Joined Jul 2007
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Forum Thread
Payoff vs tax benefit - mortgage
February 3, 2023 at
02:03 PM
Thread Details
Hello,
I am thinking of paying off my home loan of around 300K. In past few years i have never recd any tax benefit out of my mortgage interest payment at 3-5%
I am not one of folks who can put this money in stock funds as they all tanked in last 1-2 yrs. I know they can now move up... but too much risk
Trying to get advice from fellow SD'ers if i should go ahead and payoff debt and avoid 1K per month interest that i am paying right now.
I will have 100K+ remaining in my account after the payout.
I am thinking of paying off my home loan of around 300K. In past few years i have never recd any tax benefit out of my mortgage interest payment at 3-5%
I am not one of folks who can put this money in stock funds as they all tanked in last 1-2 yrs. I know they can now move up... but too much risk
Trying to get advice from fellow SD'ers if i should go ahead and payoff debt and avoid 1K per month interest that i am paying right now.
I will have 100K+ remaining in my account after the payout.
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I am thinking of paying off my home loan of around 300K. In past few years i have never recd any tax benefit out of my mortgage interest payment at 3-5%
I am not one of folks who can put this money in stock funds as they all tanked in last 1-2 yrs. I know they can now move up... but too much risk
Trying to get advice from fellow SD'ers if i should go ahead and payoff debt and avoid 1K per month interest that i am paying right now.
I will have 100K+ remaining in my account after the payout.
That said, normally if interest rates were in the 0.5-2% range like they had been for a number of years I would say pay down the debt with extra payments as much as you can afford to do so and be rid of of it. However, with current T-Bill rates for 17 and 26 week T-Bills being near 5% (state and local tax free), if you have 300k lying around, I probably would stick that in T-bills and let income from that offset the mortgage interest while carrying the deduction. You probably will come out a little ahead depending on the current effective rate of your mortgage\how much is interest vs. principal at this point, but that is just my opinion. Consult with a tax pro\accountant and have him run the numbers imo.
So you have a 300K home loan how far into the loan are you and what was the original loan amount?
Where is the money coming from?
Just quick numbers a 500K loan at 3% interest in the first 10 years you are paying about 50% interest in the payment is about 2100/month and the interest averages out to 100/month.
So if you are in the first part of your mortgage then it COULD make sense . Likewise the last 10 years the effective rate is lower.
If you pay off your house you are putting all of your investments into your house.
Depending on where you live home values could be steady or volatile. If you are in Florida you have insurance and natural disasters to be concerned about.
You could also have something move into your town or out like a plant closing or them running a pipeline near where you live etc..
You can diversify and lessen your risk it depends on how close to needing the cash. Now if you put all your cash into your house are you going to move when you "retire' and need the cash?
There is a school of thought that as long as you have the cash to pay the mortgage it can be better off having a mortgage when you are 70 than having your house paid off and 400K in cash tied up in your home.
A lot depends on your age and the state that you live in as well as your overall financial health and your age.
So you have a 300K home loan how far into the loan are you and what was the original loan amount?
Where is the money coming from?
Just quick numbers a 500K loan at 3% interest in the first 10 years you are paying about 50% interest in the payment is about 2100/month and the interest averages out to 100/month.
So if you are in the first part of your mortgage then it COULD make sense . Likewise the last 10 years the effective rate is lower.
If you pay off your house you are putting all of your investments into your house.
Depending on where you live home values could be steady or volatile. If you are in Florida you have insurance and natural disasters to be concerned about.
You could also have something move into your town or out like a plant closing or them running a pipeline near where you live etc..
You can diversify and lessen your risk it depends on how close to needing the cash. Now if you put all your cash into your house are you going to move when you "retire' and need the cash?
There is a school of thought that as long as you have the cash to pay the mortgage it can be better off having a mortgage when you are 70 than having your house paid off and 400K in cash tied up in your home.
A lot depends on your age and the state that you live in as well as your overall financial health and your age.
So, what's the rate on your mortgage? Considering "safe" investments, you would probably be better off with CDs or MM. For example, my mortgage is 2.99% but numerous 4+ to 5% CD's and MM are available, which are basically risk free. Why in the hell would I pay down a 3% mortgage when $100k in a 5% CD is netting me ~ $2k/yr? Yes the CD/MM rate will fluctuate with the market - generally the longer term you commit to will have higher rates, but liquidity suffers.
As far as tax benefits of mortgages, that's pretty much a thing of the past for most people. One easy way to account for it when making investment decisions is to discount the mortgage rate by the tax benefit. Just makes it easier to compare vs. other investment options.
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So, pay it off, BUT don't stop paying the "mortgage". Put the $$ you would have paid to the mortgage into the bank. IE pay yourself your mortgage. Once you have a decent emergency fund, then you can put your "mortgage payments" into the bank, or market, or bonds or whatever.
YMMV, just my opinion. Owning your home outright =The American Dream.
So, what's the rate on your mortgage? Considering "safe" investments, you would probably be better off with CDs or MM. For example, my mortgage is 2.99% but numerous 4+ to 5% CD's and MM are available, which are basically risk free. Why in the hell would I pay down a 3% mortgage when $100k in a 5% CD is netting me ~ $2k/yr? Yes the CD/MM rate will fluctuate with the market - generally the longer term you commit to will have higher rates, but liquidity suffers.
As far as tax benefits of mortgages, that's pretty much a thing of the past for most people. One easy way to account for it when making investment decisions is to discount the mortgage rate by the tax benefit. Just makes it easier to compare vs. other investment options.
Except that that 5% is taxed by the feds and depending on where you live and\or whether you go with T-bills (also paying about 5%), could be subject to state and local taxes. So that 2k in your example gets cut down some. Add in that depending on where you are in the mortgage, you might be paying significantly more right now in real interest terms because the early years of mortgage payments on a standard amortization schedule are largely interest payments and the latter years mostly principal so the math is not straight forward. But generally you are correct in that you go with the option which nets you a better return for the present time.
So, pay it off, BUT don't stop paying the "mortgage". Put the $$ you would have paid to the mortgage into the bank. IE pay yourself your mortgage. Once you have a decent emergency fund, then you can put your "mortgage payments" into the bank, or market, or bonds or whatever.
YMMV, just my opinion. Owning your home outright =The American Dream.
Really? You are mistaken. Own means OWN.
Even if I owe taxes, it does not impinge on my ownership, I still OWN the property, I am just assessed taxes on it. If/When I am in default for non-payment, my state/county/whatever can place a lien on my home and maybe (depending on laws in the state) foreclose on it, but I still own it until then. Just like if I paid rent, I could be evicted if I didn't pay. Or, if I really could not pay my taxes, I could sell my house as I own it. Not the same if you can't pay rent. It is always better to own. You then are not subject to a landlord. Do you really not get that?
Really? You are mistaken. Own means OWN.
Even if I owe taxes, it does not impinge on my ownership, I still OWN the property, I am just assessed taxes on it. If/When I am in default for non-payment, my state/county/whatever can place a lien on my home and maybe (depending on laws in the state) foreclose on it, but I still own it until then. Just like if I paid rent, I could be evicted if I didn't pay. Or, if I really could not pay my taxes, I could sell my house as I own it. Not the same if you can't pay rent. It is always better to own. You then are not subject to a landlord. Do you really not get that?
If you don't pay your property taxes they can foreclose.
So you constantly have to pay somebody to live in your home or you can no longer live there. Essentially renting it from the government but they will pay you your equity back if they auction it off.
If you don't pay your property taxes they can foreclose.
So you constantly have to pay somebody to live in your home or you can no longer live there. Essentially renting it from the government but they will pay you your equity back if they auction it off.
For most people, you must pay someone something for shelter. BUT rent, taxes, mortgage are all different. For most people, owning is BETTER.