| paying off my house....good idea?? |
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holden
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| paying off my house....good idea?? |
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Hello to all,
I live in Alabama and because of Hurricane Katrina last year I am able to withdrawl a portion of my 401 savings. I did withdrawl and did not have to pay any penalties because of the storm. I had all the state and federal taxes taken out before receiving any funds. Okay......my question is why would it not be a good idea to pay my house off? I am 41 years old, with a secure job and no medical problems. I still have money left in my 401 and will have time to "replace" the money I withdrew. With the money I withdrew I plan on paying off my house and eliminating all credit card debt. We are a very responsible family financially so not saving for the future would not be an issue. As you can probably tell I'm in favor of paying my house off but I'm looking for reasons not to before I actually write the check. I am aware of the tax advantage of having a mortgage but am willing not to have that tax break. Last question......even though I "grossed up" with the taxes on my 401 withdrawl, will I have to pay more taxes on that money with my 2006 tax filings? Thank you in adance for your help and advice!
Nic
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Wed Apr 19, 2006 5:18 am |
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Rolo
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What is your mortgage interest rate? If it is not a bad rate, do not pay it off; you can earn more in investments than you pay in interest.
"Expect me when you see me."
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Wed Apr 19, 2006 10:59 am |
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holden
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My interest rate is 5.75 and I have 12 yrs left. A quick calculation is saving a little over 20k in interest by paying it off now. I had my house built in 95 so it is fairly new and we have no intention of moving. One of the other reasons for wanting to pay my house off is not having to work too much so I can spend more time with my family. Another option I thought about would be to pay off all credit card debt and car loan....keeping the house mortgage and investing what is left over. Thanks again for your help!
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Wed Apr 19, 2006 1:02 pm |
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MattL
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First pay off your credit cards. Do you have any other debts other than your house? If you owe on cars pay them off. If you don't have 6 months emergency fund put money in a mOney Market for that. If you have any left over re-invest into retirement vehicles.
Debt Elimination
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Wed Apr 19, 2006 8:32 pm |
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Rolo
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quote:
Originally posted by holden
My interest rate is 5.75 and I have 12 yrs left.
That's a great interest rate.
quote:
Originally posted by holden
A quick calculation is saving a little over 20k in interest by paying it off now.
NO! Do not compartmentalise. It will not save you $20K, it will cost you [payoff amount * years * investment returns, ~11% average]...a lot more than $20K.
quote:
Originally posted by holden
...not having to work too much so I can spend more time with my family.
You will have to work longer since you will have dinged your retirement account(s).
quote:
Originally posted by holden
Another option I thought about would be to pay off all credit card debt and car loan....keeping the house mortgage and investing what is left over.
The same rules apply to any loan, just CC debt interest rates usually suck (not my 2.99% one, though).
What's the car loan interest? Again, bump it against your investment returns, which should average ~11%, depending on your time-'till-retirement.
"Expect me when you see me."
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Thu Apr 20, 2006 2:48 am |
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Rolo
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quote:
Originally posted by coaster
Don't forget the interest is tax-deductible, so it's really not costing you 5.75 percent.
Oh yeah, I forgot about that. There's a calculator for that (goooogle).
I also forgot to mention the tax break for funding 401(k)s and traditional IRAs and the like.
"Expect me when you see me."
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Thu Apr 20, 2006 2:49 am |
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holden
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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.
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Thu Apr 20, 2006 11:52 am |
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Rolo
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quote:
Originally posted by holden
idea of not having a mortgage is appealing as well.
That is an emotion; never make decisions based on it.
quote:
Originally posted by holden
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.
Excellent!
Now...approach the problem MATHEMATICALLY. Plug your numbers into a spreadsheet (a new tab on your financial plan's spreadsheet perhaps) to design the scenario that makes the most sense financially.
Run all the scenarios parallel and don't forget to follow-through to completion (retirement).
This is how you eliminate irrational emotion: by understanding the rationale for your decision.
"Expect me when you see me."
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Thu Apr 20, 2006 12:34 pm |
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eversun
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This is a rather simple advice.
Before making a decision you have to list down all the pros and cons and the after effect of your decision.
So what you should do now is to get hold of a paper and pencil and start listing...
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Thu Apr 20, 2006 4:58 pm |
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oldguy
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One of the other reasons for wanting to pay my house off is not having to work too much so I can spend more time with my family. Another option I thought about would be to pay off all credit card debt and car loan....keeping the house mortgage and investing what is left over.
It should be clear to you that you will be able to "work less", etc, when you have a huge reserve account that will make the house payments for many years PLUS FEED THE FAMILY. Go thru the math, you'll see that in 24 years the money will be worth many times as much in a retirement account as in a house. Can you reverse this decision and put that money back? I think you have 60 days?
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Sun May 21, 2006 11:50 pm |
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DFTR
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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.
You have already said that re-building your 401k will not be a problem. Stick to that. Have all this interest expense during your retirement years will ruin them even more than having a low balance in the 401k. I have seen it happen.
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Mon May 22, 2006 2:37 am |
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oldguy
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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.
If, God forbid, your income stops, you will have $10,000's in reserve - enough to live for years. Coversely, with a paid-for house, but no money and no job you can't borrow enough for a week's groceries.
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Mon May 22, 2006 3:00 am |
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DFTR
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In the unlikely event that you lose your job the day you pay off your house, you do have a serious problem. However, you will not have the problem of ever-accumulating debt, or the coming foreclosure.
If worse comes to worse, you can sell the house and keep 100%f the money. God bless.
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Mon May 22, 2006 3:32 am |
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Rolo
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quote:
Originally posted by DFTR
In the unlikely event that you lose your job the day you pay off your house, you do have a serious problem.
It's fatal if one loses one's income prior to the house being paid off, but nobody seems to mention that here.
Cash reserves are critical.
Retirement funding is necessary unless you want to work your entire life.
Paying off a mortgage is contrary to both of these necessary goals and would be a gross financial irresponsibility.
"Expect me when you see me."
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Mon May 22, 2006 11:33 am |
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pandashark
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quote:
Originally posted by muneepenee
1. the rule av thumb is first pae off debt with hiest % interest.
that is the kredit kard for 99.9% av us.
okay, I can't contain the question anymore...what's up with the funny spellings? it's surprisingly readable, but it still gets to me.
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Mon May 22, 2006 11:29 pm |
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