Why not pay down the mortgage?

[Anonymous]

There are CDs out there now that are paying a higher rate than my mortgage so I can get a guaranteed rate of return that beats prepaying the mortgage.
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This assumes that you are using extra money to invest in the CDs and not using that money to buy a car, eat out, go on a vacation, etc. Prepaying the mortgage can be a way to force savings for some people.

[Anonymous]

Anonymous wrote:There are CDs out there now that are paying a higher rate than my mortgage so I can get a guaranteed rate of return that beats prepaying the mortgage.

Can you point me to one? How long is the money tied up in the CD? What’s your mortgage rate?

[Anonymous]

Anonymous wrote:

Anonymous wrote:You are getting a tax deduction for the interest paid per year on your mortgage- so really you are eliminating your own tax deduction.

Let’s do some quick math. Let’s pretend you had a $200,000 mortgage at 5% interest. Five percent of $200,000 is $10,000, which means if you have a 5% mortgage on $200,000, you pay $10,000 in interest to the bank. If you make $75,000 a year, you’re in a 25% tax bracket. You’re able to deduct that interest—the tax write-off. The reason everyone keeps their mortgage is because they’re sophisticated and want to keep the tax write-off. “You don’t want to pay off your mortgage. You’ll lose the tax write-off!” How many times have you heard that bunch of crap?

Let’s play with this for just a second. If you make $75,000 a year and you have a $10,000 tax write-off, that means you pay taxes not on $75,000 but on $65,000. If you paid off your home mortgage, you would have to pay taxes on not $65,000 but $75,000 because you wouldn’t be paying any interest anymore. You’re going to have to pay taxes on $10,000 worth of income. You’re in a 25% tax bracket. Twenty-five percent of $10,000 is $2,500. Your tax bill just went up by $2,500 because you paid off your mortgage. Did I mention that you’re no longer sending $10,000 to the mortgage company? Your tax bill went up by $2,500, but your interest bill went down by $10,000. Did you get this?

What these idiots are saying all over America is that you need to keep your tax deduction—and you’re an idiot if you believe that. You’re sending $10,000 to the mortgage company to keep from sending the federal government $2,500. Calling that sophisticated would make you an idiot. I’ve been that idiot. I used to tell people to do that all the time, and then I got called out on it. Then I went, “I was completely an idiot.” That’s wrong. You don’t send Countrywide $10,000 to keep from sending the IRS $2,500 and call that sophisticated. It’s not sophisticated; it’s stupid.

That’s why I say pay off the house versus the tax deduction. If you want to trade $10,000 for $2,500, you can do that without being in debt. Just increase your giving to a 501(c)3—your church or the Red Cross or whatever. Pay off your mortgage, give $10,000 extra in charitable giving, and your tax bill will not go up one penny. You’ll save the $2,500 in taxes by giving away the $10,000. Your charitable giving is tax-deductible.

We do not stay in debt because of the tax deduction. If you’re in debt, take the tax deduction, but don’t stay in debt because you’re somehow sophisticated.

But you aren't going to save the whole 10K either. For most people, by the time they actually pay it off, they will have already paid most of the 10K to the bank. The only way to avoid that is to not get the mortgage in the first place.

[Anonymous]

Anonymous wrote:There are CDs out there now that are paying a higher rate than my mortgage so I can get a guaranteed rate of return that beats prepaying the mortgage.

but you'll owe tax on the CD interest, and the mortgage deduction may be useless to you

[Anonymous]

It really comes down to the after tax return. If you can get an after tax return of 5-6% investing the $700,000 you will be better off not paying off the mortgage. But 5-6% after tax is pretty high in the current market.

Another consideration is your real estate market. If it's flat and you pay off the mortgage you will have a large amount of your net worth tied up in a no appreciation asset. If you are in a hot market that's a different story.

It's very comforting to have no debt but it may not be the best way to build net worth.

[Anonymous]

Anonymous wrote:

Anonymous wrote:There are CDs out there now that are paying a higher rate than my mortgage so I can get a guaranteed rate of return that beats prepaying the mortgage.

Can you point me to one? How long is the money tied up in the CD? What’s your mortgage rate?

This one used to be available nationwide but is now restricted to Ohio residents: https://www.depositaccounts.com/banks/the-fahey-banking-company/offers/

60 month CD @ 4% but heavy EWP (forfeit all interest). Promos like this come up from time to time in varying required deposit periods.

My mortgage rate is 3.25%. This isn't necessarily something I would choose but if the choice is taking a few extra grand and paying down the mortgage or locking it up in a CD it might be better to choose the CD.

[Anonymous]

We are risk-averse

That's the critical factor. Much of the advice against paying off your mortgage points out that the average return on stocks is much higher than the mortgage rate. True, but so's the risk. If you want a more conservative investment and have a comfortable emergency fund, then paying off your mortgage is a great idea for you.

[Anonymous]

There is no better feeling than being debt free.

[Anonymous]

If you will not move and will pay it off eventually anyway, then it's a choice and worth running the numbers.

If you won't stay long, just pay as little for it as you can; don't tie all your money up in it.

[Anonymous]

Anonymous wrote:You are getting a tax deduction for the interest paid per year on your mortgage- so really you are eliminating your own tax deduction.

You only get the deduction because you are paying taxes. Clearly this dilutes the return so you need to be comfortable with paying down your mortgage and effectively paying yourself a return of 2-3% but it is a risk free 2-3% which is great when mixed with other assets.


Saying that you are eliminating your tax deduction is like getting one of those coupons where you save $50 if you spend $200 - I saved $50!!!!!! - nope. You spent $150

[Anonymous]

A friend of mine had his parents die and he inhereited about 100k. He owed 200k on his home. I told him to put it in principal but he said it’s a better deal to invest. He put some into CD’s and some in the stock market. 7 years later he’s down to 15k because he spent it on a new car, several nice vacations, and gave a bunch to his kid Who got into credit card debt.

Paying off your house is better than keeping your money in investments.

[Anonymous]

Anonymous wrote:A friend of mine had his parents die and he inhereited about 100k. He owed 200k on his home. I told him to put it in principal but he said it’s a better deal to invest. He put some into CD’s and some in the stock market. 7 years later he’s down to 15k because he spent it on a new car, several nice vacations, and gave a bunch to his kid Who got into credit card debt.

Paying off your house is better than keeping your money in investments.

Your friend didn't keep money in investments, he invested it for a period and then spent it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:A friend of mine had his parents die and he inhereited about 100k. He owed 200k on his home. I told him to put it in principal but he said it’s a better deal to invest. He put some into CD’s and some in the stock market. 7 years later he’s down to 15k because he spent it on a new car, several nice vacations, and gave a bunch to his kid Who got into credit card debt.

Paying off your house is better than keeping your money in investments.

Your friend didn't keep money in investments, he invested it for a period and then spent it.

Right, that’s exactly what I’m getting at. Many people are not able to invest. “Money is burning a hole in his pocket” is a phrase for a reason. I think people here think everyone is just like them but in truth a large part of the population doesn’t have the willpower.

[Anonymous]

Anonymous wrote:

Anonymous wrote:You are getting a tax deduction for the interest paid per year on your mortgage- so really you are eliminating your own tax deduction.

You only get the deduction because you are paying taxes. Clearly this dilutes the return so you need to be comfortable with paying down your mortgage and effectively paying yourself a return of 2-3% but it is a risk free 2-3% which is great when mixed with other assets.


Saying that you are eliminating your tax deduction is like getting one of those coupons where you save $50 if you spend $200 - I saved $50!!!!!! - nope. You spent $150

Incorrect. If you eliminate your tax deduction you need to subtract this amount from the cash you now have free to invest. If you pay off your mortgage let’s say you now don’t have a $2k mortgage payment. Great but you also lose the tax deduction so it’s more like $1,500. This just reduced the benefit to you of paying off your mortgage.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:A friend of mine had his parents die and he inhereited about 100k. He owed 200k on his home. I told him to put it in principal but he said it’s a better deal to invest. He put some into CD’s and some in the stock market. 7 years later he’s down to 15k because he spent it on a new car, several nice vacations, and gave a bunch to his kid Who got into credit card debt.

Paying off your house is better than keeping your money in investments.

Your friend didn't keep money in investments, he invested it for a period and then spent it.

Right, that’s exactly what I’m getting at. Many people are not able to invest. “Money is burning a hole in his pocket” is a phrase for a reason. I think people here think everyone is just like them but in truth a large part of the population doesn’t have the willpower.

+1. They don’t. Which is why most families get ahead by purchasing a home. So many renters claim it’s better to buy but very few of them are not buying because they will actually invest the difference. Most simply don’t have a downpayment saved up and their rent is akin to a mortgage payment in relation to their income.