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Old 07-27-2009, 07:40 AM   #21
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Originally Posted by bank5 View Post
This is the approach I'm taking:

1. Max out tax deferred accounts
2. Pay off debt
3. Invest in BMW taxable accounts

If I was close to retirement, maybe I would move #3 ahead of #2. However, I'm more than 20 years away so I have a lot time to build a solid nest egg in my tax deferred accounts.

If you want, try doing some FIRECALC runs. One with the normal mort payments, and one with higher payments for a shorter time. The $12,000 loan probably isn't big enough to make a big diff, I just wouldn't pay it off on principle (no pun intended).

I've only done these FireCalc runs on a post retirement scenario, they usually show a *slight* advantage to holding a mortgage. I never ran one with 20 years of accumulation phase, but offhand I don't see why it would be different.

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Old 07-27-2009, 08:17 AM   #22
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Would you invest in a taxable account before paying down the mortgage? I'm excited to become debt free even though I'm still many years off
If I both (a) had a long time horizon for this money AND (b) I had a more than adequate emergency fund, then yes.
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Old 07-27-2009, 10:04 AM   #23
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Would you invest in a taxable account before paying down the mortgage? I'm excited to become debt free even though I'm still many years off
We do both. I have a rough idea of when I will retire so we are paying down the mortgage at a rate which will pay it off at about that time while simultaneously investing in a taxable account.

The Boglehead Wiki has a good overview of the pay it off vs invest issue here: Paying down loans versus investing - Bogleheads

What to invest in? I assume you have an AA already so you should invest in that in a tax efficient manner (Principles of Tax-Efficient Fund Placement - Bogleheads). Don't have an AA? Get one: Category:Asset Allocation - Bogleheads

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Old 07-27-2009, 10:23 AM   #24
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Originally Posted by bank5 View Post
This is the approach I'm taking:

1. Max out tax deferred accounts
2. Pay off debt
3. Invest in BMW taxable accounts
I'm doing something similar, but a little different:

1. max out tax deferred accounts
2. made sure the emergency fund was increased to 12 months
3. splitting the rest more or less equally between:
(a) taxable investments and
(b) paying off debt (student loans and mortgage)

Brewer and the rest of the guys (and gals) advocating investing instead of paying down your 3% student loans or your 5.25% mortgage are more than likely correct from a financial perspective. But there's an emotional benefit to being debt-free that is different for different people, so I understand the desire to pay down your debt.

What I've done is basically hedged my bets and split my extra savings between debt repayment and taxable investments -- that way, no matter what the "right" answer is, I'm only half-wrong.

As to whether to repay the mortgage or the student loans first ...

Until recently I would have been in favor of paying down the mortgage first, because that's securing your home, presumably something you need and wouldn't want taken away from you. Also, the interest rate is higher.

However, given the way our government is manipulating the housing markets, and given the implosion in the value of housing, I'm much more skeptical that there is much benefit. After all, if you truly hit hard times you can look to Uncle Sam for a cramdown, bankruptcy protection, or if you're in the mood you can just quit paying your mortgage and live mortgage free for 2 years until the bank finally gets around to foreclosing on you. Home mortgages have become responsibility-free liabilities, courtesy of Uncle Sam. So I see little benefit is being a responsible sucker and paying it off early.

Student loans can never be discharged in bankruptcy and there is no government "cramdown" for a student loan (although, I hear lots of whinging out there, so stay tuned!).

So whatever funds I'm applying to debt repayment, I'm using to knock out the student loans for now.

Edited to add: I'm only actually paying down debt if the interest rate on the debt is higher than what I can get in a FDIC-insured savings account or CD. Given the very low interest rates available in savings accounts / CDs right now, I am in fact paying down debt. But previously, the money I've used for "debt repayment" has actually gone into a dedicated savings account / CD at a higher interest than the debt, i.e. a dedicated "loan payoff fund". So long as the loan payoff fund was earning more interest than the loan it was designated for, I left the money in there; but recently as interest rates have dropped, I actually started paying down the debt.
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Old 07-27-2009, 11:01 AM   #25
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The Boglehead Wiki has a good overview of the pay it off vs invest issue here: Paying down loans versus investing - Bogleheads
That is some good info. I noticed that
- Pay down deductible mortgage or student loans (rate 4% after tax)
is above:
- Invest in taxable account (rate 4% on municipal bonds)


Does anyone know if home mortgage interest is deductible on state taxes?
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Old 07-27-2009, 11:28 AM   #26
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Originally Posted by bank5 View Post
That is some good info. I noticed that
- Pay down deductible mortgage or student loans (rate 4% after tax)
is above:
- Invest in taxable account (rate 4% on municipal bonds)

Does anyone know if home mortgage interest is deductible on state taxes?
All situations are individual and may not take things into account like personal comfort levels and cash flow concerns.

Paying off a smaller loan rather than paying down a larger one, for example, will significantly boost cash flow, so if cash flow is a concern paying off a smaller one (like the Dave Ramsey "snowball" method) would be preferable.

If cash flow isn't a concern, paying off the higher rate (after-tax) debt would make more sense. And if your debt load is manageable and FIXED RATE, and you're comfortable with the debt, it may be better long-term to invest the money instead of paying off debt. Again, if you're as averse to debt as I am, you'd likely prefer a sure-thing lower expected return debt paydown than investing.

And all this assumes you have a more than adequate emergency fund already in place. In this economy I'd save the money for liquidity unless I already had a humongous emergency fund or had good reason to believe that my current income stream (whether from a job, a pension, SS, personal savings) was extremely secure.

As for the deductibility of mortgage interest on state taxes, that would depend on state law but I believe it is deductible in most states.
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Old 07-27-2009, 12:48 PM   #27
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Paying off a smaller loan rather than paying down a larger one, for example, will significantly boost cash flow, so if cash flow is a concern paying off a smaller one (like the Dave Ramsey "snowball" method) would be preferable.
Boosting my cash flow and the psychological reasons are why I'll probably pay off the student loan first. I have 12+ month E-fund and 1 1/2 secure jobs so I'm in pretty good shape as far as that goes. I'll probably wait until tax time to make any moves though to see where I stand after paying Uncle Sam.

I don't know that much about taxable accounts so I'm going to look into that too.

Quote:
Originally Posted by ziggy29 View Post
As for the deductibility of mortgage interest on state taxes, that would depend on state law but I believe it is deductible in most states.
I live in NC and find state taxes more confusing than federal. The tax form is this - http://www.dornc.com/downloads/D400.pdf
based on line 49 I think mortgage interest would be included.
[QOUTE=NC-d400]
Other deductions from federal taxable income (Attach explanation or schedule. Do not include any deduction for retirement benefits on this line.)
[/QOUTE]
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Old 07-27-2009, 06:30 PM   #28
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