Comments on: Should I Pay Off My Mortgage Early, or Have One at All?

By: Andy

Andy — Sun, 18 Mar 2012 18:36:19 +0000

You’re ignoring the other half of the situation. The person who opts for a mortgage rather than paying cash for the house has a mountain of cash that will not sit under a mattress. It will be invested, and the proceeds of that investment will pay for the mortgage. If the person were to put the cash under a mattress, as your example suggests, your analysis would be spot on.

The real analysis here (ignoring any emotional considerations) depends on the interest rate on the mortgage, the marginal tax rate, the return on the investments funded by the cash, and the liquidity of these investments.

By: James Cannon

James Cannon — Mon, 27 Feb 2012 02:29:06 +0000

This is a false premise and if you have financial advisers saying you should do this, I suggest you fire them.

Yes, you do get a tax deduction. But it is not a tax credit. Lets say you pay 5,000 a year in loan interest and you are in a 15% tax bracket. With the mortgage deduction, you can reduce your taxable income by 5,000. How much does this save you in taxes? 5,000 x .15 = 750 So you are going to save $750 off your tax bill.

If you had payed in full, you would own the government $750 more then if you would have paid in full. Doesn’t sound good does it. But, your spent $5,000 in paid interest to the bank to save that $750. So, you are $4,250 worse off then if you would have paid in full and not carried a mortgage.

It is better to pay the government $750 then pay the bank $5,000. How many of your financial advisers work for banks??

By: St Ko

St Ko — Sat, 18 Feb 2012 04:58:04 +0000

Keep this in mind: a mortgage is the bank investing in you. That means that when all is said and done, they make money from you, not vise versa. Not having a mortgage mean you keep the money they would have made. Buying a $250,000 dollar home is going to cost about $800,000+ over 30 years. That means you gave the bank over half a million dollars.

And even if you pay cash and don’t “invest” the half million, you already invested the $250,000 in the house instead of the bank doing so.

By: steve

steve — Sun, 12 Feb 2012 03:17:36 +0000

A number crunching exercise.This is only rounded out and theoretical,but plausible.$200,000 mortgage @ floating rate prime minus .3%=2.7%=$5400 simple interest.Invest the $200000 @5%=$10000 simple interest.You will pay tax on the income but a lot of that will be cancelled by a tax return on interest paid, based on income.Even if you come out ahead by an average $2000 year you are well ahead.You can then re-invest the $2000 for a compound return or use the surplus to make early payments to reduce the term.And you are still always gaining equity .You will end up with your house paid for and still have all your cash.But there is risk.

By: Anita

Anita — Sun, 12 Feb 2012 00:07:22 +0000

Evolution of Wealth…. couldn’t agreee with you more… and if you need the deduction for mortgage interest where else are you going to get it but from your mortgage payments? With the downturn of the economy, I saw a young business woman lose her business and then the $750,000 inheritance she put down on her home. Even with so much equity in the house, her small mortgage payment was too muh for her to handle and so as you said, the bank was happy to take it all away from her.

By: Scott

Scott — Wed, 01 Feb 2012 01:03:00 +0000

My take is this: If you pay cash and own your house outright no matter what happens to you or your family you will never, ever be kicked out of your home. That’s amazing security.

By: johann

johann — Sat, 21 Jan 2012 21:28:00 +0000

Here’s an idea nobody’s floated yet. Why not use the cash to buy the home at a discounted price, and then take out a loan on the house afterward at 4% and invest that money at a rate higher than 4%?

Or, one step further. Several people have mentioned the tax advantages of owning real estate, but the best advantages are reserved for landlords.

Let’s assume our friends have $250,000. Right now, they’re considering two options, paying for a $250K house with cash, and having no investments, or keeping $250K in investments, and paying a mortgage payment that would cost them roughly $1600/mo.

Why not get the best of both worlds? Instead of buying a $250K house with cash, buy a $1M 8-plex, paying 25% down. Then they can rent a home for themselves to live in for $1600/mo. The income from that 8-plex will net them roughly $1600/mo (assuming they get $200/mo in cash flow over the mortgage payment for each of the 8 tenants). So now, their personal housing costs are $0/mo, and they still have the four parts of Internal Rate of Return that favor real estate investors: 1. Amortization, 2. Appreciation, 3. Cashflow, and 4. Tax incentives. Once that 8-plex mortgage is paid off, they’ll be millionaires, having effectively leveraged that initial $250K, and once the mortgage is paid off, they’ll have retirement income from the rental property.

By: MoneyNing

MoneyNing — Sat, 14 Jan 2012 04:22:21 +0000

Mathematically, it seems to make more sense if you just have one loan and use the extra cash from the first loan to get the second house. However, you are in effect putting more risk in your primary house if you do this as well because you just increased the chances that you might not be able to come up with the new payments in the future.

Whether that will change your decision or not will depend on what your finances are but with this approach, you are actually getting a bigger loan your primary house for the lower rate and using those funds to buy the condo. This way, you can deduct taxes from your mortgage and end up getting a better deal.

By: Allen West

Allen West — Fri, 13 Jan 2012 21:29:25 +0000

I have a quandry as I approach retirement at the same time my 7 yr ARM is up. I have a surplus of funds above my retirement that I can use to pay off my mortgage completely plus I’d like to buy a Condo in FL. Should I refinance 50% of my home and use the other 50% for the second home in FL. Money is cheap now and pricing down in FL. Is it best to have primary residence paid off or balance the costs across both properties to have 50/50 on each. Seems I’d save closing /refi costs on the primary if I went full on a pay-off. Is it harder to get seond homes with 30-40% down?

By: June Eulberg

June Eulberg — Fri, 06 Jan 2012 23:57:29 +0000

Right now, the housing market is great for a buyer but it’s better if you don’t.
In my opionion after listing to lots of experts the housing market hasn’t hit bottom yet. It would be better to rent and wait till the housing market stabilizes before buying. You would get the best deal and an opportunity to see if you can invest in a better interest paying investment. Maybe like gold stocks or ipod etc companies. Homes are not building equity at this time. You can’t sell them for even replacement value. Anyway, that’s my evalutation for what its worth.