Is it best to pay off your mortgage or keep making payments?

Question

I inheirtied a house with an adjustable rate mortgage. The loan when I took it over was $80,000 when I took it over 3 years ago. The rate right now is somewhere near 6%, I want to pay it off asap so the rate doesn't go up and so I can use the extra money that would have been a loan payment for a baby instead.

I have been paying an extra $1000 a month on top of the loan amount due.

I recently sent $14,000 (from my savings) towards my balance and now the mortgage is at $33,000 and I am going to be sending payments of about $2700 a month to pay it off in a year.

A friend of mine is telling me not to pay it off and just keep making payments since its the best solution.

I am paying like $150 in interest every month that will be staying in my pocket once its paid off, I don't get what my solution isn't the best.

The tax write off isn't really worth it, is it?

Answer 1

OK, there are a number of reasons not to payoff your house, only one of them being the tax benefits. Think of it this way. You are currently paying about 6% interest per month on the money for your house. So that money you are paying off and that $14k you sent in, costs you 6% per year to hold on to.

If instead of paying down your mortgage, you give that $14k and each additional payment to your stock broker. He invests this in a moderate risk mutual fund. The mutual fund will grow (currently) at about 10% per year.

So by giving your money to a stock broker, instead of paying down your mortgage, you get 4% per year on that money profit. Plus, your interest of $150 a month in tax deductions help you as well.

Basically, you are using the bank's money to further your own portfolio which will grow faster then what it costs to borrow. Please let me know if I did not explain well enough.

Realize the risk however, stocks and mutual funds can lose money, if you pay your mortgage, it's saved. But even on a bad year, most reasonable mutual funds will make you over 6%. call any stock broker and ask them.

Good luck, and I hope this helps

Angelo Russo
Title Plus Services, LLC
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Answer 2

It depends on how old you are and what your income is. If you're older with low income and can afford to pay if off, then do. Probably the rental income, if there is any, isn't even enough to justify the deductions. A good way to know is if when you did your taxes last year, did you take the standard deduction or use Schedule A. If the standard deduction was higher, you're not getting any benefits from the interest expense. If you are older or on a fixed income, then sell the house - but not all at once. Owner finance it, that way your taxes are lower. If you ever need cash, you can get a mortgage on it again.

On the other hand the interest expense is a tax deduction for you, you would be better off to refinance to get a FIXED rate mortgage and continue making the payments (let the gov't help you buy the house that way). If you're younger, than say 40, when you refinance, get a mortgage for as much as you can, the full value of the house (100%) if you can. Say you get a new mortgage for $70,000, pay off the old 33,000 you walk away with a check for $37,000. Make sure the house is structurally sound. If not, spend some money on it to get it that way. If it is, take $35,000 and get a good financial advisor (not this forum) to help you select some good investments like mutual funds, IRA's, etc. No matter what, get it refinanced with a fixed rate quick.

The other, $2,000. Take a vacation honey.

Answer 3

I agree somewhat with sunny.

Here is my thought. You mention that you have a variable loan. The first thing you should do is fixed that rate before it continues to go up and you continue loosing money paying more interest than you need to. Once it's fixed PAY IT off!. In some cases it would be very benficial to just make the regular monthly payments and keep enjoying the tax write offs. But in your case you are so close to paying of the mortgage that it does not make any sense.

Once you've paid off the mortgage you will have the home free and clear and you could use this as leverage for any other necesities you might have in the future like a BABY like you mentioned. You could, only if you needed to, take out a loan for a small amount to help you for the baby's health, education, etc, etc. and while you are enjoying this help to help you with your baby you are once again enjoying the tax write offs.

Another thing you could do as well is once pay off the house. Use that as leverage to invest in more homes. If you know how to invest well and sell them at the right time you could end up getting profits of up to $500,000 TAX FREE if you are married. Unlike when you invest in mutual funds or others you pay taxes on any profit you make with those types of investments.

I am sure you can make money investing in mutual funds, stocks, etc but you dont have the benefits of getting tax free profits and that market is very volatile.

I understand people will tell you that now the RE market is just as volatile as other markets, well.....I tell you that is only true if you are a speculator/flipper. If you are a true investor/homeowner there is no better market to invest than Real Estate.

I stumbled upon a great book titled "The Automatic Millionaire Homeowner" by David Bach.

PAY ATTENTION here: This is NOT a get rich quick scheme book. I as a Real Estate agent and owner of investment property, tell you that this book is very good. I started reading it because I wanted to see if it was worth mentioning to people like you that could make some good use of it.

Obviously, I am not asking for your business nor I'm promoting a book for my profit. Im just giving you my opinion.

Also another resouce of information is an article I wrote back in November 2005 (and still stands) about the so called "buble" in the Real Estate market. You might want to check it out. Follow this link:
http://jrealestate.blogspot.com/2005/11/real-estate-market-bubble-burst.html

Answer 4

If you have the money and no other, higher interest and non-deductible, then there's nothing wrong wtih paying your house off. Having the security of a home that's paid off can't be measured. If it were an investment property I might answer differently. Just be smart with the monthly payment money that you won't be spending on a mortgage. Put it in a retirement account, preferable pre-tax through your employer in a 401(k). Don't just blow it every month. You've got a great opportunity to get youself on the right track toward a nice, worry-free, retirement.

Answer 5

In general, the tax write off shouldn't be the main consideration for whether you pay off the mortgage. If you have the money to pay it off, one of the few reasons you would not want to pay it off is if you think you can get a higher rate of return on that money through other investments.

If it's an adjustable, it's going to go up soonish since the Fed keeps raising rates. No one really knows when they'll stop but they're probably not going to lower rates in the very near future.

But if you're paying 6.5% or whatever and you have some way of earning more than that through investments, then it's a better place for the money. If you're just going to stick it in the bank and earn 0-4%, then pay it off.

The tax write off theory means you get 20-40 cents back on a dollar that you paid (depending on your bracket), so it's not a valid reason in and of itself but you can take that into account when doing the basic calculations.

Answer 6

Holy cow! I would not pick any of the other people who answered your question as my financial adviser! Half of them are trying to sell you a loan, the other half have it backwards.

The first question I'd ask myself is "what is my marginal tax rate? ". Your marginal tax rate is the amount of tax paid on an additional dollar of income. This will determine how much you actually save each month in taxes due to your mortgage interest payment (more or less).

Second, I'd want to know "What rate of return are other investments paying today?" That means, if you invested money in other investments, such as a bank CD, a treasury note, a mutual fund or some stocks, how much would you expect to earn?

Lastly, I'd want to know "Can I lock my interest rate today by doing a low or no cost refinance so that I don't have to worry about it creeping up on me?" If you have an adjustable rate loan today, you might also want to know "What is the maximum rate they can charge?" as these loans often times have ceilings.

My advice is if you find that you can borrow money for less than you can expect to earn by investing that money, you should do it.

To know if this is true, you need to know your true cost to borrow, which is your total interest paid next year minus any tax savings you expect to receive, over the total amount you owe.

If your APR is 6% and your marginal tax rate is 33%, your actual interest rate, after taxes, may be much closer to 4% (67% x 6%).

If you can invest that money in a bond earning 6.5%, you're making money. Of course, you'll have to pay taxes on that 6.5% you've earned, so you should factor that in too...

If you can lock in a low interest rate, you may even decide to borrow more money than you owe today, and invest the difference in a "safe" investment, and continue to benefit from the tax "loopholes" create for homeowners.

Of course, the best place to invest your money is to pay off any high interest accounts you might have open. If you have a Macy's card with a 24% interest rate and a $2000 balance, you can save nearly $500 a year by paying off that card! And since a penny saved is a penny earned, your $2000 actually saved you $500, and therefore you can think of it as it "earned" you $500, which is way more than the $120 (6% of 2000) you had to pay in interest to your mortgage bank. I'd pay off any debts that have a higher interest rate than your mortgage before investing the proceeds in CDs or the stock market (**unless they are also very low interest rate loans with some sort of tax benefit, which is unlikely**).

Answer 7

YIKES!!!!!!!!!!!!!!!!

rule of thumb: the best monthly payment is the LOWEST monthly payment. if you're at the baby-making stage of life, you probably want to be paying the minimum (or less).

let me explain:
imagine refinancing the house with a Power Option ARM loan (rate of 1.75%ish), and pulling money out of the house at the same time. let's say you pulled 100,000 out of the house (that's assuming the house is now worth over 150,000 and you qualify for the loan (which based on your savings and diligence, i'm sure you're an A++ candidate!)).

Now you have a total loan of 140,000 (100 + 33 + closing costs).

Guess what your payment is: about $500/month (add in taxes and insurance).

And then the fun part:
Invest the 100,000 in a safe investment that returns between 8-12% (email me for a list of where to find these!).
You can also invest what you're saving every month, or, to make room for the baby--just invest another $500/month.

At this rate:
100,000 will double in six years at 12%. That's 200,000! And in another six years = 400,000! At this rate, you can pay off the house with ease when your hair goes gray or when the kids leave the house.

With the $500/month (over 18 years) you're going to have an amazing college fund for your baby, as well as enough money to buy the little one a house or two!

Now, the catch that everyone is going to freak about: a power option arm means that the interest you're not paying today, you'll pay later. instead of working down on your principle, your principle increases. Here's the deal, though: the money you'll be making on your investment will far exceed any negative amortization. For real!!

As far as tax write-off--no, it's not really worth it. What IS worth it is investing money at 12% and letting it grow TAX FREE!! That's worth it. :)

Best of luck!
Gertie

Answer 8

Just make the monthly payments, and use the additional money that you would have been sending them to invest in other things like stock, or other investment realestate.

You have already paid it down a ton, and I bet you have taken years off of the back end of the loan.

DOn't forget that the interest you pay is a tax deduction that can lower your taxable income.

Answer 9

If you have no pre-payment penalty attatched to your loan then it is always best to try and pay as much toward the principal to reduce excessive interest. The more you pay off the more equity you build up as well...
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Answer 10

If you have other debt, it'd be better to pay off your other debt, since mortgage interest is probably the lowest interest you have. If you're concerned about a rate hike, but have other debt, refinance to a fixed-rate mortgage, take a bit of extra, pay off the other debt with the extra, and then pay the mortgage off as soon as possible.

If you have no other debt and you have the disposable income to do it, by all means, pay it off as soon as you can.