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Replies (21)
- Dan, "the_country_hick"
- Contributions:4699
Paying off the highest interest debt first makes sense.
Not paying off a mortgage because you would lose 1/3 (in the highest tax bracket) of every $1 you spend is foolish. I would prefer to keep more than 66 cents of every dollar. I would prefer to keep $1 of every $1.
Not paying off a mortgage because you would lose 1/3 (in the highest tax bracket) of every $1 you spend is foolish. I would prefer to keep more than 66 cents of every dollar. I would prefer to keep $1 of every $1.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Ric Edelman, America's #1 independent financial advisor 09' & 10' (Barron's magazine), inductee into the Financial Advisor Hall of Fame, #1 selling author, amongst many other honors/awards, made a big commotion in the mortgage world a few years ago with his blog post: 10 Great Reasons to Carry a Big Long Mortgage. Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off — regardless of your age and income.
When I first read it I was thought he was just trying to get people to read it with a controversial headline, or just crazy, until I did the math myself. Ric is 100% right. There is really never a reason to pay off the house, get a 15 year loan, or even make extra principal payments towards the mortgage; and it can be counterproductive to actually achieving our goals.
Here's his article (it's been updated a few times over the years). http://www.ricedelman.com/cs/education/article?articleId=232
Since that revelation I've changed the way I council my clients. Most people are not receptive to the truth at first, and some never want to hear it, but for those that do they had the right information to make the best possible decisions with their mortgage and are in a better place for it now.
~ Greg
- Dan, "the_country_hick"
- Contributions:4699
Greg, that article makes many assumptions. One is that house prices always go up. Another is that you get 8% interest. Show me where you do that now. In fact following that kind of advice is what got many people foreclosed out of houses they had that were paid off. When someone has owned a house for over 20 years with negative equity that program is what caused it.
Many people took money from their house. hey put it into the stock market. Both lost value and now they do not have a paid for house and a big mortgage besides.
Many people took money from their house. hey put it into the stock market. Both lost value and now they do not have a paid for house and a big mortgage besides.
- shasta_steve
- Contributions:448
Greg that was the exact same advice I was hearing from a loan officer a few years ago at my buddies coffee shop. He was always saying it was stupid to pay off your mortgage, or pay down the note, and you should refi whenever you got equity. The good thing is lost everything when the market turned, the bad thing was so did many of his clients. If you go that route you really are gambling with your future.
I have no doubt that for many high income people it may be a good strategy but for many of us average Joe's it does not work so well. When people have extra money they tend to spend it and not invest it. I come from solidly blue collar people. The biggest thing I have seen, for most people, is having their house paid off when they retire is usually the difference between having decent retirement and a bad one.
Now one thing I do agree with is you should fully fund your retirement. Whenever we hire younger guys at my work one of the first speeches I give is the 401K one. I am always amazed how few people put into the system, especially because the company will put in 5% if we put in 7%.
I have no doubt that for many high income people it may be a good strategy but for many of us average Joe's it does not work so well. When people have extra money they tend to spend it and not invest it. I come from solidly blue collar people. The biggest thing I have seen, for most people, is having their house paid off when they retire is usually the difference between having decent retirement and a bad one.
Now one thing I do agree with is you should fully fund your retirement. Whenever we hire younger guys at my work one of the first speeches I give is the 401K one. I am always amazed how few people put into the system, especially because the company will put in 5% if we put in 7%.
- Jeff Miller, "Ctaj"
- Contributions:16
Good points, Doug. But you also want to consider the fact that we reach a point where the standard deduction is worth more than the itemized deductions when the loan gets paid down to that point.
Also, if you're in, say, a 15% to 20% (state + fed) marginal tax bracket, does it really make a lot of sense to keep paying mortgage interest when every $1,000 you pay only reduces your taxes by $150 to $200?
And what if the interest deduction is eventuallly taken away?
My observation is that behind every bit of advice against paying off your house is someone who stands to make money on what he wants you to do with the money that would otherwise be used to pay off the house.
Also, if you're in, say, a 15% to 20% (state + fed) marginal tax bracket, does it really make a lot of sense to keep paying mortgage interest when every $1,000 you pay only reduces your taxes by $150 to $200?
And what if the interest deduction is eventuallly taken away?
My observation is that behind every bit of advice against paying off your house is someone who stands to make money on what he wants you to do with the money that would otherwise be used to pay off the house.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Steve,
First thing, I never advocate that someone refi any and every time they have equity. Each person's situation is going to be different and should be looked at as such. I like to sit down with the borrower and his/her financial planner when they make that decision to make sure they are doing the right thing and have a solid plan with achievable goals.
So, now that we have that cleared up. No one lost anything when the market turned for NOT paying extra towards principal. Just like Ric explains the only way to get at your equity is to sell or refinance. Well, when the market turned that would be the worst time to try and do either of those, something that would be impossible to do for a lot of people and just so happens to the be the time most people needed to do it. You're making my point for me. Now this loan officer you speak of may have given bad advice, I have no idea, however if all he said was not to pay down your mortgage any faster than you have to what did any of these homeowner's lose when the market turned? If they followed his advice all they lost was risk, which was left with the bank.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
(continued)
Also, in times like these, after the market turned, a lot of people lost their jobs/income. Cashflow is more important now than it ever has been. Say you're 5 years into a 15 year loan that you've been trying to pay off as quickly as you can. You're budget allows an extra $100 towards the principal on top of your payment and, oops, down economy's here and you lost your job. Well your mortgage balance is significantly lower than it would have been if you had gotten a 30 year loan and never paid any extra to the principal but now you have no money saved and no income! A lot of good that lower balance is now, you're about to lose your house anyways (that 15 year payment is a lot harder to make with no income than the lower 30 year payment would be). And, since this is happening while homes are at their lowest value in 8 years, you're taking a big loss too. Now you've lost your house and all that extra money you put into the mortgage, and have nothing. While your neighbor got a 30 year loan 5 years ago, he lost his job too (you worked at the same place). But he put the difference of the amount between what you put into your mortgage, and his 30 year payment, into low/moderate risk investments. His mortgage balance is quite a bit higher than yours but he has enough extra saved to make his mortgage payment for another 4 years if he had to.
You're right, having your house paid off at retirement is usually the difference between a nice retirement and a bad one, except you have it backwards. Most people that retire with their home paid off have much less wealth and income than they would have otherwise had. Someone that wisely saves/invests will always have a more comfortable retirement compared to the person that puts that extra money into their mortgage just to have the house paid off. A LOT of those people retire with nothing.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
(continued)
I don't know about you but I'd rather have (I'm just making these numbers up) a $1,000 mortgage payment with a $3,000 monthly income and $300,000 in the bank/retirement accounts than $0 mortgage payment and a $1,000 a month income and little to nothing in the bank. While the differences don't have to be that dramatic, they usually are. I see it all the time. My retired clients with a free and clear property or that almost have their home paid off have little to nothing for savings/income, they put it all into the house. A lot of them are looking for reverse mortgages (products I don't like if they can be avoided) just to be able to have any sort of dignified lifestyle. While my clients at or near retirement that have money in the bank and a more certain retirement in front of them almost always have a mortgage, usually one that wasn't originated all that long ago. They can make their mortgage payment and have plenty in monthly cash flow and reserves. Heck, a lot of them have enough to pay the mortgage off in full. But they don't, because they are smart.
Of course there are some variables. In a down economy like this one some people may not be able to sell when they might have wanted. Some people may decide to work an extra year or two before retiring. But you know what? Those decisions would be no different if they put money into their mortgage instead of saving/investing it over the years. The difference is the person with the smaller loan will be less wealthy and have a smaller monthly cash flow. Every time. It's the "Smart Sam" & "Nervous Nick" thing.
~Greg
- Rich Lee, "Real Estate Geek"
- Contributions:99
Doug,
Great points.
Also consider the opportunity cost of tying up your money by paying off the loan. If you can earn more than the interest cost with the money you would use to pay off the loan, do not pay it off early.
Your Real Estate Geek,
Rich
Great points.
Also consider the opportunity cost of tying up your money by paying off the loan. If you can earn more than the interest cost with the money you would use to pay off the loan, do not pay it off early.
Your Real Estate Geek,
Rich
- Dan, "the_country_hick"
- Contributions:4699
Greg, make a few assumptions.
1 a person buy a house with a 15 year mortgage at age 25. They pay it off by age 40.
2 that person did not place themselves in a tight financial situation so they could actually afford to live. In fact they even saved some money just in case.
3. that same person who spent their money on their house now at age 40 has another 25 years until retirement with no rental costs except for taxes, insurance, and maintenance.
4 that person now at age 40 saves heavily for retirement placing all of their house money not into rent or a monthly payment but into savings.
Explain how them paying more in interest costs than they can get from interest on their money gets ahead.
Some people never save a dime. It does not matter if they make $5,000 a year or $500,000 a year. They can blow everything on nothing. For them buying a house at least gives them one asset they can call their own in time. If they have nothing else for retirement it is their own fault. They never think ahead or plan for anything. Giving that type of person a home equity loan is likely going to help them lose their house. It is far more likely they will blow the money and not invest it. If they do invest it expect the investment to blow up and disappear.
1 a person buy a house with a 15 year mortgage at age 25. They pay it off by age 40.
2 that person did not place themselves in a tight financial situation so they could actually afford to live. In fact they even saved some money just in case.
3. that same person who spent their money on their house now at age 40 has another 25 years until retirement with no rental costs except for taxes, insurance, and maintenance.
4 that person now at age 40 saves heavily for retirement placing all of their house money not into rent or a monthly payment but into savings.
Explain how them paying more in interest costs than they can get from interest on their money gets ahead.
Some people never save a dime. It does not matter if they make $5,000 a year or $500,000 a year. They can blow everything on nothing. For them buying a house at least gives them one asset they can call their own in time. If they have nothing else for retirement it is their own fault. They never think ahead or plan for anything. Giving that type of person a home equity loan is likely going to help them lose their house. It is far more likely they will blow the money and not invest it. If they do invest it expect the investment to blow up and disappear.
- Pasadenan
- Contributions:21466
Very rarely can you invest money at a higher interest rate than you are paying, even after adjusting for any tax benefit (if there even is one). And even for people that do, that investment sometimes goes "bad" causing one to have major losses.
There is no better "security" than knowing that regardless of loss of job or health or anything else, that there is no housing payment to be made!
Besides, once it is paid off, all the money that would have gone to mortgage is free to invest as one chooses, which is "great" for those that really know they can get that 10% to 30% annual return on their investment!
Yes, Realtors® are taught from day one that "leveraging" is the best thing ever invented, and that it will make you a fortune with other people's money; but that is only in a rising market. In a falling market, leveraging bankrupts people instead.
There is no reason to gamble on your home. Pay it off! Your bank is only paying you about 1% interest to deposit it there, so why not deposit it into your house and get about 6% return? Even after the tax deduction, that is still at least a 4% return which is 4 TIMES what the bank will pay!
There is no better "security" than knowing that regardless of loss of job or health or anything else, that there is no housing payment to be made!
Besides, once it is paid off, all the money that would have gone to mortgage is free to invest as one chooses, which is "great" for those that really know they can get that 10% to 30% annual return on their investment!
Yes, Realtors® are taught from day one that "leveraging" is the best thing ever invented, and that it will make you a fortune with other people's money; but that is only in a rising market. In a falling market, leveraging bankrupts people instead.
There is no reason to gamble on your home. Pay it off! Your bank is only paying you about 1% interest to deposit it there, so why not deposit it into your house and get about 6% return? Even after the tax deduction, that is still at least a 4% return which is 4 TIMES what the bank will pay!
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
Dan,
Take a short course on Compound Interest 101 and then ask me again. The person that pays off their house in half the time, assuming they never have a loss of income along the way and are able to keep the house the entire time, will still end up with less wealth and MUCH less financial security at the end of 15, 20, 30+ years.
Take a short course on Compound Interest 101 and then ask me again. The person that pays off their house in half the time, assuming they never have a loss of income along the way and are able to keep the house the entire time, will still end up with less wealth and MUCH less financial security at the end of 15, 20, 30+ years.
- Greg Cowart, "Roseville Loan Guy"
- Contributions:448
P.S. Do you people realize how many seniors end up with their homes free and clear but can't even afford the basic necessities of life? And how many of those seniors end up losing their home because they can't even pay the property taxes every year? This is a real problem that happens more than you realize.
- Dan, "the_country_hick"
- Contributions:4699
Greg, I do understand compound interest. I also know that compound interest that is accumulated paying 6% on a mortgage is going to cost more than 1% will create in a savings account. These are the numbers many would face today. Actually, 1% interest is higher than many would get.
At 1% in 50 years $1 will grow to $1.645 (WOW!!!) savings???
At 6% in 50 years $1 will grow to $18.42 (OUCH!!!) mortgage costs
Going to 15 years at 1% $1 becomes $1.161
yet at 6% $1 becomes $2.397
Paying the mortgage off first saves much more than it costs.
In my scenario above I said the person got a 15 year mortgage and paid it off in 15 years. I did not even try to pay it off early. If you instead got a 30 year mortgage the added interest costs involved both in time and the higher rate would cost even more.
At 1% in 50 years $1 will grow to $1.645 (WOW!!!) savings???
At 6% in 50 years $1 will grow to $18.42 (OUCH!!!) mortgage costs
Going to 15 years at 1% $1 becomes $1.161
yet at 6% $1 becomes $2.397
Paying the mortgage off first saves much more than it costs.
In my scenario above I said the person got a 15 year mortgage and paid it off in 15 years. I did not even try to pay it off early. If you instead got a 30 year mortgage the added interest costs involved both in time and the higher rate would cost even more.
- John Souerbry, "John Souerbry"
- Contributions:67
For a qualified opinion on your personal situation, see a CFP or a CPA. My personal opinion - home ownership isn't just about money. It's about a place that is part of you and your family. It's something that is part of our legacy that we leave to future generations, along with the memories that were created there.
Let's face it though - if you never pay off the mortgage, you don't own the home. You're just paying rent to the bank.
- Mike Grogan, "ShowMeTheBurg"
- Contributions:27
Dan, I think that your point is well stated and actually share similar advice with my younger clients. Furthermore, the peace of mind of just knowing that you own your home is also very valuable to many people.
- sunnyview
- Contributions:25139
Peace of mind should never be a substitute for solid financial planning. Young and first time buyers tend to buy emotionally and they would be better off making their decision based on the financial end first.
- John Souerbry, "John Souerbry"
- Contributions:67
Sunnyview - I understand your point, but there should be a balance between peace of mind and financial planning. The purpose of sound financial management isn't always just to pay lower taxes or to put the most $$$ in the bank. Sometimes financial security is achieved through risk management that provides peace of mind. For example, when we tell our tax preparer to take out a deduction that will raise our tax payment, but will also lower our potential for an IRS audit. Financial success and security isn't always measured in dollars and cents. And there are a huge number of better ways to generate tax savings than the mortgage interest deduction.
- sunnyview
- Contributions:25139
Strictly speaking financial success is measured in dollars and sense. Peace of mind may not be. Real estate agents are not financial planners or CPA's. Often when they help clients buy, they do not look at the house or consider the house as financial tool. If they did, discussions of PITI vs fair market rent would be part of the discussion along with historical appreciation for that specific neighborhood vs others.
Buying a house is a balance. I do believe in homeownership, but I also believe in a return on my investment. People may have to give up a higher percentage return on their money over a strictly rental property to have the type of house that that they want or the schools that they favor. However, they need to be aware of the trade that they are making and buy using some criteria other than emotion alone.
You can have both and do not have to forgo making a good choice to get the house that will also further your financial plan.
Buying a house is a balance. I do believe in homeownership, but I also believe in a return on my investment. People may have to give up a higher percentage return on their money over a strictly rental property to have the type of house that that they want or the schools that they favor. However, they need to be aware of the trade that they are making and buy using some criteria other than emotion alone.
You can have both and do not have to forgo making a good choice to get the house that will also further your financial plan.
- mckylie
- Contributions:5034
I am all for paying it off IF you can also save for retirement and have money in reserves as well in case of emergencies. Yeah, with a Mortgage you get to deduct the interest but as someone said before it's not dollar for dollar. And you are paying so much more than just the principal for the house. It's nice to know that if you had to sell your house for some unforseen reason you will actually get cash back and not have to short sell, foreclose or come to the table with money! And if you do run into financial hardship and don't have "enough" money for living costs you can sell as well and have that cash.
Should you pay off the house?
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- 0.0/5.0
- (no reviews)
Contributions:281An increasing number of homeowners are considering paying off their mortgage early. While paying off debt generally is a sound strategy, homeowners also are aware that mortgage interest is tax-deductible, so paying off a mortgage early may not be in the best interest for all homeowners.
MAKING SENSE OF THE STORY
clear skies,
Doug Reynolds
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