Paying off my mortgage?

Question

I came into some $ via an inheretence recently...and it is enough to pay off my 30 year mortgage at 8.1% completely.....I want to pay myself back this money monthly, and it would only take 15 years to do so.......or should I continue to pay the mortgage and invest this money in the stock market? Which would be the better investment?

Answer 1

Hippyghost,

A very good question that a lot of my clients are asking themselves every day... Hello my name is Ali and I'm a Senior Business Banker for a well known financial institution. I saw your question and thought I'd give you a little insight into one of the most common questions that I run into in the banking industry.

The first thing you need to do is, can you refinance your house? If so, market rates are still rather low and you can go get a refinance on your 1st for as low as 6.25% to 6.50% on a 30-year fixed. Even with marginal credit you can still get sub-prime lending loans to get a lower rate than what you're paying on currently. Another reason to refinance is that it will lower your monthly payments - this assumes that you've held the mortgage for a few years and it wasn't in an interest-monthly only option and have paid down principal each month with each payment.

Okay, so why would I mention refinancing your home? Well one reason is that the market values of homes have gone up so high that you can still take advantage of the low home rates that are available. With the inflation of housing prices, you'll hopefully have what we call a low "loan to value." In the banking industry the lower the LTV, the better for you... Banks will not only give you a lower mortgage rate but they're also more than willing to do "cash out" options if you want to pay off other debt that you may be paying a higher interest rate on (car loan, credit cards, etc.). I'd take advantage of this too if you're able... Now I am sure that you bought this house a few years ago? If so, look into refinancing and investing the death benefits that you've just received.

Now if all that I said above holds true, then the next thing you'll want to do is look into investment accounts. Some investments pay dividends and if you're looking for a substitute of monthly income, this is an easy way to do it. You'll also want to diversify some of the funds into some kind of retirement account that earns money for you but that you don't have to pay taxes on.

I can give you an example of where I have clients that we've put into sweep accounts (money market) that pay the person anywhere from $300 a month to over $10,000. It all depends on the type of investment tool that is used and also the dollar amounts that you're willing to invest with. For these clients, I always tell them that they need to diverse their portfolio and put some away for a rainy day into retirement instruments. Most of these long-term investment tools will pay over what you're paying on your mortgage. In the long run, you'll be better off...

Things that you need to keep in mind:
1) If you immediately pay off your house then you won't have a tax write-off at the end of the year for your on-going mortgage payments. I highly suggest that you talk to a CPA to see how much you should pay down on your 1st mortgage versus paying it off completely. Ask them if they think it is a good idea for you to pay it off completely, partially or not at all. Remember to focus your question on the sole purpose of getting money back for making those mortgage payments.

2) Next, if you are paying 8.1% on your mortgage but you can get back 4% in a tax return for all the payments that you made, doesn't that mean that you're really only paying 4.1% in interest at the end of the year? Now take into effect that you can invest those monies and earn at least the difference in a CD (right now CDs are paying over 4.11% for 7 months). So you just broke even... I would also really look into annuities, dividend accounts (i.e. ING Savings) and money market accounts as well as tax-free deferment accounts (like SEP accounts, IRAs, etc.).

NOTE: I'm not recommending CDs as the solution; I just wanted to point out to you what they were paying. You have so many options that doing just a little homework will pay off.

So to sum it up, call your CPA and get a little tax advice. Call your local financial consultant (if you don't have one just ask) and ask what kind of rates are available on accounts that pay monthly dividends (keep in mind you will owe taxes on all dividend payments made at the end of the year) and also look into retirement accounts that will increase in value, are principal secured (if the option is available) and will supplement your income later on in life. If you need any of the funds today, find out what the penalties are for using those funds first and compare them to the other solutions provided above. Some times its "okay" to pay interest on money borrowed because we are making money in investments...

I really hope this helps you out. If you need to ask any more questions, please feel free to do so... I have quite a few people that I can refer you to if you want to ask specialists more questions and they all work for a major financial institution.

Regards,

A.R. Pouretezadi

Answer 2

There are certain factors here that are not readily available, such as your age, when you plan to retire, how much do yo think you will need for retirement, vs how much you presently have in your retirement.

Paying off the home would seem like the ideal thing if getting your home in a free and clear status. some people like that and no matter the arugument they feel as if this is what they want to do, if you are one of these type the solution is clear, pay off your mortgage.

Remeber paying off your mortgage you lose the tax write off of the interest that you presently enjoy. This might be a consideration that you will want to consider. If you decide to keep the mortgage, you should refinance your mortgage to a lower interest rate and since the rate would be lower the payments might be such that you can get a 20 or 15 year mortgage, with just a small increase in your payments.

Put the rest in certain bonds, stocks and real estate depending on how you feel about the investment instrument. What interest return on these type intruments would you get if you invested more into these instruments vs paying off the mortgage.

You investing in stocks,bonds, real estate and others will depend on the risk you take. The older you are the less risk you should take. Make sure that your investment portifilo have some real estate in it, either 2nd trust deeds through a real estate mortage banker or broker.

I used the 1/3 of my total investment amount and moved to less riskier investment items as I got older. It is something like this when you are in a status where you can still earn money, and your investments are 1/3 risky stuff, 1/3 less risky and 1/3 in safe stuff. As I got older I moved more in the later 2 of the 3 thus into safer investment instruments.

I hope this has been of some use to you, good luck.

"FIGHT ON"

Answer 3

If your employer will match some or all of your 401k contributions, that would probably be your best option. For example, if I contribute 6% of my pay to the 401k plan, my employer will match half of what I put in. That's an immediate 50% gain on my investment, far more than I'd benefit from putting that money towards a mortgage. Also, your 401k contributions are exempt from income tax and Social Security tax, which saves you another 20-30% or so depending on your tax bracket. That is a benefit you don't have when paying the money towards your mortgage. It also depends on your mortgage interest rate. If all of your mortgage interest is tax-deductible (that will depend on how much you have in other deductions), then your "real" mortgage interest rate is 15%-28% less than the stated rate. It's also important to have funds available to you in case of a financial crisis (job loss, disability, etc.). If all your assets are tied up in home equity, it's not that simple to turn them into cash. You'd have to get a home equity loan. There are too many variables to say for sure what the right move is for you... tax bracket, interest rate on your mortgage, the amount of matching funds your employer contributes to the 401k, how much other savings you already have, etc. I am a big fan of being debt-free but it's critical to build up funds for retirement, and a 401k is a great way to do that. In my case, I paid some extra on my mortgage every month but not a huge amount. After taxes, my "real"mortgage rate was about 4.5%, and it made more sense for me to put the additional extra funds I had into investments because those would grow more than 4.5%. We ended up paying our mortgage off in 19 years, but our retirement savings has grown tremendously.

Answer 4

Good heavens.....8.1% is really high!!!! I would refinance and pay off at least 75% of the mortgage....so that your mortgage payment was some crazy small amount like $400/mo and enjoy the freedom of not worrying about making a large monthly payment.....then start a CD ladder w/ your freed up money and get used to have your money tied up for short periods of time...Then you'll get more savvy and knowledgable about what you are comfortable investing in .

Answer 5

If you have no other higher-interest rate debts, I'd pay off the mortgage.

Sure, you could get tangled up in deciding whether your house or the market is a better investment, but I believe in the "bird in the hand" theory. Meaning - a real paid off mortgage now, is better than a maybe better return from the market later.

Also - before you pay off or invest, keep your 6 month nest egg fully funded, in something liquid like a money market.

Answer 6

This is by far one of the most sought after questions in the financial industry. A very wise and shrewd financial analyst once said to me, "Never deplete your principal, rather add to it".

This advice should speak to you at a very high volume. Most financial advisors these days warn against paying off your mortgage. Simply because of the tax benefit that you receive from the interest that you pay every year. Until this tax law is defunct, I would highly advise taking advantage of it as much as possible.

Now, unlike Ali who gave you some very, very good advice, I am not going to go into numbers and statistics. Rather, I am going to give it to you straight up.

Refinance the mortgage if it is at all possible. I am not sure what is driving your interest rate so high, but you need to find a mortgage that is going to compliment what you are going to do with the money that you need to invest. These types of mortgages are out there and you need a good strong company to find the right product for you. Also, someone who can work with your financial advisor in finding the right place to be.

There is also another good adage to go by. "Don't put all your eggs into one basket". Diversify your funds. What types of accounts you put this money into is going to depend heavily on your age and your tax bracket, as you have already been told. Annuities are GREAT and offer some amazing returns. What about hedge funds? Risky? You better believe it. But with the right advisor, they will be able to tell you when you should pull out. The goal here is to leverage your money, in a way that will cost you less monthly and in the long run. This is not an easy task.

Someone else also said something somewhat profound as well. What about investing into real estate? Of course, you will need to "BUY RIGHT", and that would come with a good seasoned Realtor who can show you the ropes and can be honest with you. If you would like to know how to test a Realtor's integrity, then I can give you some sure-fire ways to make sure that who you are dealing with is sompletely honest with you in ALL facets. I will give you my info. here in a minute so that you can contact me about this.

In a nutshell, the answer to this question cannot be summed up all in one sitting. This will take some time and calculating. Haste will be your best friend in this strategy my friend. What I would highly recomend is to call a mortgage professional about your mortgage and see if there is anything that he can do to help you with your interest rate adn possibly deferring the costs of the mortgage in question.

If you would like more information on this, feel free to contact me anytime at timothy.kazee@americanhm. com and I would be more than happy to talk to you more about this and offer some more advice on this.

It has been an honor to answer this question, and I commend you on seeking advice on what to do with your money. Good luck and if you need anything, feel free to contact me anytime.

Answer 7

Personally, I would consider refinancing the mortgage regardless of the inheritance (8.1% is high; you could probably refinance at 6.5% now) and invest the inheritance (although I would think of adding some bonds to the portfolio; stock-only portfolio with a 15-year time horizon looks riskier than necessary).

Answer 8

Check the website below where you can find Mortgage Reduction Program which Quickly Builds A Minimum Of $40,000 Worth Of Home Equity.
Hope it helps

Answer 9

I'd put the money on a down payment on a rental property. Remember the more money you put down the higher your rate of return. That way you can get monthly cash back that can pay for part of your monthy mortgage.

Answer 10

I think it would depend on many factors, including your age, your expected retirement age, and the tax bracket that you are currently in. I would consult a financial planner/accountant if I were you.

Sometimes, NOT having Real Estate Interest as a write off is a major detriment!

Congrats on the $$.