Financial Question

[Epic Fail]

Originally posted by: Kroze
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"

I literally did a facepalm after reading this.

 

[LegendKiller]

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Beattie

Originally posted by: LegendKiller

Originally posted by: Beattie
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.

It all depends.

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.

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 Funds held in a taxable account can be withdrawn at any time, but what if the person was maxing out their 401k instead of paying down their mortgage?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.

He could also make 20% over the next 5 years and have a 148% return.

 

[soulcougher73]

Pay off all debt including mortgage. Invest the rest and also invest what USED to be your mortgage payments. Debt free with no worries Sounds good to me.

 

[Special K]

Originally posted by: LegendKiller

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Beattie

Originally posted by: LegendKiller

Originally posted by: Beattie
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.

It all depends.

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.

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.

He could also make 20% over the next 5 years and have a 148% return.

I guess that ultimately comes down to personal risk tolerance.

 

[Special K]

Originally posted by: soulcougher73
Pay off all debt including mortgage. Invest the rest and also invest what USED to be your mortgage payments. Debt free with no worries Sounds good to me.

This is likely not ideal from a purely financial standpoint. You would probably do better to invest immediately and not pay extra on the mortgage.

 

[bananapeel42]

You know, that's a very sound thing to do. The only problem is that 200k is going to come off the top from taxes.

Originally posted by: dullard
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.

 

[LS21]

Originally posted by: dullard


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.

or send the money to a charity i set up. you get the tax deduction. i get to squander the money. your grandpa would be so proud knowing how much happiness you've given to someone else (ME)

 

[ponyo]

Originally posted by: dullard
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.

Sounds like a nice plan.

Most people make bad investment decisions and end up losing money or underperforming. I would stick with the safe plan and pay off all debt in full including the house. You should still have plenty left over to invest. Live debt free and love life.

 

[sciencewhiz]

Originally posted by: bananapeel42
You know, that's a very sound thing to do. The only problem is that 200k is going to come off the top from taxes.

You don't pay income taxes on the benefit from the estate. The estate may have to pay estate taxes, if the value of the estate was more then 2 million. I would assume that was already factored in, and he gets to keep the full 500k.

 

[lightstar]

pay off the 20% loan and keep the 80% mortgage for the tax benefits unless you can refinance the whole mortgage into a 15 or 30 yr. mortgage in the low 5%'s. . . .

as far as investing the rest of the lump sum, i would advise against using a financial advisor. with a little bit of reading, you'll know more than 99.9% of them. . . .invest in stocks/index funds, real estate and/or a small business

 

[SearchMaster]

This is a Dave Ramseyism but I think it is a good illustration of the emotional security of a paid off mortgage...

If you had a paid off house worth $250K, would you take out a $250K loan against it to invest? The answer for 99+% of people is no.

Financially there are valid reasons to keep the mortgage and invest the windfall. But also remember that the money being sent to the bank every month would be used to build wealth now as well.

 

[dullard]

Originally posted by: sciencewhiz

Originally posted by: bananapeel42
You know, that's a very sound thing to do. The only problem is that 200k is going to come off the top from taxes.

You don't pay income taxes on the benefit from the estate. The estate may have to pay estate taxes, if the value of the estate was more then 2 million. I would assume that was already factored in, and he gets to keep the full 500k.

Thanks Sciencewhiz. We simply don't have enough information from the posts to determine the tax (if any).

1) If the estate is $2M or less, there are no taxes. If Jaha2000 is the sole heir (or if there are only a few heirs of $500k size) then there are no taxes.

2) The taxes are only for the amount over $2M. Thus, if the estate is $2.5M, the tax is a grand total of 45% * ($2.5M-$2M) = $225,000. That would lead to an average tax rate of 10.7%. The average tax isn't very high unless the state has well over $2M.

3) The estate pays the tax, not the person receiving the money. Thus, when you discuss numbers, you almost always discuss the post-tax numbers. It would be like me telling you that I'll give you $1000 for Christmas, but first I'll withhold $450 and actually only give you $550. No, no one actually talks like that. I would say I'll give you $550 for Christmas.

Thus, without more details (such as the total estate size), we should assume when he is told that he is getting $500k that he is actually getting $500k. And he doesn't pay tax on what he receives.

 

[LegendKiller]

Originally posted by: SearchMaster
This is a Dave Ramseyism but I think it is a good illustration of the emotional security of a paid off mortgage...

If you had a paid off house worth $250K, would you take out a $250K loan against it to invest? The answer for 99+% of people is no.

Financially there are valid reasons to keep the mortgage and invest the windfall. But also remember that the money being sent to the bank every month would be used to build wealth now as well.

What? This doesn't even make sense.

 

[aldamon]

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

Not if you don't go over the standard deduction.

 

[Kroze]

Originally posted by: LegendKiller

Originally posted by: JS80

Originally posted by: LegendKiller

Originally posted by: Kroze

Originally posted by: LegendKiller

Originally posted by: kranky

Originally posted by: JS80

Originally posted by: Pale Rider

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

Owning your home = greater advantage.

You = fail at finance

Nothing wrong with wanting to be debt-free. Yes, there are tax advantages to having a mortgage, but it still costs money. Even though I didn't suggest paying the mortgage off in full, I have no problem with anyone who wants to be completely out of debt. It's a personal choice.

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.

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.

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.

The $4K made on the house is completely independent of financing of the house. You are also using inflation incorrectly.

you are way nicer than me.

But I did miss something in there...lets see if anybody else catches it

He failed to realized the income from his job ...If you paid of your house, you'll get $4k + your income from your job....but what do I know. I'm stuck in a rat race.

Here's how the logic should go..

1. Paid off house scenario: $4k interest + $4k "appreciation" + $$$ from your job/salary... (do you think you can save more than $4k a year with your job if you don't have a mortgage to pay?)

2. Don't pay off your house/mortgage: $8k from 8% gain from investing the $100k. 4% capital appreciation cancelled out the 4% "mortgage interest" that you "saved" by having a mortgage. And since you still have a mortgage, the income/salary/money from your job goes to pay the mortgage every month.

 

[Special K]

Originally posted by: Kroze


He failed to realized the income from his job ...If you paid of your house, you'll get $4k + your income from your job....but what do I know. I'm stuck in a rat race.

In case one, the money is going from your paycheck toward the mortgage. In case 2, that same money is going from your paycheck to your investment account. The time frame being considered is the length of time it would take to pay the mortgage off early.

I'm not sure I understand what you are talking about.

 

[LegendKiller]

Originally posted by: Kroze
He failed to realized the income from his job ...If you paid of your house, you'll get $4k + your income from your job....but what do I know. I'm stuck in a rat race.

Here's how the logic should go..

1. Paid off house scenario: $4k interest + $4k "appreciation" + $$$ from your job/salary... (do you think you can save more than $4k a year with your job if you don't have a mortgage to pay?)

2. Don't pay off your house/mortgage: $8k from 8% gain from investing the $100k. 4% capital appreciation cancelled out the 4% "mortgage interest" that you "saved" by having a mortgage. And since you still have a mortgage, the income/salary/money from your job goes to pay the mortgage every month.

What?

Is it me, or does this make absolutely no sense at all?

 

[Kroze]

Originally posted by: LegendKiller

Originally posted by: SearchMaster
This is a Dave Ramseyism but I think it is a good illustration of the emotional security of a paid off mortgage...

If you had a paid off house worth $250K, would you take out a $250K loan against it to invest? The answer for 99+% of people is no.

Financially there are valid reasons to keep the mortgage and invest the windfall. But also remember that the money being sent to the bank every month would be used to build wealth now as well.

What? This doesn't even make sense.

Why doesn't it make sense?

If you have a paid for house that is worth $250k, would you take out a loan equal $250k to invest in the stock market? Yes or No?

It's no different than:
If I have a $250k mortgage but have $250k cash on hand, should I pay the house off or use the money to invest in the stock market?

 

[LegendKiller]

Originally posted by: Kroze

Originally posted by: LegendKiller

Originally posted by: SearchMaster
This is a Dave Ramseyism but I think it is a good illustration of the emotional security of a paid off mortgage...

If you had a paid off house worth $250K, would you take out a $250K loan against it to invest? The answer for 99+% of people is no.

Financially there are valid reasons to keep the mortgage and invest the windfall. But also remember that the money being sent to the bank every month would be used to build wealth now as well.

What? This doesn't even make sense.

Why doesn't it make sense?

If you have a paid for house that is worth $250k, would you take out a loan equal $250k to invest in the stock market? Yes or No?

It's no different than:
If I have a $250k mortgage but have $250k cash on hand, should I pay the house off or use the money to invest in the stock market?

Absolutely, I would leverage it.

 

[Kroze]

Originally posted by: LegendKiller

Originally posted by: Kroze
He failed to realized the income from his job ...If you paid of your house, you'll get $4k + your income from your job....but what do I know. I'm stuck in a rat race.

Here's how the logic should go..

1. Paid off house scenario: $4k interest + $4k "appreciation" + $$$ from your job/salary... (do you think you can save more than $4k a year with your job if you don't have a mortgage to pay?)

2. Don't pay off your house/mortgage: $8k from 8% gain from investing the $100k. 4% capital appreciation cancelled out the 4% "mortgage interest" that you "saved" by having a mortgage. And since you still have a mortgage, the income/salary/money from your job goes to pay the mortgage every month.

What?

Is it me, or does this make absolutely no sense at all?

His original logic didn't take into account that if you pay off your house, you free up your income from your job to invest with. If you don't pay off your mortgage, you have to use your income from your job to pay the mortgage with.

 

[Kroze]

get it?

 

[BurnItDwn]

I am sorry to hear about your grandfather. It sounds like he had a long life, I hope it was good for him.

 

[Kroze]

Originally posted by: LegendKiller

Originally posted by: Kroze

Originally posted by: LegendKiller

Originally posted by: SearchMaster
This is a Dave Ramseyism but I think it is a good illustration of the emotional security of a paid off mortgage...

If you had a paid off house worth $250K, would you take out a $250K loan against it to invest? The answer for 99+% of people is no.

Financially there are valid reasons to keep the mortgage and invest the windfall. But also remember that the money being sent to the bank every month would be used to build wealth now as well.

What? This doesn't even make sense.

Why doesn't it make sense?

If you have a paid for house that is worth $250k, would you take out a loan equal $250k to invest in the stock market? Yes or No?

It's no different than:
If I have a $250k mortgage but have $250k cash on hand, should I pay the house off or use the money to invest in the stock market?

Absolutely, I would leverage it.

So let's say that your house is worth $300k right now and you've managed to pay it down over the years so now you only owed $150k, why don't you go out and borrow $150k and invest it.

How much equity do you have in your house right now and why aren't you leveraging it.

 

[Kroze]

Originally posted by: Special K

Originally posted by: Kroze


He failed to realized the income from his job ...If you paid of your house, you'll get $4k + your income from your job....but what do I know. I'm stuck in a rat race.

In case one, the money is going from your paycheck toward the mortgage. In case 2, that same money is going from your paycheck to your investment account. The time frame being considered is the length of time it would take to pay the mortgage off early.

I'm not sure I understand what you are talking about.

I was trying to tell him what you're trying to say. He failed to mentioned the income from his job that he'll get to use & invest if he pay his house off.

 

[Kroze]

All of this sophisticated "leveraging" sounds eerily familiar...let me see.

Buy house, being smart/sophisticated by borrowing money against the house to buy 2nd house or maybe 3rd house (but in this case, he use the "leveraged" money to invest in stock market instead of buying 2nd house)

and then boom, housing market came to a halt and the economy is where it's at today.