To Pay off the Mortgage or Not

[afchic]

For the smarter financial folks than me, here is a question.

My husband and I have a home appraised at approx $300K, with a $208K mortgage. If I were to increase our mortgage payments by a hefty amount, and the only thing I would have to do is stop paying into my TSP, leaving my IRA and Mutual Funds as they are, I could pay off our mortgage by the time I retire in 4 years.

Is it better to pay off the mortgage (5.25% loan) or is it better to take that extra money and dump it into my TSP, as well as increase the amount going into my mutual fund.

The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.

[GratefulCitizen]

If it were me, I'd sell, even at a loss.
Rent while the housing market declines.
Buy again when the time is right.

Hypothetical example:

-Sell for $250-$300K
-Rent for 1-4 years
-Buy "retirement home" at $150-200k

It all depends on what you think will happen to housing values where you plant to retire.

[afchic]

Originally Posted by GratefulCitizen

If it were me, I'd sell, even at a loss.
Rent while the housing market declines.
Buy again when the time is right.

Hypothetical example:

-Sell for $250-$300K
-Rent for 1-4 years
-Buy "retirement home" at $150-200k

It all depends on what you think will happen to housing values where you plant to retire.

This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.

[BrainStorm]

I'm not a certified financial planner, so my advice should be suspect.

I am in a similar situation and spoke with my financial planner who also takes care of most of my investments. She suggested I look at the value of the interest deduction in my taxes in considering my decision. She also felt that she would be able to produce results higher than the mortgage interest rate so excess funds could go into earning that return.

YMMV

[ZonieDiver]

I am no financial genius - in fact, I am a financial dolt. (You would probably be wise to do just the opposite of what I suggest. <g>) However, I did sleep in a Holiday Inn Express for my week in Colorado Springs, so...

I'd pay off the house more quickly. Tax deduction is just that. True, you will have less retirement income due to less in TSP, etc. but, you will need less income with NO house payment.

[GratefulCitizen]

Originally Posted by afchic

This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.

Fair enough.
(Though the important numbers on the sell/rebuy are the difference between sale price and buy price, not on how much is owed vs rebuy)
***********
***********

If you don't pay it off:

"Expense"
-the amount you pay in interest

"Profit"
-the amount you get in tax deduction on the interest
-the amount you can net profit if the money from principal and interest were used somewhere else
(expected rate of return, future taxes and inflation are among the things which will affect this)



If you do pay it off:

"Expense"
-the amount you lose in tax deductions

"Profit"
-the amount you don't pay in interest
(this is a "guaranteed" rate of return)


Comes down to future economic expectations and risk tolerance.

[JJ_BPK]

Originally Posted by afchic

The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.

I look at it this way:

If your retirement funds have a higher rate of return than the 5.5% house mortgage, you're ahead by not paying it off.

Remember to factor in the federal tax rebate from mortgage interest and the taxes due on your dividends and capital gains.

I am not a schooled investor, but with a little reading, I manage to consistently beat the market and exceed my mortgage rate.

That includes many many years where I only invested in mutual funds. I let them do their dirty deeds, earn their million dollar bonuses, and reaped the benefits.

If you are lucky enough to have a bean-counter in the family, put him/her to work.

My $00.0002

Good Luck..

[Anevolution]

Originally Posted by NORMAL550GIRL

The standard line is to never never pay your mortgage off early in exchange for sacrificing cash into retirement funds and/or paying off credit card debt. The reason for that is that mortgage interest is tax deductible, and even though it's tempting to be completely debt-free, you'll need every penny in those IRAs when it's time to retire. [/URL]

Afchic:

This.

But if it really is something you want to do why not just go biweekly with you payments? It will take a lot of time of your mortgage, because you will be paying less interest. It shouldn't cost anything just make the call to you bank. Or you could start makeing some principal only payments with any "extra cash" you have. That way if something came up and you needed that money you don't "have to" pay more if you don't want to. I like to leave my options open. My .02

V/r
Anevolution

[Dan]

Originally Posted by afchic

For the smarter financial folks than me, here is a question.

My husband and I have a home appraised at approx $300K, with a $208K mortgage. If I were to increase our mortgage payments by a hefty amount, and the only thing I would have to do is stop paying into my TSP, leaving my IRA and Mutual Funds as they are, I could pay off our mortgage by the time I retire in 4 years.

Is it better to pay off the mortgage (5.25% loan) or is it better to take that extra money and dump it into my TSP, as well as increase the amount going into my mutual fund.

The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.

Keep it as simple and focused as possible with the least amount of risk. This plan is based on what I'm currently doing and is from Dave Ramsey. Too many people want to offer advice, but admit they aren't financial geniuses!

Emergency Fund: If you don't already have it, get 3-6 months of basic living expenses in an emergency fund before you do anything. If your already there great!

Retirement Investing - Continue to invest where you get a match first (i.e. TSP 5%), but no more than 15% of your wages. Make sure your TSP is where it should be; i.e. 60% in C-Fund, 20% in S-Fund, and 20% in I-fund. This breakdown is straight from an article that Dave Ramsey did and shows long-term that it's the right percentages/funds.

Paying off the mortgage - Dump anything and everything else you can into the mortgage to pay it off ASAP. Stay focused on the goal; retiring in 4-5 years and having your retirement home completely paid for will be sweet!

No chances and easy to follow plan!

[Roguish Lawyer]

Originally Posted by afchic

This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.

I am not in the investment business, but I represent lots of people who are. They tell me stuff. Lots of people think that we are soon going to see significant increases in inflation and interest rates. If that prediction is accurate, one reasonable strategy would be to invest in hard assets -- things that will have value for you regardless of what a dollar is worth. Based on what you say above, if I were you, I would pay down the mortgage. A home, if you plan to stay in it long-term, is one of the best hard assets you can buy.

Just my .02, YMMV. And, of course, I disclaim all warranties.

[dennisw]

What a great question. Obviously there are a lot of factors to consider. The link below discusses the Obama administration's plan to limit the deduction of home mortgage interest for wealthier Americans. Even if they do not eliminate the home mortgage deduction, it's important to remember, you only receive the tax rate benefit for a deduction. If you are in a marginal fed and state tax rate of let's say, 40%, you are still losing 60% of your interest. It's important to note that large mortgages were in vogue during the Carter era as the highest marginal tax rate was in the 70% range. With this kind of tax rate, you would save 70% of every dollar of deduction. Credit card interest was also deductible then.

Also, if you or you husband are going to be deployed during the next four years, you may not need the deduction as badly as some and the tax benefit of mortgage payments is severely reduced in this case.

Finally, I believe you need to also consider utils. Utils are the measurement of enjoyment or comfort. It may be an aspect of your personality that you would feel better if your mortgage was paid off or in other words, for you there may be a high degree of utility in paying off your mortgage. If that's true, this may be the right plan for you.

Also, you can always refinance at a future date. I believe 40% of all Americans do not have a mortgage, so, if you do pay it off, you're not alone.



http://money.cnn.com/2009/02/27/real...ction_slashed/

[dac]

Originally Posted by Dan

Keep it as simple and focused as possible with the least amount of risk. This plan is based on what I'm currently doing and is from Dave Ramsey. Too many people want to offer advice, but admit they aren't financial geniuses!

I love the Dave Ramsey plan! His books and DVD's made things so simple to understand. I give his plan to all of my friends and was going to add it here until Dan beat me to it.

I am still a long way from real retirement, but I hope to shorten that time as much as possible.

[Surf n Turf]

afchic,
We were in a similar situation 10 years ago. We decided to pay off the mortgage, and currently have no debt. About 5 years ago, I was involved in an accident that caused early retirement – I am thankful that we paid of the house.
Since your house is the one you will retire in, it seems to me that it is more of a “comfort” decision rather than financial. Lets face it, even the best of investors are making single digit returns, so the question is not “where do I get the most return”, but how would you feel to be debt free going into retirement (or another career).

BTW, Roguish Lawyer is correct. Hard times, and inflation, are coming.
Ensure that the bulk of your money is “hard assets”.
SnT

Originally Posted by Roguish Lawyer

Lots of people think that we are soon going to see significant increases in inflation and interest rates. If that prediction is accurate, one reasonable strategy would be to invest in hard assets -- things that will have value for you regardless of what a dollar is worth. Based on what you say above, if I were you, I would pay down the mortgage. A home, if you plan to stay in it long-term, is one of the best hard assets you can buy.

[afchic]

Thank you all for the input. It certainly has been helpful, especially the advice from folks that have thought about doing the same thing I am.

I talked to my brother yesterday who is in finance, and he told me that as long as I am keeping some money going towards investments, and can afford to put extra money each month towards principle, that paying off the house is a good idea. Keeping the same mortgage, will allow me to choose month to month if I want to put extra money towards principle. That way if something comes up out of the blue that month, that our current 6 months worth of savings can't handle (don't see that kind of a scenario happening) then I can choose not to put the extra in that month.

He also said that if inflation starts to creep up, putting our money someplace other than a 5.25% loan will be in our best interests.

I guess that I am lucky that I am in a position where I have the opportunity to decide what is the best means to ensure we are taken care of in our old age, without "having" to do anything other than make our normal mortgage payment.

I talk to my kids about this alot, and hopefully they are becoming more aware of money issues, and how spending/savings habits begin at their age, not at our age.

My mom is in a very similar situation as you. The advice she got was to stop making payments for a few months until the mortgage company comes to the table, then talk them into reducing the amount you owe. The savings are worth the credit hit if the mortgage company writes off 1/3 of your principle. There is no 1099 involved since the mortgage company agrees to it, so it is simply a free-to-you reduction in the amount you owe.

If you don't have any other debt and are not planning on buying a new house anyway, what do you need a good credit score for? My spider sense tells me that when all the dust settles from the current financial situation in the US a credit score won't mean jack anyway.

I have had a house on the market for almost 2 years now and only had a couple of bites, neither of which were able to secure a loan. I made my last payment on that house last month based on the advice my mom got, in hopes that my mortgage company will make a deal. I tried calling them to negotiate while my payments were up to date and they said hell no. So I will try again after a couple of months of not paying and see if they will negotiate.

This goes against my grain in a big way. I was taught to always pay my bills on time and fulfill my responsibilities, so stopping the payments hurts a little inside, but knowing my mortgage company falls under the AIG umbrella helps ease the sting some.

I am living in my dream home now and don't plan to ever move again. We have no debt other than our mortgages and aren't planning on financing anything ever again, so...ain't got no use for credit anyway.

Anyway, good luck!!!