A Question for the Financial Gurus....

[classy]

I am trying to gear up towards retirement, which the income will be about 65-70% of what it is now.

I have no other debt. No car payment, no credit cards (Might be $100-200 on it), no loans. That's why I was thinking of doing a clean sweep and get rid of all my monthly bills except for utilities.

Bob

I am in a similar situation, but owe a couple grand on credit cards, but everything else exactly the same as you. The problem with the idea is not that it is a bad idea and would have been great 8-9 years ago. The housing values are just to flaky to suggest dumping a bunch of cash into paying it off. You lose the write off which is very valuable and potentially you could lose cash you used to pay it off. Obivously a lot of this depends on the amount of money we are talking about using to pay off the house. But under no circumstances would I ever use a credit card to pay a mortage unless I had too.

 

[iGas]

I am trying to gear up towards retirement, which the income will be about 65-70% of what it is now.

I have no other debt. No car payment, no credit cards (Might be $100-200 on it), no loans. That's why I was thinking of doing a clean sweep and get rid of all my monthly bills except for utilities.

Bob

As said above you can't pay mortgage with credit card/s, and it would be wise to seek assistant from investment/financial advisor at your bank. It make more sense to be diversify hence having some money in investment.

I would increase monthly payment if needed to make sure that the mortgage is payoff the day I retire, so that I can take advantage of the tax break and keeping the cash more liquid than having it lock up in the house.

 

[John P]

There will come a point when the interest on the mortgage isn't deductible - when your standard deduction will be greater than your itemized. Then it's probably time to pay off the mortgage. Before that point, as you've already been told, you need to run the numbers and see what's best. If you're throwing a bunch of money away on interest just pay off the mortgage, there is no guarantee what the market is going to do the next few years.

If you do pay off your mortgage how much cash/liquid assets will you still have? Remember, once the mortgage is paid off you can always open up a home equity line of credit that has a pretty low interest rate if you need emergency cash.

 

[spidey07]

Really? With rates where they are now, you could have a 15yr fixed in the 3.75% range, and get a much better return with your cash.

Yep. Dumbest thing one can do is pay down their mortgage with rates like this.

 

[kranky]

And remember, once the mortgage is paid off you can always open up a home equity line of credit that has a pretty low interest rate if you need emergency cash.

I want to nitpick this. The way things are now, I would not be comfortable thinking that in an emergency, a home equity line of credit will be available to me. Banks can pull the plug on those any time they want. It's a nice thing to have available but for me I consider it Plan C or Plan D in an emergency. In no circumstances would I drain my cash reserve assuming I can get access to cash via a HELOC.

 

[John P]

I want to nitpick this. The way things are now, I would not be comfortable thinking that in an emergency, a home equity line of credit will be available to me. Banks can pull the plug on those any time they want. It's a nice thing to have available but for me I consider it Plan C or Plan D in an emergency. In no circumstances would I drain my cash reserve assuming I can get access to cash via a HELOC.

Agreed, you would still want a some cash reserve in addition to the line of credit. There are certainly no absolutes, each person needs to evaluate their situation and determine what is best for them.

 

[ponyo]

I want to nitpick this. The way things are now, I would not be comfortable thinking that in an emergency, a home equity line of credit will be available to me. Banks can pull the plug on those any time they want. It's a nice thing to have available but for me I consider it Plan C or Plan D in an emergency. In no circumstances would I drain my cash reserve assuming I can get access to cash via a HELOC.

agreed. HELOC or any kind of home equity would be my last line of defense. I'll max out my credit cards and any other available credit before I even think about touching my HELOC.

It's pretty easy to build up nice fat cash reserve if you don't have a mortgage payment. That is assuming your job is stable and income is steady.

 

[alkemyst]

Read the fine print. Most all cards have a cap on points/cashback.

QFT, it's no wonder so many here still live at home...they'd be slaughtered like sheep in the wild if not.

 

[John P]

agreed. HELOC or any kind of home equity would be my last line of defense. I'll max out my credit cards and any other available credit before I even think about touching my HELOC.

It's pretty easy to build up nice fat cash reserve if you don't have a mortgage payment. That is assuming your job is stable and income is steady.

So, you'd keep a lump sum on a credit card instead of a HELOC? Please explain. Let's assume the CC rate is 7% and HELOC is 4%. Why not purchase with the CC (to get points or whatever) and then either pay the CC off each month or use the HELOC to pay it off (carry the balance on the HELOC)?

 

[alkemyst]

So, you'd keep a lump sum on a credit card instead of a HELOC? Please explain. Let's assume the CC rate is 7% and HELOC is 4%. Why not purchase with the CC (to get points or whatever) and then either pay the CC off each month or use the HELOC to pay it off (carry the balance on the HELOC)?

That's totally nutty. Esp that for most HELOC interest will be a write off.

 

[goog40]

The interest on the note is only 4.9%. Blackjack2000 had calculated it and it seems right to NOT pay it off. I'll run it by my nephew the next time I see him (CPA-MBA - Don't know if he's any good ).

I do have an emergency fund of 4 months of complete living expenses, and also keep an extra $1000 in my gun safe for emergencies.

Thanks,

Bob

Keep in mind those numbers aren't really accurate unless you were going to itemize your deductions on your taxes anyways. Check how much your itemized deductions were last year, and subtract the amount of the standard deduction ($11,400 if you're married, $5700 if single). The remainder multiplied by your marginal tax rate should be your overall benefit from itemizing. I imagine for many people, the benefit from the mortgage interest deduction isn't as great as they think.

 

[classy]

There will come a point when the interest on the mortgage isn't deductible - when your standard deduction will be greater than your itemized. Then it's probably time to pay off the mortgage. Before that point, as you've already been told, you need to run the numbers and see what's best. If you're throwing a bunch of money away on interest just pay off the mortgage, there is no guarantee what the market is going to do the next few years.

If you do pay off your mortgage how much cash/liquid assets will you still have? Remember, once the mortgage is paid off you can always open up a home equity line of credit that has a pretty low interest rate if you need emergency cash.

One that is pure specualtion about mortage interest. Two your scenario just puts him right back into a possible situation that is even worse. There are really only two things he should looking at. One refinancing to a lower interest rate with less years or he could just pay extra on the principle each month. Two invest his money else where in something more stable. He also has the option just to leave everything as it is. Any scenario that involves paying off the mortage in todays climate to me just doesn't make a whole lot of sense unless he has unneeded cash.

 

[JS80]

What a stupid ass question. Why would mortgage servicers accept CC payment and pay the CC issuer 2% fee? The whole point of the CC cash back/points is that charge you a higher interest rate and pass down the 2% fee they make off the vendor.

 

[iGas]

One that is pure specualtion about mortage interest. Two your scenario just puts him right back into a possible situation that is even worse. There are really only two things he should looking at. One refinancing to a lower interest rate with less years or he could just pay extra on the principle each month. Two invest his money else where in something more stable. He also has the option just to leave everything as it is. Any scenario that involves paying off the mortage in todays climate to me just doesn't make a whole lot of sense unless he has unneeded cash.

It still doesn't make sense to be paying off the mortgage even if he have unneeded cash, liquid assets at anytime specially now is more sensible IMHO.

 

[John P]

One that is pure specualtion about mortage interest. Two your scenario just puts him right back into a possible situation that is even worse. There are really only two things he should looking at. One refinancing to a lower interest rate with less years or he could just pay extra on the principle each month. Two invest his money else where in something more stable. He also has the option just to leave everything as it is. Any scenario that involves paying off the mortage in todays climate to me just doesn't make a whole lot of sense unless he has unneeded cash.

How is it speculation? Either your itemized deductions are higher than the standard deduction or they are not, it's simple math. Once they are not then you don't reap any tax benefits from paying the mortgage interest since it's no longer a deduction.

Yes, he could invest his money elsewhere and HOPE for better returns than his mortgage interest. I don't agree that paying off the mortgage will necessarily put him in a worse situation though. Unless you know exactly what the market is going to do the next few years.

It might very well make sense not to pay it off as most of you are saying, I am not disagreeing altogether. But you have to look at all the variables for each individual.

 

[iGas]

How is it speculation? Either your itemized deductions are higher than the standard deduction or they are not, it's simple math. Once they are not then you don't reap any tax benefits from paying the mortgage interest since it's no longer a deduction.

Yes, he could invest his money elsewhere and HOPE for better returns than his mortgage interest. I don't agree that paying off the mortgage will necessarily put him in a worse situation though. Unless you know exactly what the market is going to do the next few years.

It might very well make sense not to pay it off as most of you are saying, I am not disagreeing altogether. But you have to look at all the variables for each individual.

There are corporate bonds that with higher return than than current mortgage interests. The only sure thing in life are death and taxes, because bonds/stocks come with risks so as your house.

I'm not advocating bonds, but IMHO bonds seems to be not as risky as stocks.

 

[John P]

The only sure thing in life are death and taxes.

Amen.