| paying off my house....good idea?? |
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DFTR
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I just cannot let this subject go. If we were talking about someone who is close to retirement, or someone whose 401k balance was extremely low, then I would agree that keeping the mortgage would be safer.
I got the message that the writer has productive years ahead. This gives the opportunity to rebuild the balance in the 401k. This is much easier to do when one does not have the burden of a mortgage.
Believe me: the mortgage companies are not too sentimental to evict a 90 year old person who has defaulted on a loan. You neither own nor control your encumbered property.
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Tue May 23, 2006 4:15 am |
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laurre
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Nothing can beat the feeling of owning your home free and clear. I have for years and find money so much easier to manage when paying cash for everything, even cars. Money seems to just pile up. Don't forget that money invested for retirement can vanish, even in secure investments inflation is a factor.
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Thu May 25, 2006 5:08 pm |
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Blue Eyed Cat
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As an accountant, I would always run the numbers to see exactly what "paying off the house" versus not would mean but ultimately the decision is more than that.
I have had many people who were convinced that keeping a mortgage was important when running the numbers indicated that the difference financially was small.
There is a tremendous psychological benefit to being mortgage free.
There is no guarantee that a retirement account will generate a specific gain. It can, in fact, lose money if invested in non-insured CDs, etc.
I personally paid off my mortgage 2 years ago.
What you do need.
Pay off all other credit first.
Have at least 3 months of expenses in an emergency fun.
Do not incur any additional debt--save for what you want and pay cash.
Continue to contribute to your retirement regularly.
Make a commitment to increase your retirement contribution by as much as you possibly can.
Know what it will cost you in increased taxes by not having a mortgage and make sure you have adequate withholding to cover it.
Pay off the mortgage and do not burn it. Put it in a safe place.
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Wed Jul 12, 2006 2:32 pm |
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SomeBum
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quote:
Originally posted by holden
Thanks to all for their advice. It really is a hard decision. I see and understand everyone's point but the idea of not having a mortgage is appealing as well. However since I am struggling with the idea I have decided not to do anything at the moment. If there is one thing I've learned it is not to make a decision if I feel hesitant.
Question: If you didn't have a mortgage would you be putting all that money into investments instead or would you end up spending it like most people? If you would just spend it then, yes, you would have a paid off house but no retirement fund, in which case it is better to keep the retirement fund growing and continue your slow and steady pay off of your mortgage. You're only paying 5.75% interest which is just a few points above inflation so it isn't all that much in reality... As long as your investments are also growing at more than 5.75% then your money is better off where it is.
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Tue Aug 01, 2006 8:53 pm |
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jasonm
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| paying off your house |
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how much do you owe? How much in reserves do you have? How much are you making per year?...
We never know what can happen to us in the future. It would be good to have your cash in an account where its gaining 4.75-5%. Your interest rate on your house is good. Just apply more to principle once in awhile as you are still earning good money. You said that you would save 20,000 over 144 months(12 years). That's only $138 per month, doesn't seem like a lot.
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Thu Aug 03, 2006 8:25 am |
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go2self
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Optiond depending on your goals:
1) Pay off your house, then use the former mortgage debt service amounts to accelrate pay off your cards.
2) Refinance, pay off cards, and accelerate payoff of your house, using 401K
Higher interest does not mean higher cost.
Example:
100,000 x 10 year @ 12% costs 72,166 interest
100,000 x 30 year @ 6% costs 115,838 interest
Time is our most volatile resource that if not used immediately is lost instantly
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Wed Aug 09, 2006 12:03 am |
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El Presidente
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quote:
Originally posted by go2self
Optiond depending on your goals:
1) Pay off your house, then use the former mortgage debt service amounts to accelrate pay off your cards.
Total balance should not be a motivator for choosing what to pay of first. Always go by interest rate. If you need an emotion reason to do this then look at the amount of money you shell out for rented money.
quote:
Originally posted by go2self
2) Refinance, pay off cards, and accelerate payoff of your house, using 401K
I find it hard to believe he will be able to refinance below or at 5.75% interest.
quote:
Originally posted by go2self
Higher interest does not mean higher cost.
Example:
100,000 x 10 year @ 12% costs 72,166 interest
100,000 x 30 year @ 6% costs 115,838 interest
This has got to be one of the most misleading statements I have seen posted. The number's are correct, but interpretation is off. This an example of comparing apples and oranges.
Using a mortgage payment calculator monthly payments would be as follows:
10year 12% 1434.71
30 year 6% 599.55
Total interest saved by go2self's calculations:
$43672
Monthly payments saved by the 30 year loan compared to 10 years:
$835.16
Now lets use these figures and see what we come up with.
Using an invest calculator
http://cgi.money.cnn.com/tools/savingscalc/savingscalc.html
Start with $0 and invest montly payment of $835.16 for 10 years of investing earning %7. I also entered the Federal Tax rate of %25 and state %6.
The total would be $134,958.49. This in completely ignoring the tax deffered investments and taking into account the deductable interest on the home loan. Is my logic wrong?
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Wed Aug 09, 2006 11:14 pm |
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coltster45
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I wish I were in your shoes- life with no debt at my fingertips.
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Thu Aug 10, 2006 4:27 am |
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go2self
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El Presidente, Apples to oranges is close but you are comparing garden hoses to fruit. Your logic is correct, if long term investment were the goal, but you are off track. Nic’s question “why would it not be a good idea to pay my house off?, relates to the need to repay a 401k withdrawal NOT making long term investments.
quote:
Originally posted by El Presidente
quote:
Originally posted by go2self
Optiond depending on your goals:
1) Pay off your house, then use the former mortgage debt service amounts to accelrate pay off your cards.
Total balance should not be a motivator for choosing what to pay of first. Always go by interest rate. If you need an emotion reason to do this then look at the amount of money you shell out for rented money.
Did you miss the example. Rate has less to do with the total cost of a debt than time. Lower rates always costs more. In time and money. In my case I shop for rate value but buy on time value.
quote:
Originally posted by El Presidente
quote:
Originally posted by go2self
2) Refinance, pay off cards, and accelerate payoff of your house, using 401K
I find it hard to believe he will be able to refinance below or at 5.75% interest.
Unless you apply a 90 day loan @ 8% apr for option #2 and be at debt 0 in 90 days
quote:
Originally posted by El Presidente
quote:
Originally posted by go2self
Higher interest does not mean higher cost.
Example:
100,000 x 10 year @ 12% costs 72,166 interest
100,000 x 30 year @ 6% costs 115,838 interest
This has got to be one of the most misleading statements I have seen posted. The number's are correct, but interpretation is off. This an example of comparing apples and oranges.
So you are saying a lower rate loan costs less than a high rate loan? If you look closely you see that lower payments increases costs and the time it takes to pay off a debt has a significantly greater impact on costs, than the rate.
quote:
Originally posted by El Presidente
Using a mortgage payment calculator monthly payments would be as follows:
10year 12% 1434.71
30 year 6% 599.55
Total interest saved by go2self's calculations:
$43672
Monthly payments saved by the 30 year loan compared to 10 years:
$835.16
Now lets use these figures and see what we come up with.
Using an invest calculator
http://cgi.money.cnn.com/tools/savingscalc/savingscalc.html
Start with $0 and invest montly payment of $835.16 for 10 years of investing earning %7. I also entered the Federal Tax rate of %25 and state %6.
The total would be $134,958.49. This in completely ignoring the tax deffered investments and taking into account the deductable interest on the home loan. Is my logic wrong?
So your advice to Nic is to not pay off his mortgage, invest money to repay his 401k and make mortgage payments?
If it were me I would:
1. Pay off the mortgage and use the former mortgage payments to repay the 401k to regain the retirement cushion and deferred taxes.
2. Instead of a mortgage, I would float a HELOC and pull out cash out of the house (stricly on a need to basis) should there be a future emergency or other.
3. Get 100% tax credit (instead of only 20%) by simply writing a check to a charity or an education fund or family foundation.
Without knowledge of the cash flow (present and future) of Nic, is my logic wrong?
Time is our most volatile resource that if not used immediately is lost instantly
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Fri Aug 11, 2006 1:52 am |
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El Presidente
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quote:
Originally posted by go2self
comparing garden hoses to fruit.
I think you got me there. I allowed myself to be distracted by this statement. quote:
Originally posted by go2self
Higher interest does not mean higher cost.
Example:
100,000 x 10 year @ 12% costs 72,166 in interest
100,000 x 30 year @ 6% costs 115,838 interest
Under this case that the 30 year loan was the way to go. All my figures and calculations had nothing to do with the original scenario. Let’s try to go through the figures for the original scenario and see if your advice pays off.
100,000 x 0 year @ 0% costs 0 in interest (
100,000 x 30 year @ 5.75% costs 110086.23 in interest, payments $583.57.
Let’s compare the two at different interest rates over 30 years.
Rate--$100K/down-$0/month--$0/down-$583.87/month
6%----436,332.08--------------478,879.73
7%----557,441.42--------------558,273.30
8%----712,047.54--------------653,588.77
9%----909,382.32--------------768,281.93
10%---1,161,212.99-----------906,592.19
11%---1,482,535.91-----------1,073,725.21
So which is better? Depends I guess on how high your investment return is, including subtracting the $110086.23 for interests around 9% seems to make the 100K a good choice. The rate might be lower, but I am not sure how much impact the tax benefits based on the interest would be.
quote:
Originally posted by go2self
1. Pay off the mortgage and use the former mortgage payments to repay the 401k to regain the retirement cushion and deferred taxes.
2. Instead of a mortgage, I would float a HELOC and pull out cash out of the house (strictly on a need to basis) should there be a future emergency or other.
3. Get 100% tax credit (instead of only 20%) by simply writing a check to a charity or an education fund or family foundation.
Without knowledge of the cash flow (present and future) of Nic, is my logic wrong?
1. Advantage with paying off the mortgage depends on how high your investment return is. I think this puts the right choice squarely in the realm of opinion, since no one can predict returns on investments that will make around 9%.
2. HELOCS? Not very well informed on these. Do fybpm's comments on the following thread http://www.money-talk.org/ptopic3162.html seem to cover it? I am not sure how this influences whether to pay off the house, but it seems like something worth looking into none the less.
3. Looking at my last years Schedule A, Gifts to charity seem to have the exact same tax benefits as interest paid, where did the 100% instead of 20% come from? Also to be fair, that 110086.23 over 30 years to match interest tax benefits would have to come from the monthly invested, otherwise you injecting new money into the senerio unevenly. This would make the 30 year loan better even at an investment return of 6%. Don't see this one as a real factor in making a decision.
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Fri Aug 11, 2006 10:04 pm |
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go2self
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Elpresidente
I really appreciate the time and effort you have devoted to the subject. I hope that I can reciprocate with similar efforts
1. Advantage with paying off the mortgage depends on how high your investment return is. I think this puts the right choice squarely in the realm of opinion, since no one can predict returns on investments that will make around 9%.
A. You are right about investments, but we can control debt costs. I used a safe 6% investment rate for scenarios described below.
2. HELOCS? Not very well informed on these. Do fybpm's comments on the following thread http://www.money-talk.org/ptopic3162.html seem to cover it? I am not sure how this influences whether to pay off the house, but it seems like something worth looking into none the less.
A. If used properly, turns your house into a bank.
3. Looking at my last years Schedule A, Gifts to charity seem to have the exact same tax benefits as interest paid, where did the 100% instead of 20% come from? Also to be fair, that 110086.23 over 30 years to match interest tax benefits would have to come from the monthly invested, otherwise you injecting new money into the senerio unevenly. This would make the 30 year loan better even at an investment return of 6%. Don't see this one as a real factor in making a decision.
A. Unless you pay to a family foundation or education fund that benefit you tax wise and is allowed to pay for family related or educational (normally out of pocket), getting 100% benefit.
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Nic
The question is to pay off debt or invest for gains. Although commented as an apples to oranges solution, it is actually one question. Which action or series of actions will produce the greater benefit?
Debt is loaded at the front end while investments load up at the back end. Consider the many variables when designing an investment entry and exit strategy including age, cash flow, earning capacity, children, other obligations, long term goal, short tem goal, tax bracket, citizenship etc.
The following is for illustrative purposes and does not intend to provide tax, legal or investment advice. While strategies and techniques are general, plans and execution are specific to each scenario.
Here is the data provided:
Debt: 70,000 mortgage, rate is 5.75% w/12 yrs left.
Cost: Homeowner’s calculation remaining cost of a little over 20k
Other: House built in 95, family has no intention of moving.
Plans:
A) Pay off mortgage and spend more time with family.
B) Pay off all credit cards & car, keep mortgage and invest left over.
C) Apply SELF plan, cards, car & mortgage w/ funds to invest and spend more time with family.
Deduced:
Debt: 1995. 70,000 30yr mortgage @ 5.75% w/ 12yrs left
Means a balance of 42,216, w/ 143 payments of 408.50 & 16,402 of interest cost.
Assumumption: 55K will be pulled from 401K
Plan A)
42,300 to pay off mortgage, adds 408 to monthly cash flow.
408 invested monthly for 12 years @ 6% gains 27.4K, adjusted for 3% inflation and 16 cap gains tax produces estimated net gain of 11.7K
Plan B)
15K to pay off cards & car
45K invested for 12 years @ 6%, gains 47K, adjusted for 3% inflation and 16 cap gains tax produces estimated net gain of 18.5K
16.2K of debt cost over same 12 years nets 2.3K in profit.
Plan C)
12K into an interest earning SELF account
43K to investment 12 years @ 6% gains 45.1K, adjusted for 3% inflation and 16 cap gains tax produces estimated net gain of 17.7K
Mortgage, cards & car paid off in 4 years, give another 408 monthly to invest monthly for 9 years @ 6% gains 14.4K, adjusted for 3% inflation and 16 cap gains tax produces estimated net gain of 6.4K
7.2K in debt costs over 4 years + investments over 12 years nets 16.9K in profit
According to my calculations the best choice is plan C.
Time is our most volatile resource that if not used immediately is lost instantly
Last edited by go2self on Fri Aug 18, 2006 8:59 pm; edited 1 time in total |
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Fri Aug 18, 2006 7:51 pm |
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go2self
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Coast, I like your thought. To paraphrase it
'The solution to a scenario occurs as a series practiced actions and responses'.
Kinda Einsteinish (?)
BTW - elpres, just noticed your picture of a stop sign.
for me it stand for (STOP) SELF Training Online Program
Time is our most volatile resource that if not used immediately is lost instantly
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Fri Aug 18, 2006 8:51 pm |
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GotGoalz
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quote:
Originally posted by DFTR
DO NOT TALK YOURSELF OUT OF IT! You are absolutely right to pay off your mortgage. You are giving up your tax deduction, but that is small loss. In the tax business that is called "spending $1.00 to save 25 cents".
You will be gaining by having your house free and clear. This will be critically important if, God forbid, your income ever goes down. At that point, you will not want mortgage companies making your life even more miserable.
I agree! In about 8 months, i will be paying my house off and will free up about $900.00 per month to invest!
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Wed Oct 11, 2006 4:12 am |
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go2self
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Pay off your house in full, if you need security take out a HELOC and only use it if you need.
With 80% equity available, even if income stops you have cash in the bank (your house) that you can still tap into.
If you have $100,000 today, the same $100,000 would be worth only $50,000 in 15 years. Inflation eats the rest. A retirement account must realistically adjust for inflation.
Even if you sell your property, what could you buy for that same amount?
Answer - you couln't even buy the property you just sold unless you are able to time the sale at the top of the market, then wait for the market to slow and turn down prices to where it was.
hmmm... has that ever happened?
You got the right idea...900 per month invested today and every month thereafter, will build that nestegg and with emergency funds in the form of a standby HELOC how can you lose?
Time is our most volatile resource that if not used immediately is lost instantly
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Fri Oct 13, 2006 4:18 am |
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mxjbt
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I would suggest reading Missed Fortune 101 by Andrew R. Douglas. He shows you how to use your house as a cash cow. Never leave more than 20% equity in your home. He also explains 401k's and Government Qualified plans. I'm completely confused as to why someone would invest in a 401k unless they are getting matched dollar for dollar. He gives numbers to back up his ideas for all you mathematical genius'. Read the book!!!
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Sun Nov 19, 2006 12:34 pm |
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