Another payoff the mortgage outlook

[dm]

I too have been pondering about paying off my mortgage. I have a 15yr, 5% mortgage. I am in the second year.

My mortgage is $120,000 and my principle and interest payment is $950. I will pay around 50,000 in interest over the term of the loan.

I guess I'm looking at it in more in terms of cash flow. If I could get 5% on my 120,000 invested it would still only get me $6000 . I would still have to come up with the additional $5400. I would also have to pay taxes on the 6000. Now I realize my principle would be reduced but Im also paying the bank the $5400.

If I don't have to come up with the $5400 interest payment to the bank, it is continuing to earn money for me. Thus offsetting somewhat if interest rates rise in the future. Now this value would change each year of coarse and Im not going to calculate it for each year, but you get the idea. Also the money that doesn't go to the payment will also be componding each year.

Im sure Im missing something but it just seems easier to payoff the bank and not worry about comming up with the $950 a month payment for the next 13yrs.

I basically did the same thing last year with a 9 year $170,000 @ 5.25%. I looked at it like it was part of my bond component and an easy way to get 5.25% interest.

I'm glad I did it.

[JDARNELL]

I concur. Our current home is Approx $275K. We have been in it for 2 years and owe $150K on it. Have a 15 Yr @ 5%. Plan to have it paid off in less than 4 years. That will reduce our monthly income requirements considerably.

The way I look at it is that I am getting about 5% on my money by paying it down and treating it as a bond component. It will give us huge flexibility the last 2 years before I retire from the AF since we will have considerably more disposable income to make the final adjustements before we pull the trigger. We may pay off one of our rentals so we have more income or buy another one. Who knows.

JDW

Slightly off topic, but indulge me. Maybe something
in here someone can use.

My tiny holding company owns all of our real estate
and I own the company 100%. No debt on anything
for reasons which I have listed in prior posts. We rent our
home from my company (friendly landlord - good rate).
Now, I take the standard deduction personally and pay no federal income taxes as I keep my income under
the threashold of taxability. However, my company gets
to take all of the tax write offs (except mortgage interest of course) on the real estate. Since I converted the
corp. to a holding company (1993), I think it's made money every year. But, we don't pay taxes at the corporate level either as we had a large NOL
(net operating loss carryforward) from prior years.
In case any of you think this was superior planning,
I must confess it was mostly worked out "on the fly" which is kind of typical.
I remember telling someone that I knew I had turned the corner when I started spending more time on
figuring how to hang onto and grow my money, and to
minimize taxes, than I did on making it.

John Galt

[brewer12345]

I think that if you are already retired, it makes a lot of sense to pay off the mortgage. However, if you are in the accumulation phase, a mortgage may very well make sense, as you get cheap funds on an after-tax basis. I'm in no hurry to pay off my 15 year 4.99% mortgage, since I am in no danger of default.

John,

Correct me if I'm wrong - but it sounds like you set this up when it was possible to take real estate losses off your primary income (effectively deferring taxes). Unfortunately it is no longer possible since this type of organization is considered passive income.

So there is not much benefit for someone new to create a separately owned company to own the real estate - in fact if you aren't careful you may pay extra taxes now (since you can't deduct rent) that you will only get back later as the holding company becomes profitable.

[Beachbumz]

Not to step on John's toes but...

From what I understand, there is a profit to the holding company, since there is no mortgage, the rental income is higher than the expenses (depreciation, property taxes, insurance, etc.). This profit from the rental property is offsetting Net operating losses carried forward from prior ventures, which is the only way he is going to get credit for them.

Problems may arise if John decides to sell this house (no capital gain exclusion and he would have to recapture the depreciation, but maybe the NOLs are enough to cover that or maybe there won't be much in the capital gain department.

How'd I do John

The bum

[Beachbumz]

I have a similar dilema with a rental house with a 5.25% fixed rate 15yr mortgage. I'm about 2 years into it, so I hate to give up such cheap money. I'm still not sure what I'm going to do, a guaranteed 5.25% or ?. It sure would be an easier decision if the rate was higher, but I guess that is a good problem to have.

Hi Beachbumz! How'd you do? Damn near perfect!

John Galt

[dm]

I know the rates are relativly cheap right now but who know's. I figure that I'll pay close to 120K now and have the 50k of interest I would have paid still earning something.

Isn't the money I would have paid in interest now able to compound for me at whatever rate I can get. Thus if rates rise I should be able to offset some of the rate difference.

If I would have paid $5400 in interest this year that is what I earned or saved on my 120K payoff. But I am then free to invest that money at the current rates. Also if I payoff the loan my expenses are lower so I can reduce my income and taxes.

Are the banks and mortgage companys really foolishly lending money at today's rates?

[Beachbumz]

Thanks John , I thought I followed you on that one. A pretty smart move under the circumstances.

DM...I too was faced with this difficult decision last summer. After discussing the issue with several bankers, I liquidated all my accounts and paid off my morgage completely...(a 15 yr 5.785% in year 2). The bottom line was would I walk in to a bank and request a $200K loan at 5.785% to go and invest it in whatever? If I was silly enough to do that, what do you think the banker would say to me? Does that tell you something? Clearly it was a difficult decision since I enjoyed the feeling of having the money lying around. But, I will say it was the right decision for me and I'm very glad I when through with it.

Even the bankers assured me that if I ever needed money, I'd have no problem getting it if I owned my house free and clear.

Best of luck with your decision.

Barnstormer

[cute fuzzy bunny]

Barnstormer...go ahead and find yourself a zero cost, no obligation home equity line of credit for $100-200k. Many banks and credit unions offer them, and some will even pay you a hundred bucks or so to apply for one.

Then if you NEED the money for a sudden catastrophic emergency, or if the S&P500 drops 40% in a day or two and you think you see a bargain investing opportunity...voila...instant mortgage...