quintin
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My parents passed away last year and I inherited their home with a $50k mortgage at 4% APR. With savings and other liquidated inheritances I have over three times this amount readily available. I could pay off this mortgage outright and still have some investment potential left over, or I could continue to make minimum payments on it. Are there any tax implications/techniques or other things I should consider before making this decision? I lean toward simply paying it off, even though it is a fairly low interest rate and other real estate investments are tempting right now.
Thanks in advance for any thoughts.
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Thu May 19, 2011 4:49 am |
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coaster
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The implication is that you can be earning more on the money than you're paying to borrow it. Therefore, paying off the 4% mortgage means you give the bank all the money that you could earn twice that or more if you keep it. Please, with an income tax deduction for the interest, it's really only costing you maybe 3%. You prepay the mortgage and give up earning maybe 7% over and above your net cost of carrying the loan.
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Thu May 19, 2011 6:18 am |
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littleroc02us
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Do you have your own home? What is the home worth? The reason I ask is because if the house is only worth 100k and your in a market that probably won't see huge increases in worth then I would just sell it. The estate will pay the taxes if there were any. If you want to rent it out then that's another great idea, but IMO I would pay off the house if you plan on keeping it. I would rather have the cash flow coming in each month from renters and no payment. Interest rates aside I'm personally more comfortable with no debt and more disposable cash. Investing over the long haul is great, but no debt is worth the risk I feel.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Thu May 19, 2011 1:50 pm |
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terrancebrandt
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Maybe renting it out is an ok choice. But if you have the cash to pay it all off.. that is better too. Unless you don't intend to keep the house for your own.
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Thu May 19, 2011 2:19 pm |
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quintin
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I do plan to live in the house, so I should qualify for tax deduction on the interest-only payments I've already been making. I think coaster has a good point that with this tax deduction (are there any others?) the effective interest is more like 3%. I guess I have to decide if I think I can invest the $50k elsewhere with a better return than that. I'm spreading my time pretty thin these days as it is. I like the idea of being debt-free too, but I don't want to foolishly give the bank all the money if there are smarter things to consider. I was hoping for some advice that would really tip the scales for me in one direction or another. Perhaps something I hadn't considered up to now.
Thanks again for the thoughtful advice.
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Fri May 20, 2011 5:39 am |
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littleroc02us
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quote:
Originally posted by quintin
I do plan to live in the house, so I should qualify for tax deduction on the interest-only payments I've already been making. I think coaster has a good point that with this tax deduction (are there any others?) the effective interest is more like 3%. I guess I have to decide if I think I can invest the $50k elsewhere with a better return than that. I'm spreading my time pretty thin these days as it is. I like the idea of being debt-free too, but I don't want to foolishly give the bank all the money if there are smarter things to consider. I was hoping for some advice that would really tip the scales for me in one direction or another. Perhaps something I hadn't considered up to now.
Thanks again for the thoughtful advice.
When you say it's foolish to give the bank all the money, they love people who keep their mortgages forever because you end up paying them a ton of interest. I would pay off the mortgage and move on in life being mortgage free. The reason why most Americans who own houses don't have any disposable income is because they either have a ton of debt and a mortgage or they have a mortgage that eats up a chunk of their cash. Personally I would rather have the extra cash and no payments. Now how do you not become wealthy if you have no debt and nothing but cash?????
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri May 20, 2011 1:41 pm |
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coaster
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quote:
Originally posted by littleroc02us
When you say it's foolish to give the bank all the money, they love people who keep their mortgages forever because you end up paying them a ton of interest.
I love keeping my mortgage because I'm paying the bank back with ever-cheaper money. They get a constant number of dollars, the value of which is an ever-smaller portion of my income. And if I can refi at a lower interest rate (which I've done twice) it gets even better.
Reminds me......I gotta check rates again. 
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Fri May 20, 2011 4:13 pm |
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littleroc02us
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quote:
Originally posted by coaster
quote:
Originally posted by littleroc02us
When you say it's foolish to give the bank all the money, they love people who keep their mortgages forever because you end up paying them a ton of interest.
I love keeping my mortgage because I'm paying the bank back with ever-cheaper money. They get a constant number of dollars, the value of which is an ever-smaller portion of my income. And if I can refi at a lower interest rate (which I've done twice) it gets even better.
Reminds me......I gotta check rates again.
This is just an area that we differ in and although I understand your point of view it's definetley not mine.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri May 20, 2011 4:26 pm |
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quintin
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I certainly appreciate both viewpoints as well. I'm low-risk by nature, and have maintained zero debt most of my life. This inheritance puts me in an unusual situation. I also dislike throwing money away, and the financial argument from coaster is pretty convincing (assuming I can find the time/knowledge to invest the money elsewhere at a better return). Perhaps I am blessed enough to consider a bit more risk in my life. This is my attempt to look around for any obscure tax or banking issue that would greatly influence the decision, but I may end up just having to go with my instincts.
Again, I appreciate the feedback.
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Fri May 20, 2011 5:03 pm |
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oldguy
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quote:
I love keeping my mortgage because I'm paying the bank back with ever-cheaper money. They get a constant number of dollars, the value of which is an ever-smaller portion of my income. And if I can refi at a lower interest rate (which I've done twice) it gets even better.
I follow coaster's plan. I have refi'd our rental houses regularly over 35 yrs to maintain the leverage, I have one house that is on it's 4th mortgage over a 30 yr period.
I place the equity in the SP500 Index Fund, it has averaged 11%/yr over that period. I would never prepay a 4% loan, it is definitely a 'keeper'. Even over a fairly short term of 18 yrs, your $50,000 would be expected to grow to $325,000. And if you are in a position to leave it for 30 yrs, it should be about $1,100,000. Don't derail a million dollar opportunity just to prepay a $50k debt. 
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Fri May 20, 2011 8:07 pm |
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littleroc02us
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quote:
Originally posted by oldguy
Don't derail a million dollar opportunity just to prepay a $50k debt.
So are you saying you cannot become a millionaire if you pay of the 50k mortgage and then invest your disposable money for 25 years making 11% and have much lower risk?
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri May 20, 2011 8:12 pm |
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oldguy
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quote:
cannot become a millionaire if you pay of the 50k mortgage and then invest your disposable money for 25 years making 11% and have much lower risk?
That's right - if you give up your $50k of seed money at the front end of the 30 yr compounding period, you can never regain that loss (without adding new money.)
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Fri May 20, 2011 10:04 pm |
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coaster
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quote:
Originally posted by littleroc02us
although I understand your point of view it's definetley not mine.
Fair 'nuff.
And more than enough room on this board for multiple viewpoints. Thing about viewpoints: I don't think I've ever come across one that's 100% right 100% of the time for 100% of the people. And wouldn't that be a real bore anyway?
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Sat May 21, 2011 6:33 am |
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vinotht
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I might be wrong. Instead of payoff the mortgage loan completely you can do it as a advance payment. So you can have more tax benefits.
Mortgage Loan Calculator
Amortization Calculator
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Sun May 22, 2011 11:27 am |
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littleroc02us
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quote:
Originally posted by oldguy
quote:
cannot become a millionaire if you pay of the 50k mortgage and then invest your disposable money for 25 years making 11% and have much lower risk?
That's right - if you give up your $50k of seed money at the front end of the 30 yr compounding period, you can never regain that loss (without adding new money.)
You didn't answer my question, you made your own question and answer to it. Even in your qoute that I used you answered the question. You added the parenthesis that says "Without adding new money". So I'm not sure why you didn't say yes you can become a millionaire. I just don't want people who read this posting think that if they pay off their mortgage they cannot become a millionaire because then your completely off base. All it takes is maxing out your Roth IRA's for 25 years @ 11% and you and your spouse would have 1.4 million and a paid for house.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Mon May 23, 2011 1:20 pm |
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