Ten months ago I sold my house and reaped a significant profit. I bought a smaller home, and I realized that I could pay off the new mortgage (15 yr fixed @ 5%) with one lump-sum pmt from the profit from the old house. Is this wise? My thinking is, I will pay 75K in interest over the 15 yrs, or 30-40K if I prepay and reduce the 15 yr term to 8. Obviously the lump-sum pmt eliminates that debt. I’ve also always felt that paying interest, just to get 1/3 back at the end of the year as a write-off, was foolish. I’ve tried a bunch of calculators online, but I get conflicting results. Paying this off will not hurt my retirement plans, but I”m wondering if the money could grow faster if I invest it, and if so, in what. My tax bracket is 35%, monthly mtgg pmt (P&I) is about 1580. and total mtgg amount is 0K. I gross 0K+ per year, and have no other debts (I own my car, and pay all credit card bills in full).
Any help would be appreciated, thanks in advance!
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Sun, Mar 28, 2010
March 28th, 2010 at 11:02 pm
I think you should talk with a CFP and / or a CPA, regarding your situation, to analyze and decide what your best options are.
Owning your home outright is a good feeling, but that’s all it is, a feeling…you get no benefits from not having a mortgage (other than not having to write a check every month).
Having a mortgage gives you a tax write off, as you said. But it also leaves you the cash you have on hand for other profitable ventures or investments.
Have you thought of using the money on hand to purchase rental properties? Using a property management company reduces the headaches involved, if that was a worry.
Investing in CD’s, Mutual Funds, or bonds might be a much more profitable avenue for you.
Again, you should consult with a CFP & a CPA about what your best approach is. I’m not a CFP or a CPA, but in my honest opinion, paying your mortgage off is not your best option available for you overall.
March 28th, 2010 at 11:02 pm
why not just make large curtailments?….not suggesting that your credit is less than admirable but it always helps to pay on a loan rather than pay it off….also you sound like you know what you are doing so i’m sure you know whether there is a prepayment penalty…..still you should call the mtg co just to verify…i used to work in customer service for chase manhattan mortgage corporation and had to answer these types of questions all day long
March 28th, 2010 at 11:02 pm
Hello. I suggest that you do not pay off your mortgage unless you prefer to let the banker hold your $ for you. I suggest that you reinvest your profit into a cashflow producting asset. Some of the best non-complicated common cashflow producting assets are CDs and bonds. I’m not sure how you feel about owning a rental property but that is also an option. If you pay off your mortgage now, you’ll be more cash poor and you’ll be tempted to take out the equity in the future. I’m just sharing the thoughts I have off the top of my head. Let me know what you think, thanks.
March 28th, 2010 at 11:02 pm
This kind of question comes up alot among people in your situation. Do I pay off the house or continue to make payments and have tax write-offs for interest? There’s no one answer that fits all. I personally think you should consult with a tax accountant so he/she can make the appropriate recommendation tailored for ‘you’. It may be worth your while.
March 28th, 2010 at 11:02 pm
the money that you put into paying off your home is just going to sit in the bank’s account – earning nothing in interest for you. Your home appreciates at the same rate irregardless of whether you pay it off or not. If you instead put that money into a savings vehicle of some kind you could end up with a greater sum at the end of the day. This all depends on your interest rate you are able to earn however. Also, the 5% on the mortgage is simple interest, while what you earn would be compounded. Plus – what if some emergency occurs & you need the cash? There is no easy answer here – there are alot of factors involved. Check out the missed fortune series of books too (can prob get at library)
March 28th, 2010 at 11:02 pm
with your bracket and income you should just pay it off in full and be done with ONLY if you DO NOT have any prepayment penalties on your mortgage. you’ll actually wind up paying more if you do and more of a hassle. up to you really, simply paying the monthly dues or even reducing the payment period in half will gain some beneifts but after taxes and interest, you’ll maybe break even than if you were to invest and just pay monthly dues. I’d say just get rid of it and move on. no need to fuss over it since you’re obviously not in any sort of financial crisis.
March 28th, 2010 at 11:02 pm
Investing in paying your mortgage off (or down) is a good investment, but rarely the best one. Investing in the stock market usually beats it hollow (the money is costing you 5%. If you can’t beat that, after taxes, in the stock market, something is wrong).
What really blows it out of the water, if you have the cash flow, is using the money to buy another property.
All the usual disclaimers about doing your own due diligence apply, of course.
Here’s a more in depth article:
http://www.searchlightcrusade.net/posts/1139361917.shtml