Reply to If paying off your mortgage is dumb, why do so many rich people do it?

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Reply to "If paying off your mortgage is dumb, why do so many rich people do it?"

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.[/quote]

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest.  My mortgage is 2.625% interest.  It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

[/quote]

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket.  And let’s assume you’re in Maryland so you pay another 8% in state and local taxes.  Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%.  Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.[/quote]

This - thank you. People forget to take tax into the equation and also risk. 
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