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Old 08-06-2010, 02:34 PM   #61
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Yes he did. With the thinking that the higher WR would be taxed at (or near) your marginal tax rate. So it could well be a factor (unless your minimum WR from an IRA and/or pensions already exceeds that?).
Another factor in 2014 could also be the health care subsidy. It might be beneficial to pay off the mortgage in order to lower expenses and qualify for a higher subsidy.

It'll be interesting to see how that plays into the pay off the mortgage discussions.
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Old 08-06-2010, 04:13 PM   #62
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Another factor in 2014 could also be the health care subsidy. It might be beneficial to pay off the mortgage in order to lower expenses and qualify for a higher subsidy.

It'll be interesting to see how that plays into the pay off the mortgage discussions.
True. But let's say I pay off the mortgage by selling stocks with no cap gains (which a lot of us have), to avoid a big tax bill in one year. I could also use that money to pay the mortgage for many years, and while my 'expenses' would be higher, my taxable income would not be - and I think that is all that matters.

But you are still counting on that investment to kick off some income, and some/all of that could be taxable. So say average returns of 6% could mean another $6,000 in taxable earnings on a $100,000 mortgage (but you could also be much more tax efficient than that). And that could be something to watch for. So I guess it depends just what the true 'marginal rate' of that that extra earnings would be. Good point.

Now dang it, you're gonna get me off on a rant - taxes and credits and deductions and AMT and refundable tax credits (many of which have different AGI thresholds on them), are all so complex these days, calculating the marginal rate isn't as simple as it would seem, and it sure isn't predictable.

-ERD50
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Old 08-06-2010, 05:13 PM   #63
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True. But let's say I pay off the mortgage by selling stocks with no cap gains (which a lot of us have), to avoid a big tax bill in one year. I could also use that money to pay the mortgage for many years, and while my 'expenses' would be higher, my taxable income would not be - and I think that is all that matters.

But you are still counting on that investment to kick off some income, and some/all of that could be taxable. So say average returns of 6% could mean another $6,000 in taxable earnings on a $100,000 mortgage (but you could also be much more tax efficient than that). And that could be something to watch for. So I guess it depends just what the true 'marginal rate' of that that extra earnings would be. Good point.

Now dang it, you're gonna get me off on a rant - taxes and credits and deductions and AMT and refundable tax credits (many of which have different AGI thresholds on them), are all so complex these days, calculating the marginal rate isn't as simple as it would seem, and it sure isn't predictable.

-ERD50
This just underlines my point that "pay off or not" arguments that hinge on future returns and taxes etc are pretty pointless. However, I can get behind an argument that refinancing to a lower payment frees up cash to spend.
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Old 08-06-2010, 10:48 PM   #64
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True. But let's say I pay off the mortgage by selling stocks with no cap gains (which a lot of us have), to avoid a big tax bill in one year. I could also use that money to pay the mortgage for many years, and while my 'expenses' would be higher, my taxable income would not be - and I think that is all that matters.

But you are still counting on that investment to kick off some income, and some/all of that could be taxable. So say average returns of 6% could mean another $6,000 in taxable earnings on a $100,000 mortgage (but you could also be much more tax efficient than that). And that could be something to watch for. So I guess it depends just what the true 'marginal rate' of that that extra earnings would be. Good point.

Now dang it, you're gonna get me off on a rant - taxes and credits and deductions and AMT and refundable tax credits (many of which have different AGI thresholds on them), are all so complex these days, calculating the marginal rate isn't as simple as it would seem, and it sure isn't predictable.
Your analysis leads me to believe that it really depends on the individual situation. And I agree that it is not close to simple. I wish it could be easier, but then we'd miss out on all the fun discussions.

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This just underlines my point that "pay off or not" arguments that hinge on future returns and taxes etc are pretty pointless. However, I can get behind an argument that refinancing to a lower payment frees up cash to spend.
The best you can do is look at the current environment and see if it makes sense. If it does, forecast with a conservative set of expectations. If after that, it still makes sense, then it's might be worth it.

But I agree that the biggest benefit is increased cash flow.
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Old 08-06-2010, 11:59 PM   #65
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This just underlines my point that "pay off or not" arguments that hinge on future returns and taxes etc are pretty pointless. However, I can get behind an argument that refinancing to a lower payment frees up cash to spend.
Agreed. I re-re-read (!) your OP, and maybe I can rephrase it a bit so we can see why this keeps getting into 'pay-it-off-or-not' territory, and address that as a side comment.

So in the OP, you are asking for opinions on refinancing a 15 yr mortgage @ 4.5% and 5.5 years remaining to a new 15 year mortgage @ 4% to reduce the monthly bill from $2500 to $1100. Your other posts indicate that:

1) You want to reduce monthly expenses.

2) You aren't so concerned about the total return side of things (or simply recognize it's hard to evaluate and could go either way). and...

3) Carrying the debt for this longer period isn't a concern for you.

Based on that, I don't think anyone has come up with a reason for you to not re-finance. Rather, they gave reasons that they would not re-finance.

Maybe you could expand on your reply in post #4 (30 year mortgage suggestion from Nords). Do you feel that incremental delta is too small to justify doubling the mortgage term ( $2,500 to $1,100 to $770)? Otherwise, this seems to fit in with wanting to reduce your monthly expenses.

OK, so back to the pay-it-off issue for just a moment. Obviously, paying it off reduces your mortgage expenses to zero. So if reduced expenses are the goal, pay-it-off sure fits the bill. I think there is something implied here, that you didn't explicitly state. You don't want to 'mess' with your current portfolio. The advantage of this re-finance is that it does not affect your portfolio - it just trades one mortgage for another. Maybe your funds aren't liquid, maybe you'd have big capital gains, whatever. But pay-it-off means tapping into that, r-fi does not.

So, Readers Digest version - the re-fi seems a fit for you, and you may want to re-think the 30 year option.

At any rate, thanks - I keep thinking about locking in a 30 year at these rates, so this whole process is helping me think that through.

-ERD50
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Old 08-07-2010, 07:40 AM   #66
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The thing about a 30 year loan is that it gives you options. Having more alternatives rather than fewer is a Good Thing.

A 15 locks you into higher payments than a 30. I know how to pay off a 30 year note in 15 years. Just pay more. But paying off a 15 in 30 is awkward, since the sheriff comes over and puts all your furniture on the sidewalk.

This alternative comes with a price. The rate on a 30 is higher than the rate on a 15.
A quick peek at nationalmortgagealliance.com shows these (300K, approx. zero lender fee):
[term, rate, monthly payment, 1st mo interest]
30Yr: 4.50% $1520/mo, $1125
15Yr: 3.875% $2200/mo $969
20Yr: 4.25% $1858/mo $1063

The freedom of having a $680/mo (31%) smaller payment costs $156/mo (16%) more.
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Old 08-07-2010, 08:29 AM   #67
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The thing about a 30 year loan is that it gives you options. Having more alternatives rather than fewer is a Good Thing.
True; we paid off our last 30-year note in 5.5 years ....
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Old 08-07-2010, 09:38 AM   #68
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Maybe you could expand on your reply in post #4 (30 year mortgage suggestion from Nords). Do you feel that incremental delta is too small to justify doubling the mortgage term ( $2,500 to $1,100 to $770)? Otherwise, this seems to fit in with wanting to reduce your monthly expenses.

OK, so back to the pay-it-off issue for just a moment. Obviously, paying it off reduces your mortgage expenses to zero. So if reduced expenses are the goal, pay-it-off sure fits the bill. I think there is something implied here, that you didn't explicitly state. You don't want to 'mess' with your current portfolio. The advantage of this re-finance is that it does not affect your portfolio - it just trades one mortgage for another. Maybe your funds aren't liquid, maybe you'd have big capital gains, whatever. But pay-it-off means tapping into that, r-fi does not.
Nicely put. Refinancing is all about cash flow for me. I have enough in after tax investments to pay off the mortgage, but I wouldn't have much left so it would be a bad use of my capital. While Im working I don't mind the $2500/month mortgage payment and the thing that got me thinking about this was the insanely low rates and being almost at the point of ERing. The $17000 reduction in my annual expense that refinancing to a 4%, 15 year loan would give me while preserving my after tax capital is very tempting.

The 30 year option is just a bridge too far for me, not worth the extra $300 a month for twice the term. I don't think mortgage rates will suddenly rise so my plan is to keep working for a year or so and aggressively pay down the mortgage while I have the cash coming in so that when I do ER I'll be able to refi a smaller principal balance and have the freedom of a low payment while knowing I could pay it off whenever I liked.
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