edro
Lifer
- Apr 5, 2002
- 24,326
- 68
- 91
Not paying off the house is like buying crap you don't need just because it's on sale.
Interest is tax deductable, but it's a better deal if you don't have to pay it at all.
The amount of interest 140k will get you in a year is conservatively $5000.
His house interest is well over $5000/year.
Pay off your house, or at least a large chunk, and refinance with a fixed @ <6%.
Interest is tax deductable, but it's a better deal if you don't have to pay it at all.
The amount of interest 140k will get you in a year is conservatively $5000.
His house interest is well over $5000/year.
Pay off your house, or at least a large chunk, and refinance with a fixed @ <6%.
Paying off the mortgage costs money too. It's opportunity cost that you've completely thrown out the window by investing that money at a higher rate of return.
Look at it this way, if you pay off a 4% 30-year loan, all you've done is invest your money at 4% for the next 30 years.
If you don't do that and you invest your money at 10%, then you're investing your money at 6% (10-4). That 2% adds up.
Now, as far as actual advice.
1. Pay off the 20% loan and any other personal debt. That's a no-brainer.
2. Determine what investments you want to put your money into. If you have a high risk tolerance, then I would suggest a mix of index funds, perhaps a few international mutual funds, among other instruments.
However, the way you're talking (CDs and such), your rate of return on those will be far lower, but so is the risk (you're risk averse). This isn't unnatural with inherited money, as people will protect it more than "earned" money.
If that's the case, then paying off your mortgage might be the smarter play, since the money you'd earn on the investments would be at, below, or just at break-even, the cost of the mortgage.
3. Invest the rest in the instruments of your choice.
If you want some advice, let me know. I am not all-knowing with regards to personal finance, but I do have my CFA charter.
Chances are highly likely you'll earn more money by investing than you will by paying off the house. If you want to grow your wealth, pay off the 20% piggyback loan, keep the original and invest the rest. Include any extras cash flow in after getting rid of piggyback.
Ask the planner to run the numbers for 5, 10, 20, 30 years. You'll start to see the gain and growth in even the original 500 to get staggering and blow by any savings in interest.
Ask the planner to run the numbers for 5, 10, 20, 30 years. You'll start to see the gain and growth in even the original 500 to get staggering and blow by any savings in interest.
Kroze
Diamond Member
- Apr 9, 2001
- 4,052
- 1
- 0
4% for the next 30 years? that's if his house didn't appreciate in 30 years. EG. bought house for $250k and sell it for $250k in 30 years....
now with your 6% gain from investing... don't forget to subtract tax & 3-4% annual inflation..what's your number after that?
don't listen to JS80 guy about mortgage interest = tax deduction either.
Kroze
Diamond Member
- Apr 9, 2001
- 4,052
- 1
- 0
this is in response to JS80 guy about keeping the house to get "mortgage interest tax deductions"
$250k house x 7% interest = $17,500/year in interest you're paying to the bank..
say you're in the 35% tax bracket...
that's $6125 the government will not tax you for sending the bank $17,500.
Why would anyone burn $17,500 just so that they don't get taxed $6125?
you can give the money to your church and still get the same "tax advantage"
$250k house x 7% interest = $17,500/year in interest you're paying to the bank..
say you're in the 35% tax bracket...
that's $6125 the government will not tax you for sending the bank $17,500.
Why would anyone burn $17,500 just so that they don't get taxed $6125?
you can give the money to your church and still get the same "tax advantage"
Your house appreciates whether or not you pay off the mortgage. It has no bearing on the decision of prepaying your mortgage or investing in something else. The only thing (emotional/psychological components of being debt-free aside) that has should matter is whether you can earn a greater after-tax return on your investment than your mortgage rate after the deduction, and whether those investments are worth the extra risk.
The value of the house appreciates independently of how fast you pay down the mortgage. LegendKiller's comparison was simply between "investing" extra money in the mortgage, or investing the money in long-term investments like index funds.
Taxes would depend on where you were holding the funds and how tax-efficient the particular funds were. Inflation is a wash because it affects the loan and the investments equally. Inflation is a drag on your investment returns, but it also means that the mortgage payments you make are worth increasingly less to the bank in real terms.
Personally I would think the investments would outperform paying down the mortgage over 30 years, provided you take some time to learn about expense ratios, turnover, and tax-efficiency of mutual funds.
Except you don't actually own anything when you give your money to the church. You build equity in the house by paying off the principal of the mortgage.
I'm not trying to say that people should not donate money to charitable causes. I'm only pointing out that your comparison between paying down a mortgage and donating to a church is not an apples to apples comparison.
Also, the tax deduction effectively lowers the interest rate of the mortgage, making the mortgage less attractive to pay off compared to alternative investments.
You don't understand what I was saying, nor how a house works.
Your mortgage's value doesn't go up with the appreciation of the house. Appreciation is totally disconnected from whether it's paid off or not.
If I have a $100K mortgage, 100K in cash, and a $100K house you have two scenarios in the next year.
1. You pay off the mortgage, don't get charged $4K in interest. House is now worth $104. Thus, you "made" $8K (4K saved on interest, 4K made on appreciation).
2. You don't pay off mortgage, pay $4K in interest, invest at 8%, make $8K, and the house appreciates to $104K.
Thus, you made $8+$4-$4 = +8K.
However, since we are talking about actual costs vs benefits (and not theoretical ones, such as the $4K "saved" in scenario 1), then in scenario 1, you only actually "made" $4K.
Thus, in Scenario 2, you made $4K more than scenario 1.
The $4K made on the house is completely independent of financing of the house. You are also using inflation incorrectly.
His point was that if the goal is the taxes savings, then it's the same. And if the tax savings is all you are keeping the mortgage for, you are losing money.
But are you taking into consideration the amount of interest you would gain from the money used to pay off the mortage?
dullard
Elite Member
- May 21, 2001
- 26,048
- 4,695
- 126
1) $500,000 isn't much money. Yes, that sounds stupid - $500k is more than most people will ever get in one chunk. And I'd love to get $500k. But, my point stands, it really isn't THAT much. You can't retire now and live on it. You can't go on a shopping spree and act as if it is a lot. It isn't.
2) Thus, you have two choices: (A) invest it for retirement or (B) use it to make your life better now. I personally would chose the combination of both (A) and (B). Put half of it ($250k) into accounts for your retirement. By the time you retire, you'll have ~$10 million from that half (plus whatever you get from other retirement savings). With that $10 million, you'd be able to withdraw $400k per year in your retirement. Note, due to inflation, that is only worth $100k of todays money. But still, you'll live quite well in retirement.
3) Take the other half and make your life better for the next 40 years while you are still working. First, pay off your small debt ($5k) and the 20% loan (I assume that is about $25k). That is the best investment you'll likely make, so do it. That'll leave you with $220k in your fun account. Invest this fun money as well. Then, each month while you work, withdraw $1500 from your fun account. Spend this to make your life better. Take a trip, buy that big screen TV, or save a few months and buy a new car. Do whatever you like and have fun, your grandfather would be proud that his money brought so much enjoyment. This is all fun money because your normal job will pay the bills, the mortgage, etc.
With this plan, you'll have a great financial life for your WHOLE life. Have your cake AND eat it.
2) Thus, you have two choices: (A) invest it for retirement or (B) use it to make your life better now. I personally would chose the combination of both (A) and (B). Put half of it ($250k) into accounts for your retirement. By the time you retire, you'll have ~$10 million from that half (plus whatever you get from other retirement savings). With that $10 million, you'd be able to withdraw $400k per year in your retirement. Note, due to inflation, that is only worth $100k of todays money. But still, you'll live quite well in retirement.
3) Take the other half and make your life better for the next 40 years while you are still working. First, pay off your small debt ($5k) and the 20% loan (I assume that is about $25k). That is the best investment you'll likely make, so do it. That'll leave you with $220k in your fun account. Invest this fun money as well. Then, each month while you work, withdraw $1500 from your fun account. Spend this to make your life better. Take a trip, buy that big screen TV, or save a few months and buy a new car. Do whatever you like and have fun, your grandfather would be proud that his money brought so much enjoyment. This is all fun money because your normal job will pay the bills, the mortgage, etc.
With this plan, you'll have a great financial life for your WHOLE life. Have your cake AND eat it.
No, not really. The only thing here is whether or not you want to pay off the house and that wasn't covered in his post.
Personally, I'd rather have the security of the paid off house and not having to send payments but obviously that's not the mathematically optimal solution to the problem.
There isn't any "security" in having the house paid off. If you have the cash and it is invested wisely, then you are no more better or worse off "security" wise. You *STILL* have that cash available.
Sending payments isn't a material consideration, unless you are irresponsible.
That's not totally true either. What if I were to invest in real estate or bonds or a CD? Then that portion is less liquid and I can't count in the income from renters. What if I put some of it into an IRA or whatever over time?
You are right that you should probably keep that money more liquid and in like mutual funds or something that grows better than a CD anyway but people do use those other methods that could get them in a liquidity bind.
There is some security in paying off the mortgage, since there is almost no way an investment returning a rate higher than your mortgage rate is risk-free (most people consider the risk-free baseline to be T-bills). No matter how wisely you invest or how diversified you are, you are not *guaranteed* a return on your investment greater than the return you get paying off the mortgage- you aren't even guaranteed to retain your principal investment. Granted, over a 30 year period, we expect the return on our investments to be higher, but we are still taking on additional risk.
I suppose you could be worse off if you lost your job in the middle of a deep bear market, and the money you had been investing instead of paying off your mortgage had declined to the point where it couldn't cover your mortgage payments until you were able to find work again. In that instance, owning the house outright would have been better. It also depends on where the investments are held. Funds held in a taxable account can be withdrawn at any time, but what if the person was maxing out their 401k instead of paying down their mortgage? In that case, they couldn't easily access their money to cover their mortgage payments if they hit a rough spot. This of course assumes the house is completely paid off before the disaster hits.
I admit the above scenario is somewhat contrived, but it does illustrate a case in which it would be advantageous to own a home outright.
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