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

Forum Index » Money and Finances

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

Subject:

Emoticons





More smilies

Text Color: Font: Close Marks

[quote=Anonymous][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. 
[/quote]

The PP rather conveniently factored in the taxes paid on the earnings, but assumed away the tax benefits of deducting mortgage interest.  When you manipulate the facts, it's pretty easy to come up with a scenario that favors your position . . . and he still couldn't even do that.  He also completely disregarded any liquidity benefit - having easy access to cash if needed.

But I'm more interested in your comment about "risk" - what risk do you see in the scenario above?  [/quote]

Options

	Disable HTML in this message
	Disable BB Code in this message
	Disable smilies in this message

Review message

Search Recent Topics Hottest Topics