Pay off the house or not?

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Hey folks, asking for an advice as I'm not an expert in these matters. Here is the situation: I owe 100K on a 200K house at 5% interest. House was bought in 2009 and is now worth probably slightly less, if that matters.
Have saved up 160K (mainly by living like a peasant) and I'm considering paying it off. Should I:

- Pay it off
- Refinance and pay some off
- Refinance and invest the rest (but invest into what?)

What benefits, other interest deduction, would I lose if I pay it off?
I'm 31.

Appreciate the advice.

Thanks,

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Can I ask what the OP's income is?

debtblag (Jan. 28, 2013 @ 5:45p) |

Good stuff folks, appreciate your responses, especially the analytical ones with numbers to back it up.

I'm leaning towar... (more)

birkoff2 (Jan. 28, 2013 @ 8:32p) |

I'm pretty sure that the OP asked, "Will paying off my mortgage give me a good feeling?"

debtblag (Jan. 29, 2013 @ 7:27a) |

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Refinance it to 3% interest

Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.

Do you have any kids?

Do you have any other meaningful deductions?

How stable is your job? How stable is your income at your job? How stable is your employer in your community?

If you lost your job today, how long would it take for you to find a new job? At what salary would that job be? Would it be in the same town or would you need to move?

etc etc

How long will 60k keep you in beer and property taxes if you get laid off? How likely is that?

I'm in a somewhat unstable industry, so my answer would be to refi into either the Penfed 1.99% 5 year home equity loan or a low rate 15 year loan and try to leave the 160k untouched. If you have a spouse that works or almost no expenses then your answer may be different.

If you do pay it off then a HELOC could be a good way to pad your cushion until you can rebuild it.

When you prepare your taxes, try figuring them out with no mortgage interest and see if the standard deduction's a better deal. With no interest it might be better, but don't forget property tax.

BlueSeaLake said:   Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.


I agree with this. Plus paying off the house is a guaranteed rate of return of 5% on the 100k.

BlueSeaLake said:   Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.


DITTO!

You really don't want advice, you want to recognize the need to learn about this "stuff".
The answer to you question is "it depends" as comments here have indicated; you must take into accounts many factors.
One factor not mentioned here, what do expect interest rates to be in five years or so. Suppose you're borrowing at 3% for 15 years and can then put it in a bank a few years from now at 5% or invest it over those fifteen years at an average rate of return of 6%+, free money but no guarantees.

Not having a house payment is a great feeling!

To me its about portability. Cash makes it easier to move. If you dont see yourself there in 10 years due to jib or life changes, refi with low or no closing costs, take the deduction, and keep on saving.

Refinance it with a lower rate.

Which option will allow you to sleep better at night? Only you know that one.

cajundavid said:   Not having a house payment is a great feeling!

Knowing I can stiff my lender when I die is a great feeling!

dyam45 said:   To me its about portability. Cash makes it easier to move. If you dont see yourself there in 10 years due to jib or life changes, refi with low or no closing costs, take the deduction, and keep on saving.

Generally, residential mortgages can be paid off in advance without penalty.
But if plan is to move shortly, then probably not worth refinancing, should be paid off or paid down to the extent affordable to do so.

Consult with a financial professional and provide full details of the situation and get a book on personal finance, etc.

birkoff2 said:   Hey folks, asking for an advice as I'm not an expert in these matters. Here is the situation: I owe 100K on a 200K house at 5% interest. House was bought in 2009 and is now worth probably slightly less, if that matters.
Have saved up 160K (mainly by living like a peasant) and I'm considering paying it off. Should I:

- Pay it off
- Refinance and pay some off
- Refinance and invest the rest (but invest into what?)

What benefits, other interest deduction, would I lose if I pay it off?
I'm 31.

Appreciate the advice.

Thanks,


'Invest into what' is a good question. I assume the money is now in cash and that you don't have much if any investment experience.

I'd pay off the mtg and find something to invest the freed up payment into monthly, preferably into a retirement account. With no mtg payment to worry about, it would be easier for you to be more aggressive with your investment choices. ( A good thing up to a point) If you make stupid mistakes, it will be with much smaller amounts.

Any deductions, that you might lose are no big deal as you must spend at least a dollar to save 25 cents or so in taxes. Most of us don't even do that well.

BlueSeaLake said:   Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.

You raise good points, however the place I would push you is on your description of why others will recommend he stay in debt.

First... the interest rate used to compute what he'll pay in interest ought to be what he could refinance at today, because that's his true opportunity cost. A 15 year fixed mortgage will run you just under 3% interest today, Yahoo Finance says 2.89% this week. So right off the bat, we're at $2,890/year for $100k outstanding, and that will decrease as his principal is reduced.

Assuming the 25% marginal tax bracket, he could reduce that 2890 to under 2200.

Oh, and we should remember he will earn interest on that $100k. Even with the AMEX Personal Savings account, he can pocket nearly 1% - so $1k per year.

Suddenly, even that $2890 gets knocked down because you earn interest on your cash, and you get a tax writeoff.

Imagine a worst case scenario where you get laid off. Having cash on hand can be very valuable, much more so than equity in your home, because cash can pay the bills - equity in your home, while an asset, cannot pay the bills. The only ways to access the equity value would be to either sell the home (good luck when people are being laid off and asset values fall), get a HELOC, rent out the home (not normally feasible), etc.

While it often sounds good to be debt-free, the reality is that someone who manages their money well is probably going to benefit by having a mortgage right now no matter how much cash they have. Even if you're a millionaire, at today's rock bottom low interest rates, the government is essentially paying you to have one. They want money to be put into the economy and pick up velocity.

Imagine a scenario where inflation picks up even a little bit... by having a loan that has a fixed interest rate, the benefits of inflation potentially accrue to the benefit of the homeowner.

Home value today: $200k
Home value after inflation in 10 years: $300k (hypothetical)

Loan size: $200k
Interest rate: 2.89% fixed

Excess cash: High yield savings account via FW Finance list
Interest rate: Variable, 1%+
Hypothetical future rate: 6%

If interest rates move to 6%, because of inflation, the person who used borrowed money benefited twice. Not only did their home's value increase to adjust for inflation, but their savings account, which has a variable rate, also kicks up, and earns them money.

Under an inflationary scenario, the person who locked in a low interest rate early on will do well.

The challenge is that this requires a prudent individual to manage their finances - I think most people will see the $100k in their account and be compelled to spend it. That's their choice, but not what the OP is likely to do. He's saved it by being prudent, and is likely to hang onto it. He isn't at risk of having a loan, then blowing through his savings, and ending up upside-down with money that he can't pay off.

I think he'll do well with a refinance.

Yeah, I would pay it off. Two reasons:

1. You can always cash-out refi when CD rates see signs of recovery
2. It's a GREAT feeling being debt free
3. Your paying more in interest then you gain by letting the cash just sit there

I think the prudent thing would be to max out on retirement accounts because those are protected from bankruptcy. Homestead exemption only covers a small % of the home value and so your house is not really covered during Chapter 7 bankruptcy.

avalon6 said:   I think the prudent thing would be to max out on retirement accounts because those are protected from bankruptcy. Homestead exemption only covers a small % of the home value and so your house is not really covered during Chapter 7 bankruptcy.

That depends on what state you are in. In FL your house is cannot be taken in bankruptcy, No matter how expensive/big.

I tend to go against the norm and believe that having fluid cash is important. You never know when you might get laid off and spend 1-2 years trying to find a job. And for those people who say you might later cash out of your house with a refi, just think about the recent downturn where people lost 20%+ of their home value... they're not getting cash out of their home now.

However... you say you have $160k in savings (I assume that's fluid), so if you put the $100k into the house, you're still left with $60k. That's a good cushion if things go south.... so... I am going to have to side with others and say pay off the house. You're not likely to find anything that will get you better than 5% ROI.

horizon6 said:   
Generally, residential mortgages can be paid off in advance without penalty.
But if plan is to move shortly, then probably not worth refinancing, should be paid off or paid down to the extent affordable to do so.

Consult with a financial professional and provide full details of the situation and get a book on personal finance, etc.


The OP did not suggest he planned on moving in a shorter time frame but unforeseen/unposted variables may make moving more likely. If the OP knew of variables that would make him more likely to move in less than 10 years, why not refinance with a low or no-cost refi and save on interest, still get the deduction, and still have the cash. It is easy to see how long it will take to recoup minimal closing costs and many ~3% refis can break even in just a few months, some will pay you to take a lower rate. If he doesn't move, at least he didn't stay at his current rate of 5%. If he does move, the cash funds would be useful for acquiring a new home whereas funds tied up in a paid off underwater house may be more difficult to access.

What does paid off without penalty have to do with my comment regarding the ability to move whenever you see fit ro have a need to do so? I think you are confused and need to get your own book, etc.

alamo11 said:   Yeah, I would pay it off. Two reasons:

1. You can always cash-out refi when CD rates see signs of recovery
2. It's a GREAT feeling being debt free
3. Your paying more in interest then you gain by letting the cash just sit there


A 3% no cost refi will reduce his interest paid by 2% and he can still write off the mortgage interest potentially.

With cash in a crappy 1.35% CD, the difference is only 0.65% or less if again taxes can be written off. If you risk a little (seems reasonable at 31), you can certainly beat 1.35% and come out on top vs. locking your funds in an underwater home.

I've heard it put this way before --- and I liked the perspective....

Let's say you already had your house completely paid off. Would you feel comfortable going out, getting a mortgage on that paid-off house, and then taking that money and investing it? If the answer is no, then you should pay-off the mortgage now. Because it's essentially the same scenario as the one you described, just flipped around and the question asked in a different way.

Interest rates have nowhere to go but up, and eventually (sooner than later) they have to go way up. Bonds are in a historical bubble, even as our government purchases it's own debt. Lock in a low rate now and enjoy liquidity when nobody else has that luxury. You will easily find avenues to make more than 3%, especially in a high interest rate environment. Why not buy a rental property or 3?

sell the house, move overseas and retire on a beach in mexico, south america, or southeast asia.

Refi to PenFed 5/5 w no closing fee. Pay off over 5 years.

I honestly think this is a very personal choice. I personally would pay it off. I feel OP is leaning toward paying it off based on the provided information but has a bit of hesitation because so many people say why pay off when interest rates are so low. I paid mine off, took a hit on available cash and do not regret. If OP had only 110k-120k or already making good money in the stock market then I'd say don't pay off. But having 160k in savings accounts even making 1% while paying mortgage interests is not something I personally would prefer.
There would be taxes on the interests from savings accounts plus costs of mortgage interests. And it's even worse if the standard deduction is bigger than the mortgage interest deduction. I have to admit it wasn't an easy decision to me though. But it was the right choice based on my personal investment style and willingness to take risks. So ultimately OP has to consider his own financial situation.

Finally, congratulations to OP for being able to pay off mortgage if he wants to at a young age by living the FW way.
That's quite impressive by itself...

Refinance at a lower term and rate, plus pay additional toward principal.

ohmic314 said:   I tend to go against the norm and believe that having fluid cash is important. You never know when you might get laid off and spend 1-2 years trying to find a job. And for those people who say you might later cash out of your house with a refi, just think about the recent downturn where people lost 20%+ of their home value... they're not getting cash out of their home now.

However... you say you have $160k in savings (I assume that's fluid), so if you put the $100k into the house, you're still left with $60k. That's a good cushion if things go south.... so... I am going to have to side with others and say pay off the house. You're not likely to find anything that will get you better than 5% ROI.


Did you look at the S&P Index last year?

Refinance into a lower rate on a 30 year. If rates go lower, refinance again. If rates go up, you'll have cash an additional $100K you can invest, and your ~3% interest rate will seem like an asset.

dyam45 said:   horizon6 said:   
Generally, residential mortgages can be paid off in advance without penalty.
But if plan is to move shortly, then probably not worth refinancing, should be paid off or paid down to the extent affordable to do so.

Consult with a financial professional and provide full details of the situation and get a book on personal finance, etc.


The OP did not suggest he planned on moving in a shorter time frame but unforeseen/unposted variables may make moving more likely. If the OP knew of variables that would make him more likely to move in less than 10 years, why not refinance with a low or no-cost refi and save on interest, still get the deduction, and still have the cash. It is easy to see how long it will take to recoup minimal closing costs and many ~3% refis can break even in just a few months, some will pay you to take a lower rate. If he doesn't move, at least he didn't stay at his current rate of 5%. If he does move, the cash funds would be useful for acquiring a new home whereas funds tied up in a paid off underwater house may be more difficult to access.

What does paid off without penalty have to do with my comment regarding the ability to move whenever you see fit ro have a need to do so? I think you are confused and need to get your own book, etc.


If OP can obtain a no-cost refi without an interest penalty, great. Usually there is some "cost" to refinancing which may not be recouped in a very short period. If one had a loan with an pre-payment penalty that could negate some of the potential savings. In most cases, but lacking details on OP's full situation, refi would be a good choice. If Op can get an assumable refi, possibly even a better choice.

While it seems we're in basic agreement, possibly except your slight attitude you are correct that all need constantly get new information in this ever changing financial world.

Disclaimer: This should not be considered personal financial advice, and OP and others should consider their own circumstances and consult their own financial advisers.


Pay off the house - what a great feeling it is to not have a monthly payment. Plus very quickly you will start seeing your savings account as month after month you will see the money saved rather than pay the mortgage.
Yes, you will likely not be able to itemize going forward but whats the point of paying 3% interest on 160K (if you qualify to refinance) just to get a bit of it on your taxes.

Ask yourself a question, how paying off the mortgage would make you feel. In our case, not having any debt (including mortgage we paid off in 2012) empowers us to be able to save even more knowing we are debt free, and not have to worry that a money what we could have used to free ourselves from debt it locked in the stock market and worry that any time something might happen where we could start losing the base of our investment. BTW we are 33 and 31, 2 young kids, and as of 2012 debt free. Awesome feeling being able to start saving for kids education, increase savings for our retirements (maxing roth IRA, contributing to 401K to at least company match).

BTW great job on saving 160k at your 30s, not many can say the same... Now make a good use of it

Usorry said:   Refi to PenFed 5/5 w no closing fee. Pay off over 5 years.

A re-fi of 15 years fixed rate, no pre-payment penalty, if one plans to stay in the house for some extended number of years, is probably worth the most look in today low interest environment. Even "bank rates" are likely to exceed current fixed mortgage rates over the next few years - just a guess, not a guarantee.

Disclaimer: This should not be considered personal financial advice, and OP and others should consider their own circumstances and consult their own financial advisers.


Even if you pay it off, have huge home equity line of credit open on the house. It can work as emergency cash cushion as well as It would deterrent to frivolous lawsuits.

ankitgu said:   BlueSeaLake said:   Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.


You raise good points, however the place I would push you is on your description of why others will recommend he stay in debt.

First... the interest rate used to compute what he'll pay in interest ought to be what he could refinance at today, because that's his true opportunity cost. A 15 year fixed mortgage will run you just under 3% interest today, Yahoo Finance says 2.89% this week. So right off the bat, we're at $2,890/year for $100k outstanding, and that will decrease as his principal is reduced.

Assuming the 25% marginal tax bracket, he could reduce that 2890 to under 2200.

Oh, and we should remember he will earn interest on that $100k. Even with the AMEX Personal Savings account, he can pocket nearly 1% - so $1k per year.

<snip>

I think he'll do well with a refinance.


The two assumptions that you make are a stretch.

1) If all the interest that the OP is paying each year on his mortgage is less than $3k, then I think it is a stretch to assume that they are itemizing deductions. (Lets take the example where the OP is married) In addition, until the OP is itemizing well above their standard deduction of $12.2K then they aren't realizing the full 25% back. For instance, if they are itemizing 13K on a 100K/year salary (25% married tax bracket) then they really are only getting $200 back because they would have gotten the 25% deduction on the 12.2K standard deduction anyway.

2) The OP will have to pay taxes, in their highest tax bracket, for the 1% they would earn, effectively giving them .75%. In addition, depending on how close the OP is to the phase out range for certian tax credits and deductions this could be even more detrimental. If they use the money to pay off the loan they either realize 5% RoR. While I agree we should look at it in current mortgage rate terms... in this case they are realizing more than 3% RoR (assuming closing costs, etc).

If you are in a position where you can pay off your house then you should. The extra money you will save from your monthly mortgage payments going forward you can use to invest. I am not the best person for advice as to how to diversify your portfolio with the extra money each month but there are many people here who can help you with that. But definitely be aggressive, you are 31 so you have plenty of years left.

Here's a whole different perspective...

With the $160K take $50k and put 25% down on a nice rental in your neighborhood following close to the 1% rule. even if you low ball the rent at $1,200/month you'll be taking in $14,400/year in rental income. A $150k mortgage will likely be in the $700-800 range yielding just under $5k/year in positive cash flow. Again this is low balling in. Take a serious look into it. You could be using your rental income to pay your mortgage, live mortgage free and be increasing equity all at the same time.

Link to master thread discussion:

http://www.fatwallet.com/forums/finance/426039/

alamo11 said:   Yeah, I would pay it off. Two reasons:

1. You can always cash-out refi when CD rates see signs of recovery
2. It's a GREAT feeling being debt free
3. Your paying more in interest then you gain by letting the cash just sit there


This is a terrible post.

1. When CD rates are higher so will be mortgage rates.
2. Successful investors don't invest based on emotion.
3. It's "you're" not "your".
4. 3. /= "two reasons"

Skipping 33 Messages...
dcwilbur said:   cajundavid said:   Not having a house payment is a great feeling!That's an emotional decision, not a financial one. Most of my "great feelings" end up costing me money. At the end of the day, I'd put paying off my mortgage in the same category.

I'm pretty sure that the OP asked, "Will paying off my mortgage give me a good feeling?"



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