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Mortgage trivia....

SallyBR's picture

... I have a horrible time with the mathematics behind taxes in the US - my overall idea of financial bliss is to get my debts paid as quickly as possible. We have a 15 year mortgage with 12 years to go.... we try to make one extra payment per year to pay it all off sooner...


BUT lots of people (including Phil's sister) - tell us that this is not the smart thing to do. That it is much better to have a longer mortgage because when you don t have house payments to make, your taxes will jump and in the end you are left with less money from your paycheck.


I would love to hear CTer opinions on this. We might re-finance our mortgage to profit from the lower rates.


 


 

 

MEANCHEF's picture

(post #41637, reply #1 of 29)

That theory is analagous to "I don't want to make more money because my taxes will go up"  It's nonsense.  Would you object to a 15 year mortgage that was interest free because your taxes will be higher?  I think not.  Tax savings are only a maximum of 30% or so of what you pay out.


The real issue is what alternative investments are available for your money.  If you can invest your money at a higher rate of return than the mortgage rate (which would obviously include paying off high interest debt like credit cards), then crank up your refinancing to the maximum, Take the money out and invest it.  Otherwise refinance at the lowest possible amount for the shortest possible time..

dixie1's picture

(post #41637, reply #2 of 29)

That it is much better to have a longer mortgage because when you don t have house payments to make, your taxes will jump


Sally, I don't know what taxes you are referring to - local property or federal income. It is true that you can deduct your interest paid on mortgage payments from federal income taxes, but if you are talking property taxes, they are going up anyway.


If you are concerned with federal income taxes, when you get to your mortgage being paid, you can always take out a home-equity line of credit to do all sorts of things and you can deduct that interest as well. The mortgage on my home has been paid, but I still have a line of credit against my house to use for other things (buying other properties to re-sell) and the interest is still deductible. FWIW, I don't believe in long mortgages - pay them off and use the credit line to do other things. JMHO.


Edited to say - you are on the back side of re-financing at a lower percentage than you wil probably be for some time in the future.


Edited 11/30/2003 6:44:17 PM ET by dixie

UncleDunc's picture

(post #41637, reply #3 of 29)

Money in the bank will get you through times of no income better than a paid off house will.

I feel the same way you do about eliminating debt. Paying off your house is a good investment, and the house will probably appreciate faster than most other investments. And even if you put aside the investment issue, being debt free feels better than not being debt free. On the other hand, I understand better now than I did two years ago how important it is to have some liquid assets available. If you _needed_ money and it took nine months to sell your house, or if you had to reduce the price steeply to get a quicker sale, you'd be hosed. It's tough to get a second mortgage or a home equity loan when you don't have any income. Not impossible, perhaps, but difficult.

So my advice is, save up enough money to pay for six months or a year of bare-bones living, and then start pre-paying the mortgage.

MadMom's picture

(post #41637, reply #4 of 29)

Very good points.  Still, I'm amazed at the "I don't pay off my house so I can have the tax deduction" logic...it defies any mathematical sense, unless you are borrowing money on other things.  If you have all of your other debts paid off, why not pay off your house?  If you absolutely must have a tax deduction, send me $1000 and I'll send you back $300 and you can figure you have the equivalent of a 30% deduction on $1000 in interest.  If anyone is interested in that deal, e-mail me, and I'll gladly send you my snail mail address!

Things are going to get a lot worse before they get worse.
Lily Tomlin

RHart18's picture

(post #41637, reply #20 of 29)

My SIL graduated college with a degree in Mathematics.  She has worked as a computer programer, now VP.  She recently bought a new beach house (upgraded from the old one) with a considerable mortgage.  She believes that the interest she deducts is a good reason to have a mortgage.  The realtors and the taxmen must be expert marketers to make so many people believe its good to have a mortgage.  And now they're convincing people to take out home equities so they can go on vacation and buy cars.  It's free, you'll get it all back in your taxes, right?  It's totally a shame that there are too many people giving financial advice that have vested interests in the outcome.  We used to learn finances from our parents and grandparents, now we learn it from the realtors, the car finance guys, the credit card companies, even the financial industry.  There is no such thing as "free" advice.  it usually comes with a price.

dixie1's picture

(post #41637, reply #21 of 29)

"free" advice


Is worth exactly what you pay for it.

wisekaren's picture

(post #41637, reply #5 of 29)

I'm with you. We are the type of people who can't stand owing anyone any money. We pay all our credit card bills in full each month and have no outstanding debt whatsoever except for our mortgage. So although it is financially more sensible to have a longer mortgage at a good rate, we switched to a 15-year as soon as we could. We haven't been able to pay off any additional principal yet, although we did that with our last house as often as possible. We just sleep better knowing we owe less. We are currently somewhat house-poor, but we prefer it that way. I don't know about the tax implications; however, our financial advisor acknowledged that people's comfort level with debt plays into this, and he never mentioned that our taxes were going to get screwed up.

Karen

MEANCHEF's picture

(post #41637, reply #6 of 29)

So although it is financially more sensible to have a longer mortgage at a good rate, we switched to a 15-year as soon as we could.


 


Why is it financially more sensible to have a longer mortgage???

wisekaren's picture

(post #41637, reply #7 of 29)

Because presumably you can invest your cash in something with a higher yield, AND you can write off the interest on your mortgage. Also, depending on your age, you might be in a different tax bracket by the time your mortgage is paid off. There's something else, too, but I forget what it is....

Karen

Jangomango's picture

(post #41637, reply #8 of 29)

If you can invest cash and get a higher yield than current USA mortgage rates with  absolutely no risk please tell me what it is.

SallyBR's picture

(post #41637, reply #9 of 29)

THanks for your replies... we definitely have to think about all the possibilities before going ahead with re-financing.


Our idea if getting a longer mortgage would be to invest the extra money into a retirement fund that would allow us to get the money out if we needed.


We are trying to be ready for the awful possibility that I might lose my salary - in that case, we will pretty much have to go for a longer mortgage with lower monthly payments. WE don t have to worry for another year, but.... I like to be ready for the worst, always..


 


 

 

CookiM0nster's picture

(post #41637, reply #10 of 29)

Not that I'm one to give financial advice, but here's one thing to consider. Since we can't find any investment package that will give us better interest than our mortgage (without being high risk), we take all our extra money, when we have it, and put it into the house. DH is the one who really knows about this, but what it goes into is some sort of limbo where it counts as extra payment toward the house, but is still available to us if we need to take it back out again. There is some small penalty for removing it, but still it's a much better deal than investing it if you work out the numbers.

Hang on, what do you mean you might lose your salary???

AnnL's picture

(post #41637, reply #11 of 29)

Pay your mortgage off as soon and as comfortably as you can.  I have always paid extra to the principle balance every month.  Back in the days when I used to get raises, I would take 1/2 of whatever the monthly increase in my take-home pay was and increase the extra principle payment by that amount. I figure I could live without that money before the raise, I could live without it after.  I just "pretend" that my mortgage payment is that higher amount.  I also  have refinanced my mortgage twice in the last 3 years to get a lower rate.  I kept the principle balance the same and lowered the length of the loan only to the time I already had left on the loan, so when I just refinanced this summer, I had already paid off 4 years of principle payments, even though I've only been in this house 3 years.  So, my new term is 26 years.  The new rate and lower loan balance lowered my required payments by about $100/month.  But, I am just putting that extra money directly back into the principle.  If I continue the extra payment that I am making, I will have the house paid off in about 18 years.  However, if I were to lose my job, my required payments are smaller, so in that event, I would stop the extra payments to principle. 


I would rather do what I am doing than refinance to a 15 year mortgage, which would result in monthly payments about the same as what I currently pay including the extra payments to principle.  That would lower the interest rate and lower what I am paying in total interest, but if I were to lose my salary, my required payments would be at that higher monthly amount and I wouldn't be able to cut back on my monthly expenses.  This way, I know I can survive for a year on what I have in savings and the little bit I would get from unemployment.  If I had a 15 year mortgage, I wouldn't be able to survive for as long on what I have in savings.


It's all in what you're comfortable with.  I hope to pay off my mortgage as soon as possible.  Yes, my taxes will go up, but they're not going to go up by as much as I was paying out each month to the bank!


 


AnnL; MotherHen/Hobby Farmer

Ann
"The elders were wise.  They knew that man's heart, away from nature, becomes hard; they knew that lack of respect for growing, living things, soon led to lack of respect for humans, too."  Chief Luther Standing Bear, Lakota Sioux

SallyBR's picture

(post #41637, reply #13 of 29)

If our big grant is not renewed, my salary is a goner. 


FIngers crossed, my friends.... they are deciding our future today at 11AM.... on a net-conference involving 3 or 4 scientists


 

 

Fledge's picture

(post #41637, reply #14 of 29)

Oh Sally, so soon?


Hoping the best for you.


Love,


Fledge


"Whiskey for my men, and beer for my horses"
Willy Nelson and Toby Keith

You don't scare me

I have an African Grey

SallyBR's picture

(post #41637, reply #16 of 29)

You know, I am a worry wart, so this is killing me. But, it will be ok, no matter what.


What worries me is that at the present time there are lots of big shot scientists (we have one good example in our department) who are NOT getting funded. This is scary - plus, it is so damn expensive to do research now. Salaries & benefits are a main component of the budget - to have 1 technician, 1 post doc, 2 graduate students, you need A LOT of money/year. And of course, there are supplies, equipment, maintenance contracts to keep very expensive equipments running...


I hope they tell us the outcome soon. But it may take a couple of weeks.


 


 


 


 

 

Fledge's picture

(post #41637, reply #17 of 29)

Today sounds like a good day to knead dough or something....


 


"Whiskey for my men, and beer for my horses"
Willy Nelson and Toby Keith

You don't scare me

I have an African Grey

SallyBR's picture

(post #41637, reply #19 of 29)

I am planning on making a rye bread this weekend, that needs to have a 3 day sponge incorporated in the dough.... I'll start the sponge tomorrow... :-)

 

 

AnnL's picture

(post #41637, reply #15 of 29)

Fingers and toes are all crossed and positive thoughts are heading your way. 

AnnL; MotherHen/Hobby Farmer

Ann
"The elders were wise.  They knew that man's heart, away from nature, becomes hard; they knew that lack of respect for growing, living things, soon led to lack of respect for humans, too."  Chief Luther Standing Bear, Lakota Sioux

RuthWells's picture

(post #41637, reply #18 of 29)

Sally, fingers and toes are all crossed, here...


<hug!>


 


Ruth Wells


"Gardening is the only unquestionably useful job."
 - G.B. Shaw

Ruth Wells

"Gardening is the only unquestionably useful job."
 - G.B. Shaw

www.lemonade-and-kidneys.blogspot.com

www.ruthssweetpleasures.com

http://www.pkdcure.org/Default.aspx?TabI...

StevenHB's picture

(post #41637, reply #12 of 29)

Sally, if you are serious about paying off in 15 years but concerned about losing some income, you should refinance with a 30-year term but make the extra principle payments that will allow you to pay off in 15 (assuming that you have no other higher-interest debt like credit cards or auto loans, neither of which have tax-deductible interest and assuming that you have no better investment alternative).  If you are laid off, you can stop making the extra payments.  The only down side is the slightly higher interest rate that you will pay for the 30-year loan.


In general, paying off your mortgage early is an excellent investment: you have a 100% guarantee that you will get a return on this investment equal to the interest rate of your mortgage.



Without coffee, chocolate, and beer, in that order, life as we know it would not be possible

Without coffee, chocolate, and beer, in that order, life as we know it would not be possible
gjander's picture

(post #41637, reply #22 of 29)

Actually, the return on your investment isn't equal to 100% of the interest rate--that's where the tax calculation comes in.  When comparing another investment with paying down your mortgage you have to calculate the effect of the tax deduction.  If you have a mortgage at 6% you'll would have to count the return as being something less than that--say 4.5% or 5% or whatever.  And as others have mentioned, extra money that you put in your mortgage is extremely difficult to access in times where you might need it the most.  It really does boil down to personal comfort levels.  Some people just feel better knowing they don't have a mortgage payment.  But as a pure financial matter it generally makes more sense to keep the mortgage, pay down other debts, and invest what's left over.  Mortgages are the cheapest money you'll ever borrow.  My two cents...

Wolvie's picture

(post #41637, reply #23 of 29)

Mortgages are the cheapest money you'll ever borrow.


Couldn't agree more.


The biggest waste of money I know is credit card interest. Man oh man.


"So beautifully arranged on the plate - you know someone's fingers have been all over it."
Julia Child

 

MadMom's picture

(post #41637, reply #24 of 29)

Amen!  Anyone who pays credit card interest needs to take a serious look at their financial habits.

Things are going to get a lot worse before they get worse.
Lily Tomlin

Jean's picture

(post #41637, reply #25 of 29)

But if it weren't for those who do, there  wouldn't be credit cards for those of us who don't.














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MadMom's picture

(post #41637, reply #26 of 29)

You're probably right!  I just feel so sorry for anyone paying that horrific rate of interest, particularly when you can probably go borrow the money at about 10% of that interest rate, and pay the darn thing off.  Of course, if you then immediately go charge more, you're just asking for trouble.

Things are going to get a lot worse before they get worse.
Lily Tomlin

Adele's picture

(post #41637, reply #27 of 29)

particularly when you can probably go borrow the money at about 10% of that interest rate,


Yup, let's borrow from the bank for that car repair bill that's coming in on top of the insurance that I knew was due and had the money for.  OOOOOPS!  Can't just get a loan for a couple of hundred bucks.   Whew!  Thank Goodness for that credit card! 


Sometimes you just have to do what you can to get by.


But, but, its SUPPOSED to taste like that!

But, but, it's SUPPOSED to taste like that!

MadMom's picture

(post #41637, reply #28 of 29)

I do understand, and credit cards are great for emergencies.  All we're saying is that you pay absolutely horrific interest on them.  If you belong to a credit union or have any sort of credit at a bank, you can easily cut the interest in half by going somewhere else.  (So I exaggerated about borrowing the money at 10% of what the CC companies charge you!)

Things are going to get a lot worse before they get worse.
Lily Tomlin

Wolvie's picture

(post #41637, reply #29 of 29)

oh I agree - I have some, and I use them. I try to use the Am Ex most of the time, but - some places still don't take it. And, as you say, for that emergency situation, they are survival tools. I have one visa and one MC that I keep about 200 - 300 bucks balance on, just to make them happy. They are still at 14.9 % or something like that, so it's not too bad. I did keep a discover card until citibank bought it out too. No reason to have a few from the same bank!

"So beautifully arranged on the plate - you know someone's fingers have been all over it."
Julia Child