Pay Off Mortgage????

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Pay Off Mortgage????

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2016 Apr 20, 1:53pm 14,727 views 52 comments

I have seen a lot of commentary on whether or not a person should pay off his mortgage early. I believe it depends on too many factors to decisively say.

I want to share my friends experience and the advice i gave him.

Total Income - 145,000$/Yearly
Home Purchase Price - 450,000$
Mortgage Loan - 360,000$
Interest Rate - 4.125%

My advice to him: Do not pay off the mortgage early.

1. With a mortgage he is able to itemize and as a result his effective tax rate for the mortgage is much lower than the listed 4.125%. If his tax bracket is 25% that makes his effective mortgage rate lower than 3%. I know there is the standard deduction but now that he itemizes because of mortgage he is able to deduct property taxes, donations that his wife makes to Goodwill (1500$ yearly) and other items. This money would be lost if hehad not itemized. One example is he donated a washer and dryer to Goodwill that he could not sell on Craigslist. He valued the donation at 500$ on his taxes. If he pays off his mortgage he loses this advantage.
2. While you are not likely to make 8%+ in stocks unless you are a good stock picker, if your effective mortgage rate is less than 3% there are many bonds and munis that offer higher yield.
3. The longer you hold your mortgage the more inflation eats away at it's actual value.

I have a tendency to want to pay off debt as soon as possible but if you are smart with your money the U.S. system is built to reward debt and screw over savers.

Let me know your opinions on the advice I gave him.

« First « Previous Comments 41 - 52 of 52 Search these comments

SoTex 2016 Apr 21, 8:51pm

I'm curious what the balance in the decision would be for a rental property. I've considered paying off a rental which would literally use up only 10% of my net worth and I have way too much cash. Not paying it off tips the balance in favor of paying no income tax in California for the out of state investment. With interest and depreciation I take a loss on paper but it earns the mortgage + >50%.

Those assholes tax everything. I returned an empty bottle of coolant after doing an AC recharge to PepBoys last weekend to get my $10 environmental impact refund and got back $10.80. Fucking state taxed that 'fee' too!

42 blowmeironvagina 2016 Apr 21, 9:30pm

just_passing_through says

I'm curious what the balance in the decision would be for a rental property.

Even less reason to pay it off.

As an owner, you may get some tax advantage for mortgage interest. (depending on other deductions, etc)

as a landlord, 100% of the mortgage interest is a business expense. My worst mortgage is at 4.875%. But since my marginal federal rate is what these days? 39.6%? plus state marginal rate of 4%, the effective cost of that mortgage is under 3%. You can buy plenty of dividend stocks that pay much more than that!

43 blowmeironvagina 2016 Apr 22, 12:52am

I can add two reasons lately I've thought of:

1. switching to a 15 year fixed. Especially, if your 30 has been around for a while, it is nearly a 15's payment anyways if you refinance it. Might make sense.

2. If you might do a 1031 exchange of the property later. In that case, you'd need to get a loan equal to or greater on the new property, and that might not be what you want to do.

Other than that, it probably doesn't make a whole lot of sense.

ja 2016 Apr 22, 11:19am

Blurtman says

Re-fi into shorter duration mortgage. 10-15 years. Rates are very low, and maybe can get below 3.00%.

Consider that then the number of years/amount of interest deduction you can do is lower. Only the first year is really 3.00 effective rate. Last year is 4.125%, since you don't deduct interest.

45 Portal 2016 Apr 24, 9:03am

I think the point is that if you get to the point where you can itemize because of interest you can start deducting items you couldn't otherwise.

Examples are:
1. Property tax. Roughly 6000$ here in Portland.
2. Charity deductions. 2000$ for some people

If I'm in the 30% bracket that is roughly 2400$ in additional savings each year that I would not have save if I had taken the standard deductions.

Strategist 2016 Apr 24, 9:07am

jazz music says

"Psychology Today" seems to say that ignoring trolls isn't going to discourage them

Could be right. Nothing discourages you from posting anti American crap on this site.

Strategist 2016 Apr 24, 12:46pm

jazz music says

TROLLING TROLLS ARE STINKING ASSHOLES

WHO GET TICKLED BY YOUR TEARS.

IF YOU RESPOND THEY KEEP TROLLING ON

TIL THEIR TINY WIENERS REAPPEAR!

Shakespeare on the troll again. Still calling for revolutions against a non existent police state.

prodigy 2016 Apr 24, 8:06pm

alt account?

just_passing_through says

I'm curious

prodigy 2016 Apr 24, 8:11pm

What you gained or lost depends on what you sell it for the day it sells, not on some irrelevent snapshot in time.

tatupu70 says

Their money vaporized wherever it was invested unless they defaulted on their house. If the house loses $200K in value, it doesn't matter if you have $10K invested in it or $500K invested in it--you lose $200K.