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Old 07-05-2012, 09:12 PM   #81
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This was a great post to read. We just paid off our Mortgage this month in much the same way (sending in large chunks but keeping an emergency fund).

The next step for us is investing outside of retirement funds. I've been reading here for years and can't wait to start using some of the info.
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Old 07-05-2012, 09:52 PM   #82
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This was a great post to read. We just paid off our Mortgage this month in much the same way (sending in large chunks but keeping an emergency fund).
Congratulations!! It must be a wonderful feeling. You are four years ahead of me - my goal date for paying off the mortgage is 7/4/16. I think paying it off by Independence Day has a nice symmetry to it.

It is painful every month when I double up on the payment, but I just keep my eye on the prize, and reading success stories like yours helps keep me on track.
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Old 07-06-2012, 06:43 AM   #83
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We just paid off our mortgage before the I-Day, and it took us about 8.5 years for a 30 years fixed. The strange thing is that we don't have any hysterical jubilation afterwards; almost like a total anticlimax. But we do feel a big relief and now can concentrate more toward our final ER.

Maybe the true color of simple life is: any little bit of sweetness will be cherished and lasting a long time, and any little bit of bitterness will also be appreciated and served as a reminder what will be coming next.
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Old 07-06-2012, 07:02 AM   #84
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I was cruising around the Bogleheads Wiki and saw this guidance (below) to help make the 'pay off/don't pay off' decision. Useful info to consider if you have this choice to consider.

-----------------------
Guidelines for making the choice

Usually, you should pay down the loan if the after-tax interest rate on the loan is significantly higher than the after-tax rate you can earn on a comparable bond investment (a low-risk bond investment with duration equal to the time until you will pay off the loan), and you can pay the loan down without any liquidity problems.

Here is the most likely order of priority for investments versus paying off loans; it does depend on the rates, so these examples are based on typical rates which may not be accurate at any specific time.

Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)
--------------------------
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Old 07-06-2012, 07:02 AM   #85
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1) The simple act of "saving money" has kind of taken over my life. I have become almost too frugal. I have recently found myself pushing off a much needed vacation, probably because I don't want to "break my momentum" on my great streak of banking paychecks.
2) Because I was saving to pay off the mortgage, it has been months (years?) since I bought anything of value. I lately find myself drawn to old muscle cars. Like a sailor who has been at sea too long, I am afraid I am about to hit shore, and bust loose.
I often have the same sentiment about it. While we're still putting money away, I also just bought a nice macro lens for my camera and a half dozen more books.

There is a middle ground but it's hard to figure out what that is sometimes.
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Old 07-06-2012, 10:01 AM   #86
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Originally Posted by Huston55 View Post
I was cruising around the Bogleheads Wiki and saw this guidance (below) to help make the 'pay off/don't pay off' decision. Useful info to consider if you have this choice to consider.

-----------------------
Guidelines for making the choice

Usually, you should pay down the loan if the after-tax interest rate on the loan is significantly higher than the after-tax rate you can earn on a comparable bond investment (a low-risk bond investment with duration equal to the time until you will pay off the loan)...
I think it's great that they put a wiki together on these things, rather than endless repetitive re-hashing of redundancies, but I disagree with that investment comparison to a 'comparable bond investment'.

I just look at my total AA, and I should expect investment returns comparable with that, which over the long run should be higher than a conservative bond investment, and probably higher than current low mortgage rates.

Right now, 30 year Treas are paying ~ 2.7% while 30 year fixed Mortgages are going for ~ 3.7%. But do we really expect that interest rates will stay that low for the next 30 years? Why 'lock in' that low rate with a ' duration equal to the time until you will pay off the loan'? Or that our portfolios won't return over 3.7% over the next 30 years?

-ERD50
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Old 07-06-2012, 11:19 AM   #87
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Help me understand how paying off a mortgage is different from saving or investing until you are ready to retire and deciding then whether to pay off the mortgage?
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Old 07-06-2012, 11:48 AM   #88
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Originally Posted by Huston55 View Post
I was cruising around the Bogleheads Wiki and saw this guidance (below) to help make the 'pay off/don't pay off' decision. Useful info to consider if you have this choice to consider.

-----------------------
Guidelines for making the choice

Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)
--------------------------
Wow, thanks for that. It is actually exactly what we have done over the last 12 years:
401(k) to 15% of income
*never had credit card debt*
paid off student loans
401(k) to max
Roth IRA to max
paid off mortgage

I thought our next step was taxable accounts--- now I just need to get on that.
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Old 07-06-2012, 11:51 AM   #89
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Originally Posted by Huston55 View Post
Usually, you should pay down the loan if the after-tax interest rate on the loan is significantly higher than the after-tax rate you can earn on a comparable bond investment (a low-risk bond investment with duration equal to the time until you will pay off the loan), and you can pay the loan down without any liquidity problems.
--------------------------
I used a similar principle when deciding to pay off my mortgage back in 1997-1998. I looked at the after-tax interest saved by paying it off versus the after-tax interest forgone by using one of my investments (a muni bond fund, at least for the majority of the payoff). The tipping point for me was discovering that I would hit the "floor," or standard deduction, on my state income tax return so the after-tax interest savings was greater than first thought.
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Old 07-06-2012, 12:44 PM   #90
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Okay, which one of you guys did this?

Mass. man pays off mortgage with 800 pounds of pennies

Quote:
Thomas Daigle delivered two 400-pound boxes holding more than 62,000 pennies onto the steps of Milford Federal savings and Loan Association to make the last payment on the home he and his wife Sandra bought when they married in 1977.

Daigle tells the newspaper's Derek McLean that he just wanted to make the last payment "memorable," and began collecting an average of 2.5 pennies a day.

...Daigle says his wife didn't know how many he'd saved over the years -- she'd just laugh whenver he'd find a penny and tell her it was for the mortgage.

As the big day neared, Daigle says he gave the mortgage company a heads up and they were "100 percent for it."
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Old 07-06-2012, 04:50 PM   #91
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Okay, which one of you guys did this?

Mass. man pays off mortgage with 800 pounds of pennies
OK...I admit it!

It was REW!

Now that we have that out of the way, this dude is either very old or has poor math skills. 62,000 pennies at 2.5 pennies a day is 68 yrs. Or, maybe it's the 'marriage clock' - it just seems longer than it really is.
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Old 07-06-2012, 04:52 PM   #92
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OK...I admit it!

It was REW!

Now that we have that out of the way, this dude is either very old or has poor math skills.
Guilty on both counts...
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Old 07-06-2012, 05:10 PM   #93
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That is such a cool story about paying off the mortgage with pennies. I used to roll pennies as a kid! When we were paying ours off, we'd scrounge up all sorts of extra money, but it was put into the bank and we wrote checks. Far less imaginative!
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Old 07-06-2012, 05:25 PM   #94
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Maybe he saw that Seinfeld episode where at the end Kramer dumps a load of coins onto that guy to pay for Jerry's cigars. Earlier in that episode, he tried to buy some calzones from a pizza joint with coins and was angrily turned away (with a shirt dried and burned in a pizza oven LOL!).
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Old 07-06-2012, 05:48 PM   #95
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Regarding tax "free" versus tax "deferred", it can be either. We can keep the property and continue to earn income from it (without taxes for about as long as we will live based on depreciation schedules) or, we can exchange it (1031 exchange) to extend that period or, I've heard of those that exchange then decide to reside in their former rental properties, essentially avoiding the tax on the depreciation recapture...until probate, as you say. I have to check out the last bit to see how it works.
We're planning on living in our rental property after retirement or sooner so I'm curious if you've looked into how that works regarding avoiding depreciation recapture. Thanks.
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Old 07-06-2012, 08:05 PM   #96
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We're planning on living in our rental property after retirement or sooner so I'm curious if you've looked into how that works regarding avoiding depreciation recapture. Thanks.
I can't say I know any more than my original post but, this link seems to support the possibility of conversion to personal residence (excerpt below).

1031 Exchange - Frequently Asked Questions on 1031 Exchanges

------------
How long must I wait before I can convert an investment property into my personal residence?

A one-year holding period before investment is advised. As there is no definitive holding period that currently exists, the IRS did propose a one-year holding period before investment property could be converted, sold or transferred, yet it was never adopted by Congress. Please do not misconstrue the failure of the adoption of this proposal as an approval to convert investment property at any time. As the one-year period reflects the intent of the IRS, most tax practitioners advise clients to hold their property at least one year before converting into a personal residence.

As intent is extremely important, we remind you that it should be your intention at the time of acquisition to hold the property for its productive use in a trade or business, or for its investment potential.
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Old 07-06-2012, 08:51 PM   #97
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How long must I wait before I can convert an investment property into my personal residence?
A one-year holding period before investment is advised. As there is no definitive holding period that currently exists, the IRS did propose a one-year holding period before investment property could be converted, sold or transferred, yet it was never adopted by Congress. Please do not misconstrue the failure of the adoption of this proposal as an approval to convert investment property at any time. As the one-year period reflects the intent of the IRS, most tax practitioners advise clients to hold their property at least one year before converting into a personal residence.
As intent is extremely important, we remind you that it should be your intention at the time of acquisition to hold the property for its productive use in a trade or business, or for its investment potential.
-----------
Holy crap, I never thought this would be legal.

This implies that you could buy a house (with a mortgage as a primary residence), live in it for at least a year, turn it into rental property (still with that cheap mortgage), fully depreciate it, move back into it for at least a year to re-convert it to a primary residence, and then sell it.

That's pretty much what we've been planning to do with our rental property if our daughter (someday) wants to move into our primary residence in order to send her (possibly someday) kids to her ol' high school. After their statute of limitations expires.

I remember that there's some issue with declaring the cap gains as tax-free, so that part wouldn't work. But in our case it might avoid $40K of depreciation recapture.

This sounds like the kind of tax maneuver that's guaranteed to earn an audit...
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Old 07-06-2012, 09:39 PM   #98
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Holy crap, I never thought this would be legal.

This implies that you could buy a house (with a mortgage as a primary residence), live in it for at least a year, turn it into rental property (still with that cheap mortgage), fully depreciate it, move back into it for at least a year to re-convert it to a primary residence, and then sell it.

That's pretty much what we've been planning to do with our rental property if our daughter (someday) wants to move into our primary residence in order to send her (possibly someday) kids to her ol' high school. After their statute of limitations expires.

I remember that there's some issue with declaring the cap gains as tax-free, so that part wouldn't work. But in our case it might avoid $40K of depreciation recapture.

This sounds like the kind of tax maneuver that's guaranteed to earn an audit...
I think that last act, the sale, might cause a cap gain and/or depreciation recapture.

Another approach would be: buy a home, live in it, convert to a rental, sell/exchange rental for another rental (in desired retirement location), move into rental after 1+ yrs, remain in property until---probate, avoiding all cap gains and depreciation recapture.
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Old 08-08-2012, 02:59 PM   #99
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I say Option B... and I speak from experience because that is what I chose to do without any regret. There's nothing wrong with any of the options listed there and all speak to some level of risk tolerance that only you can define. Consider these two things that helped me make my decision (not that your decision will be the same... or that there is a right or wrong answer)...

1. If you had a paid off house right now, would you borrow money against it to invest in the market? If not, then option C is off the table because what that question introduces into the mathematics of the situation is risk tolerance.

2. If you paid your house off with the plan in option A or B and decided it wasn't such a great idea afterwards, go ahead and borrow the money back out again and do whatever else you were going to do.

In my case, having a house paid off (and a 10 month emergency fund in place) where I knew my largest monthly financial obligation was eliminated brought me peace of mind in case there was ever an emergency (e.g. disability, job market downturn, etc).

Best of luck to you and congratulations on reaching a goal through such hard work and disciplined savings!
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Old 08-09-2012, 09:03 AM   #100
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This does not consider the feel good emotion of paying off the debt. I would also seperate the extra to invest $ from reducing your mortgae. You already have an extra 2K to invest. Will more help you get a better return?

It also makes me feel good to have my mortgage amount in the bank. I am also a meduim wage earner and I always consider how long it took me to amass the stash. As you get older time is NOT on your side and you don't want to be forced to liquidate at a bad time from one of your other asset classes.

1) Get a no cost Heloc for as much as you can. Rates are approx 2.7%. Apply all to the 1st mortgage. Also maybe pay extra. If rates rise then pay off Heloc. Meanwhile the spread between your savings & debt will get greater.

2) Refi and roll all costs in loan. GetBreakeven should be under 18 months. Maybe pay extra.

3) Pay extra on current loan.

These are all no cost out of pocket options.
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