-
We’re currently investigating an issue related to the forum theme and styling that is impacting page layout and visual formatting. The problem has been identified, and we are actively working on a resolution. There is no impact to user data or functionality, this is strictly a front-end display issue. We’ll post an update once the fix has been deployed. Thanks for your patience while we get this sorted.
Are you paying extra on your mortgage?
Page 3 - Seeking answers? Join the AnandTech community: where nearly half-a-million members share solutions and discuss the latest tech.
I used to make extra mortgage payments to draw down the principle but it always bothered me that at tax time I couldn't claim the extra as a deduction.
Interest potentially saved by paying extra on the mortgage was less than the dough I was paying in CC and auto loan debt:
1. I quit paying extra on the mortage and got my credit cards paid off in one year (two years ago).
2. I quit paying extra on college loans (3.5% & 4% loans) and used that to pay off other higher debt and projects.
3. A 7% auto-loan is now receiving 'extra' to get it out of the way.
4. A diversified 401k is receiving some of that 'extra' as well.
My 30 year fixed Mtg is at 5.5%. I decided it was much more responsible at this point in life to eliminate the debt that incurred higher percentage of non-value added cost. Sure, I'd like to reduce my overall mortgage payment and long term debt. I also want to make sure that if I find myself without a job that I don't incur a heart attack when the bills still come in every month and i can't cash out my equity or get a home loan to cover it because I suddenly am not a viable credit candidate.
Interest potentially saved by paying extra on the mortgage was less than the dough I was paying in CC and auto loan debt:
1. I quit paying extra on the mortage and got my credit cards paid off in one year (two years ago).
2. I quit paying extra on college loans (3.5% & 4% loans) and used that to pay off other higher debt and projects.
3. A 7% auto-loan is now receiving 'extra' to get it out of the way.
4. A diversified 401k is receiving some of that 'extra' as well.
My 30 year fixed Mtg is at 5.5%. I decided it was much more responsible at this point in life to eliminate the debt that incurred higher percentage of non-value added cost. Sure, I'd like to reduce my overall mortgage payment and long term debt. I also want to make sure that if I find myself without a job that I don't incur a heart attack when the bills still come in every month and i can't cash out my equity or get a home loan to cover it because I suddenly am not a viable credit candidate.
RossMAN
Grand Nagus
It's just amazing how much you can save by paying an additional $50 - $100 per month.
http://www.bankrate.com/brm/mortgage-calculator.asp
http://www.bankrate.com/brm/mortgage-calculator.asp
Of course it makes sense to eliminate debt with higher interest first. Nobody will doubt that or say anything against it. Simple fact is taht 80% of people don't know how to handle money and even if they where debt free today they would have another credit card balance in 6 month. On the flip side, if you make it a habit of paying an extra 50-100$ per month into the morgage you save yourself roughly 9-11 years on a 30 year morage, something you won't feel or it hurt you.
His ideas are sound, for someone that is 100% responsible with his money!
His ideas are sound, for someone that is 100% responsible with his money!
DT4K
Diamond Member
It's also amazing how much you can save by investing $100 per month.
If I paid an extra $100 a month on my mortgage, I'd save 37,000 in interest and have my mortgage paid off in 23 years instead of 30. But if I could make 8% by investing that 100 a month, at the end of the 23 years, I'd have 78,873 in that account. So if I wanted, I could pay off the balance of the mortgage after 23 years with that investment and still have 16k left.
I didn't consider taxes on the investment or deductibility of interest on the mortgage. The point is just that the author makes some good points and you can't just say he's completely off base.
5LiterMustang
Senior member
Never paying off a house is one of the worst ideas ever...debt sucks no matter what its on. No debt>debt everytime.
5LiterMustang
Senior member
8% is pretty easy to do in the market over the long haul but I'd still rather have a paid for house and invest the house payments.
5LiterMustang
Senior member
I didn't say that at all, read all my posts, I said paying off the house is the way to go then invest what was the payment. Buying a house is a good idea, buying one with the intention of never paying it off is ridiculous.
5LiterMustang
Senior member
It's not guaranteed in real estate either
This guys advice works in a perfect world.
"Investing" and "finances" is different from "accounting" - the two former have to do with value-over-time, whereas the latter is concerned only with reconciling all moneys goint to/from an entity.
So, looking at the numbers, it is possible for a mortgage to actually be an investment tool. Let's take a look at a somewhat typical middle class situation:
140k in Mortgage @ 6% (first year will pay ~8400 in interest. Since it's deductible and the family is in the 15% bracket, they save $1260 in taxes the first year, making the effective yield 5.1%)
So any investment that returns better than 5.1% is a better place for your money. It doesn't matter how great the loan, liability or asset is, all that matters is rate of return and the amount invested:
1) Most people have credit card balances. Our example family has $29k at an average rate of 13.5%. This is their best investment, as this is guaranteed returns. In fact, if they have variable APY, it could save them more than that.
2) Car Loans? Other than promotional financing, most auto loans will be greater than 5.1%. Another good "investment".
3) Roth IRA. If you expect to retire in the 25% tax bracket (remember, they eliminated the 18% bracket this year), then a 4.08% guaranteed return (CDs or whatever) in a Roth IRA will exceed your mortgage investment by .001%. Anything higher than that makes it a better investment. This is due to the tax-free growth of a Roth. 15% bracket would require a 4.43% return-rate.
4) 401(k) or Traditional IRA: tax deductions on your contributions effectively increase the return-rate. A traditional IRA would still need the 4.08% of a Roth (tax savings now v. tax savings later), but good employer matching effectively increases the return-rate of 401(k)s. With 50% matching plus pre-tax earnings, 401(k) growth is effectively 65% larger for 15% bracket, and 75% larger for 25% bracket. Even at 2.25%, the effective growth would be around 76.3% for the first year of growth. (To be taxed later, of course; plus it would continue to compound at 2.25%, so 15 years down the road it is down to 6.48% - but still better than 5.099% for the mortgage).
This is not to mention those willing to take higher risks on the stock market for potentially higher gain (over a long enough term, it will work out). I find it hard to believe that the vast majority of the American public cannot take advantage of at least some - if not all - of these simple investments instead of paying for a house.
It is brash of the author to say that this is unequivocally best for everyone, but it is a valid point that is probably best for most people if they have the willpower to implement it. And if they don't, then they probably won't have the willpower to pay down the mortgage, either.
And there will always be people who are better off not having a mortgage. Not everyone has a steady income from year-to-year...
So, looking at the numbers, it is possible for a mortgage to actually be an investment tool. Let's take a look at a somewhat typical middle class situation:
140k in Mortgage @ 6% (first year will pay ~8400 in interest. Since it's deductible and the family is in the 15% bracket, they save $1260 in taxes the first year, making the effective yield 5.1%)
So any investment that returns better than 5.1% is a better place for your money. It doesn't matter how great the loan, liability or asset is, all that matters is rate of return and the amount invested:
1) Most people have credit card balances. Our example family has $29k at an average rate of 13.5%. This is their best investment, as this is guaranteed returns. In fact, if they have variable APY, it could save them more than that.
2) Car Loans? Other than promotional financing, most auto loans will be greater than 5.1%. Another good "investment".
3) Roth IRA. If you expect to retire in the 25% tax bracket (remember, they eliminated the 18% bracket this year), then a 4.08% guaranteed return (CDs or whatever) in a Roth IRA will exceed your mortgage investment by .001%. Anything higher than that makes it a better investment. This is due to the tax-free growth of a Roth. 15% bracket would require a 4.43% return-rate.
4) 401(k) or Traditional IRA: tax deductions on your contributions effectively increase the return-rate. A traditional IRA would still need the 4.08% of a Roth (tax savings now v. tax savings later), but good employer matching effectively increases the return-rate of 401(k)s. With 50% matching plus pre-tax earnings, 401(k) growth is effectively 65% larger for 15% bracket, and 75% larger for 25% bracket. Even at 2.25%, the effective growth would be around 76.3% for the first year of growth. (To be taxed later, of course; plus it would continue to compound at 2.25%, so 15 years down the road it is down to 6.48% - but still better than 5.099% for the mortgage).
This is not to mention those willing to take higher risks on the stock market for potentially higher gain (over a long enough term, it will work out). I find it hard to believe that the vast majority of the American public cannot take advantage of at least some - if not all - of these simple investments instead of paying for a house.
It is brash of the author to say that this is unequivocally best for everyone, but it is a valid point that is probably best for most people if they have the willpower to implement it. And if they don't, then they probably won't have the willpower to pay down the mortgage, either.
And there will always be people who are better off not having a mortgage. Not everyone has a steady income from year-to-year...
This has been cited in the Poor/Dad Rich Dad books. It works out well if you have the discipline to invest the money that you are not putting toward the extra payments, but I believe most ppl pi$$ it away by buying stuff, going on vacations, and buying more of a car than they need. The author actually mentions buying a car which I disagree with (it's a depreciating asset).
I think sounder advice would be don't put extra payments toward your mortgage unless you are debt free (I don't count 0% BTs in this unless I don't have money in the bank to cover it) since your other debt is bound to be at a higher rate and not tax deductible.
also to comment on conjur's statement, if you have a $2000 to pay off your 12% credit card or pay additional payments off your mortgage, you would pay off the credit card.
yearly credit card interset savings = 2000 * 12% = $240
mortgage interest savings that year if you put toward mortgage = 2000 * 6% = $120
Plus you get a tax deduction on the interest on the mortgage.
I think sounder advice would be don't put extra payments toward your mortgage unless you are debt free (I don't count 0% BTs in this unless I don't have money in the bank to cover it) since your other debt is bound to be at a higher rate and not tax deductible.
also to comment on conjur's statement, if you have a $2000 to pay off your 12% credit card or pay additional payments off your mortgage, you would pay off the credit card.
yearly credit card interset savings = 2000 * 12% = $240
mortgage interest savings that year if you put toward mortgage = 2000 * 6% = $120
Plus you get a tax deduction on the interest on the mortgage.
Jadow
Diamond Member
I pay a little extra, 25 to 100 bucks a month depending on where I'm at each month, however I'm in no hurry to pay my 101,000, 30 year mortgage off because,
A. It's at a low interest rate, 5.4%
B. I like the tax decuction
C. Any extra money I have that could go into paying down my house faster, I invest.
A. It's at a low interest rate, 5.4%
B. I like the tax decuction
C. Any extra money I have that could go into paying down my house faster, I invest.
his thinking is not flawed.
Get a groupd of experienced CPAs in a room and there will be a holy war of whether to pay down a house or finance it for as long as possible. There is no stead fast answer and many CPAs agree with the approach of fincancing as much as you can for as long as you can.
5LiterMustang
Senior member
Debt on a house is not good, its merely acceptable....but NOT good. A paid for house is better then a mortgaged house.
TRENDING THREADS
-
Discussion Zen 5 Speculation (EPYC Turin and Strix Point/Granite Ridge - Ryzen 9000)- Started by DisEnchantment
- Replies: 25K
-
Discussion Intel Meteor, Arrow, Lunar & Panther Lakes + WCL Discussion Threads
- Started by Tigerick
- Replies: 25K
-
Discussion Intel current and future Lakes & Rapids thread- Started by TheF34RChannel
- Replies: 24K
-
-
