay your property taxes, the gov't can simply seize it, profit greatly from it, and the homeowner is now out on the street.

Hypothetical example...some old lady who's lived on the homestead her whole life now has a home worth $1M, because of expensive development going up around her. Let's say the taxes on it are $20,000 per year, but she's only living off a meager social security, plus whatever her deceased husband might have had. She can't make her tax payments anymore, so the gov't steps in, takes it, kicks her off, and sells it to a developer for $1M. Well, they just profited to the tune of $980,000, and that little old lady is now homeless.

Now, I'm sure that's a very rare example. And you'd think that most people in that situation would simply sell and move. But then again, maybe not. Old people can be very stubborn. And, when they've lived in a place for long enough, establish their roots, they often have a bond with their home that most younger generations simply can't understand. To move them from their land could very well kill them.

Often, people like this first moved onto their land when property taxes were nominal. For instance, I found an old property tax bill to my house from 1961. It was a whopping $200. Last year, I paid $3071. Now, inflation has gone up considerably from 1961, but not to the tune of 15x! And, if it wasn't for the housing bubble burst, and plummeting assessments, it would have been worse. In 2010, my taxes would have been something like $5,000, but there was a Homestead tax credit of about $1800 applied to that, for it being my principal residence, so the bill I paid was only $3200. When assessments dropped, it ate into the credit first, which is why my actual bill didn't go down much. But, had I sold it in 2010, the new owner would have been stuck with the full $5000.

As time goes by, things do build up around them. Roads get improved, the sewer comes through and the gov't forces you to either hook up to it, or get your house condemned. They take a wide swath of your land for it, pay you a pittance, but then make YOU pay to hook up, over the course of twenty years! Then, more and more expensive homes go in, driving up property values, and assessments, so your taxes jack up even higher.

So, often, a lot of these older people get sort of the "We didn't land on Plymouth Rock, Plymouth Rock landed on US!" type of attitude.

I will also say this example is wrong...

First, they can not profit from the sale.. IOW, IF what you proposed even happened, they can only keep the money they are due and have to give the rest to the lady... they can not take the $1 million...

Second, in most places property taxes are frozen for senior citizens... so if she could have afforded the taxes prior to her becoming a little old lady, she should be able to afford them when the house goes up in value as her taxes will not change....

So either way, your example just does not hold up to the real world (maybe where you live it is different... if so, let me know and I can learn something)....

 

[Andre1969]

I will also say this example is wrong...

First, they can not profit from the sale.. IOW, IF what you proposed even happened, they can only keep the money they are due and have to give the rest to the lady... they can not take the $1 million...

Second, in most places property taxes are frozen for senior citizens... so if she could have afforded the taxes prior to her becoming a little old lady, she should be able to afford them when the house goes up in value as her taxes will not change....

So either way, your example just does not hold up to the real world (maybe where you live it is different... if so, let me know and I can learn something)....

So, what's the deal with these stories I hear about people getting a house for free simply by paying the back taxes on it? Is that something else, or is there more to the story than that?

As for freezing taxes for seniors, I'm in Maryland, but honestly don't know what kind of provisions they have for senior citizens. I don't think my grandmother's property taxes are frozen or reduced by virtue of her being a senior citizen. But, she's also doing okay, and is able to pay her bills. So perhaps there is something in place for senior citizens who are in a lower tax bracket and struggling?

My grandmother's cousin is struggling, but unfortunately, much of it is her own doing. She's been supporting and enabling her sportadically-employed son off and on for as long as I've been alive. And in 2010, her granddaughter, granddaughter's boyfriend, and their three little girls all moved in, too. And they've been dragging her down, although I heard the granddaughter recently got a decent job, so hopefully things are turning around for them.

 

[Bimmerbill]

I chose to max out my 401K this year and that leaves little left to pay extra on the mortgage.

I am not sure I'd do both if I could. I need the tax shelter the 401K provides, otherwise I'd get a hefty tax bill!

 

[pb4uski]

But renters have no skin in the game. Rent is determined by market conditions - supply & demand. The tax that the owner pays is just one of his costs, and is not directly reflected in the rent.

You're splitting hairs.

While it is true that rent is driven by supply and demand, it would be the rare instance that the rent would be less than the landlord's direct costs (property taxes, maintenance, etc).

The point is that if renters vote for programs that result in higher property taxes that ultimately those higher taxes will be reflected in rent. While I might agree that many renters are not cognizant of that linkage, it exists nonetheless. Most landlords will will start with their direct costs, plus opportunity cost of capital, etc. in determining what they want for rent and then supply and demand come into play.

 

[Texas Proud]

So, what's the deal with these stories I hear about people getting a house for free simply by paying the back taxes on it? Is that something else, or is there more to the story than that?

As for freezing taxes for seniors, I'm in Maryland, but honestly don't know what kind of provisions they have for senior citizens. I don't think my grandmother's property taxes are frozen or reduced by virtue of her being a senior citizen. But, she's also doing okay, and is able to pay her bills. So perhaps there is something in place for senior citizens who are in a lower tax bracket and struggling?

My grandmother's cousin is struggling, but unfortunately, much of it is her own doing. She's been supporting and enabling her sportadically-employed son off and on for as long as I've been alive. And in 2010, her granddaughter, granddaughter's boyfriend, and their three little girls all moved in, too. And they've been dragging her down, although I heard the granddaughter recently got a decent job, so hopefully things are turning around for them.

I have read about the tax sales, but they are not a $1 million dollar house... but hey, I could be wrong... but if the house was worth $1 million it would sell for more than the taxes... it is a bid process. It might not be close to $1 mill, but any excess goes back to the home owner...


Good to know about Maryland.... I had forgotten about the senior citizen reduction in taxes... you get an extra exemption for being 65 or older plus having your taxes frozen here (I think school taxes can go up, but I am not sure since I am not there)...

But as an example, the senior who owned my house paid about $200 for county taxes, I pay $1,300. Add it school, water district etc. and the total taxes were probably less than $500 vs mine over $3,000...

 

[pb4uski]

So, what's the deal with these stories I hear about people getting a house for free simply by paying the back taxes on it? Is that something else, or is there more to the story than that?
....

There is a lot more to the story.

Typically where a homeowner doesn't pay their taxes the property will be sold at a "tax auction". The house goes to the highest bidder, like any auction and the money goes into escrow.

The homeowner has up to a year to redeem the property by paying an amount equal to the overdue taxes and penalties through the redemption date plus interest of ~1%/month on the amount in escrow. In this case, the municipality gets the overdue taxes and penalties and the buyer gets their money back plus 1%/month interest.

If the homeowner doesn't redeem the property within a year then buyer gets title to the property. The escrow is used to pay the amount of overdue taxes and penalties to the municipality and any remainder goes to the homeowner.

While the above is a bit of an oversimplification and the details vary from jurisdiction to jurisdiction, that is generally the way it works around here.

 

[Texas Proud]

So, what's the deal with these stories I hear about people getting a house for free simply by paying the back taxes on it? Is that something else, or is there more to the story than that?

As for freezing taxes for seniors, I'm in Maryland, but honestly don't know what kind of provisions they have for senior citizens. I don't think my grandmother's property taxes are frozen or reduced by virtue of her being a senior citizen. But, she's also doing okay, and is able to pay her bills. So perhaps there is something in place for senior citizens who are in a lower tax bracket and struggling?

My grandmother's cousin is struggling, but unfortunately, much of it is her own doing. She's been supporting and enabling her sportadically-employed son off and on for as long as I've been alive. And in 2010, her granddaughter, granddaughter's boyfriend, and their three little girls all moved in, too. And they've been dragging her down, although I heard the granddaughter recently got a decent job, so hopefully things are turning around for them.

Hey... here is some other info about taxes I forgot about... from the bottom of the bill...

"IF YOU ARE 65 YEARS OF AGE OR OLDER OR ARE DISABLED AND THE PROPERTY DESCRIBED IN THIS DOCUMENT IS YOUR RESIDENCE HOMESTEAD, YOU SHOULD CONTACT THE APPRAISAL DISTRICT REGARDING ANY ENTITLEMENT YOU MAY HAVE TO A POSTPONEMENT IN THE PAYMENT OF THESE TAXES. "

You do not even have to pay your taxes if you are cash strapped here... they just build up...

 

[W2R]

You do not even have to pay your taxes if you are cash strapped here... they just build up...

Here, if you are 65 with an income below a fairly substantial prescribed level (around $62K right now), your assessment is frozen. I think we do have to pay our property taxes on time here in Louisiana, though seniors in Texas don't.

 

[jkern]

My real life example:

Refi to a 10 year fixed rate at 4.75% in 2003.

Paid off mortgage in lump sum at the end of 2004.

My portfolio's average returm from 2005 to 2011 was 4.4%.

My main reason for paying off my mortgage was not that I thought it was the best financial descision, but it was for the intangable peace of mind. As it turned out for me, it was a good financial desicion.

 

[ripper1]

I think the arguments to keeping a mortgage when you don't need to on a primary residence can be frequently sourced to not wanting to reduce consumption to pay it off early.

I don't choose to allow a bank to own part of my residence when I retire. A house is just a place to live after all. We all need that.

WRONG.....I think most people on this panel that prefer to keep their mortgage are looking for investment opportunities.

 

[REWahoo]

WRONG.....I think most people on this panel that prefer to keep their mortgage are looking for investment opportunities.

Rather than profess to know how the majority here feel, why not do a poll?