May 17, 2006

Here's an idea - lose the mortgage


Anyone free and clear on their primary residence?

Anyone thinking of cashing in stocks, bonds, 401ks, etc to pay off your mortgage instead? Say you have $200,000 in disposable financial assets, and a $200,000 mortgage. What do you do?

A reader thinking about this wants your opinions


Perhaps even grow your own food, and get solar power too. Get off the grid.

My goal - rent til this sucker blows over, then buy my next house for cash. No more mortgages for me...

Thoughts?

71 comments:

Bake McBride said...

May not be the worst idea for some....

I decided 18 months ago to wait for the Real Estate implosion when I saw so many of my close friends (who make very good money)putting themselves in way too risky positions by assuming too much debt.

My plan was to wait and put 35% down on a house....Which is sitting in my ING account....I have a feeling it will turn into a 50-60% down payment soon.

Will still stay in the market...I'm diversified in low cast index ETFs and have a long way to go before retirement. Will continue to add to my diversified positions as the market falls.

Anonymous said...

This is a really hot topic in my household, because my husband and I are in just such a position. The balance on our (15 year, 4.75%) mortgage is around $139,000, and we have about $350,000 in stocks and bonds (with another $80K in retirement accounts). Our accountant and I feel we should just continue to pay down the mortgage, since we're getting, on average, about 4.25% in dividend returns on the stocks and bonds -- in excess of 5% when you factor in the gains. The mortgage interest gives us a needed tax break, and the dividends (which mainly go to make the mortgage payment every month) are only taxed at 15%. Finally, there's the little matter of a big chunk of change going to LT Capital Gains should we decide to sell.

My husband, on the other hand, would just as soon we didn't have a mortgage (which was the case with our last home).

I think we'll stay in the market. I keep doing the math, and it keeps saying to just keep making those very low, very principle-heavy payments every month.

Anonymous said...

Yes

And next up is loosing auto ins.

I have 5 Cars, 1 Motorcycle, and two commercial vechiles.

With the sum amount I'm shelling out to the ins companies each year, I'm really considering posting a bond and self-insuring.

I hold all real prop. in LLC's so don't have to worry about some horrible traffic accident that puts my assets at risk.

These are complex legal strategies, not for everyone to be sure.

But, I'm looking at a situation where I'm spending over $5K per year in ins premiumns and never had an at fault accident in my life... worse case if I self-insure I risk $15K cost of $30K bond that I have to post, in the event I kill someone on the road and they win a wrongful death suit for millions. The ballance of the judgement would be uncollectable. I control my wealth while not holding leagle title to it. Great way to have your cake and eat it too.. ;)

Anonymous said...

if you hold your stocks, you'll lose money

if you hold your house, you'll lose paper gains

if you hold dollars, you'll lose buying power

what to do?

The Thinker said...

Why do so many people come here for financial advice? Lord help us all!

albrt said...

I am installing solar panels this summer.

May turn out to be a boondoggle, but the electric company is picking up half the tab.

twib said...

Don't take 200k out of stocks to pay the balance off on the mortgage unless cash flow becomes a problem.

There are two ways to look at your finances: 1. Capital gains/losses of your assets. 2. Cash flow. If cash flow gets tight, then eliminating the mortgage can provide immediate relief.

Anonymous said...

I didn't mean to sound like I was asking for advice, although I'm kind of surprised nobody's said to just sell off everything, pay off the mortgage, buy gold and guns and start growing veggies.

Which would be tough to do in a condo...

foreclose_me said...

How does holding real property in LLCs protect it from a horrible accident? You still own the LLCs, right?

mr. smith said...

Yes, we are paid off.

We have bought several fix-upper houses. The first was a foreclosure and was bought with cash for $65k. It doubled in price to $125k after we did all the renovating and fixup.

The next house was a fix-upper ranch with 14 acres for $135k cash. It is now going for around $400k.

We figure that the house has paid us to live in it. Figuring $2,000/month rent or mortgage, we would need about a yearly $40k pretax to make the rent/mortgage payment. Plus about $1k/yearly in free hardwood firewood from the property.

So, in 10 years, the house has paid us approximately $40k a year in free living services + $275k in home appreciation plus the $10k value of all the free wood heat.

Over 10 years that amounts to $685k payback on the original $135k purchase price.

Of course, the opportunity investment return on the original $135k would have been lost- but it wasn't destroyed in the dot.com crash either.

Anonymous said...

Bake McBride?? Did you borrow the name from the Philadelphia Phillies outfielder (circa 1980)?

Joey said...

I've said it once, and I'll say it again....I pray to The Thinker...we are not worthy, we are not worthy!

Anonymous said...

Generally, if you feel you can make more on your investments after taxes than what you pay in interest on the mortgage, while taking into account your estimated mortgage tax deduction, than you stick with the investments. If you think you will make less on your investments, than you either consider drawing on the investments to pay down the mortgage faster, or use other discretionary income to pay down the mortgage faster. Paying off the house with cash may not be sound, considering that you can shelter your investments in areas that lower your downside risk, and after a few years of poor market returns, you may wish you were back in the market with that money. You can always some of the money in a money market account to draw at least some positive returns, especially if interest rates continue to climb.

Awaiting Bubble Rubble said...

If you have a fixed rate mortgage on a primary residence where you WANT to remain, keep it and put your extra cash into tax liens, CDs or other safe vehicles that will see rising rates over the next few years. 6 month CDs are already over 5% and most fixed rate mortgages are barely over 5%. Wait another year and you'll see CDs at 6 or 7%.

Anonymous said...

I sold out of Vancouver when values were still going up about 2 years ago and bought a house on Vancouver island. I was able to buy the house cash based on the extra equity I'd made on the rise up. I also bought an older, reliable car outright. So I have no car payments, no mortgage.

This means I don't have to work much (I work through the Internet). So I have a lower income, which means I don't have to pay much for medical insurance (in Canada), and I get a huge daycare subsidy.

I've got lots of room for a beautiful garden that fountains food.

Detach from the rat race, I highly recommend it.

Fraser said...

I sold out of Vancouver when values were still going up about 2 years ago and bought a house on Vancouver island. I was able to buy the house cash based on the extra equity I'd made on the rise up. I also bought an older, reliable car outright. So I have no car payments, no mortgage.

This means I don't have to work much (I work through the Internet). So I have a lower income, which means I don't have to pay much for medical insurance (in Canada), and I get a huge daycare subsidy.

I've got lots of room for a beautiful garden that fountains food.

Detach from the rat race, I highly recommend it.

Anonymous said...

Paying off the mortgage == investing CASH into HOUSING.

Uh? Didn't the rest of this blog convince you this could be a bad idea?

At least it isn't at inflated market rates, but still, it may not be too wise.

There is an advantage to having cash: you have cash.

If there's going to be massive inflation then you're better off with a fixed rate mortgage and not paying it off early.


I'd say that having ready cash sufficient for 5 years of mortgage payments plus 2 years of living expenses is a good idea.

AndyS said...

I've been thinking this exact same thing. Don't have enough yet to go totally free and clear, but I was thinking that when I reach the 100K mark to take the 10% penalty plus the tax hit and pull everything and pay off the house. I still have 30 years til retirement, that's plenty of time with no mortgage to save for retirement.

AndyS said...

Yes

And next up is loosing auto ins.

I have 5 Cars, 1 Motorcycle, and two commercial vechiles.

With the sum amount I'm shelling out to the ins companies each year, I'm really considering posting a bond and self-insuring.

I hold all real prop. in LLC's so don't have to worry about some horrible traffic accident that puts my assets at risk.

These are complex legal strategies, not for everyone to be sure.

But, I'm looking at a situation where I'm spending over $5K per year in ins premiumns and never had an at fault accident in my life... worse case if I self-insure I risk $15K cost of $30K bond that I have to post, in the event I kill someone on the road and they win a wrongful death suit for millions. The ballance of the judgement would be uncollectable. I control my wealth while not holding leagle title to it. Great way to have your cake and eat it too.. ;)

_________________________________

This is an awesome idea. I'd love info on it.

Marinite said...

Keith -

Didn't you get the memo? Paying off the mortgage is not "financially sophisticated".

Anonymous said...

$200,000 compounded at about 8% for 10 years will produce nearly 1/2 million dollars. There are plenty of good mutual funds that can easily do this. Unless cash flow is a problem, I would invest the 200K in a good international equity fund and leave it alone.

Meanwhile, pay the mortgage and as time goes on, your equity should build and your home should appreciate.

Sinking 200K into the mortgage is a very poor use of the money and hobbles your returns. Having the home and equity funds gives you two different asset classes and better diversification as well.

I am in the position of being able to pay off my mortgage any time I want and will not do it for the above reasons.

Anonymous said...

If you expect high inflation then keep the mortgage. You'll be paying back the loan with dollars that are worth less than the ones you borrowed.

If you expect deflation (like a Great Depression or Japan) then it may be better to pay off the house.

texasdiver said...

Biggest problem with tying up all your cash in the house is that you tie up all your cash in the house.

What do you do in 5 years if you have some sort of major family emergency that requires the funds? Sure, you can get another mortgage, maybe, but maybe the interest rates will be 12% in 5 years.

My wife and I are going through this same decision process. We are starting year 3 of a 5 year locked ARM. When we bought she was in a medical residency and we weren't planning to stay more than 3 years. Now we have 2 more years to figure it out. Since we took permanent jobs in our current location we'll either just keep the house and refinance in 2 years to something like a 15 year fixed, and if the rates are really high just pay down the principle at an accelerated schedule. If we decide to move then we have 2 years to do it.

My compromise position is to pay off the loan at an accelerated schedule rather than a lump sum. Kick in an extra grand or two a month or something like that out of our salary by just scrimping rather than liquiding money we already have invested.

Anonymous said...

I'm doing the same thing

Bake McBride said...

"Anonymous said...
Bake McBride?? Did you borrow the name from the Philadelphia Phillies outfielder (circa 1980)?"

Yes...Grew up a Phillies fan as a Kid.

Anonymous said...

Anonymous said...
if you hold your stocks, you'll lose money

if you hold your house, you'll lose paper gains

if you hold dollars, you'll lose buying power

what to do? ]

Gold and silver, we are in a correction right now, in less that 45 days we will be heading up higher!

Anonymous said...

Simplify for the sake of your peace of mind.
Americans' health is worse than people in Britain: I think that it's because of stress. Pay it off, stay in the same house for the next 10 or 20 years, and eliminate this source of stress and worry!

Anonymous said...

Summary:

- Bought house 8 years ago for $500k with 20% down and 408k balance for 7.3% 30 yr fixed. Call me old fashioned...

- Refi in 2001 *putting cash in* to be 275k on a 15 yr at 6%. They were very, very surprised that I wanted to put money into the house to *lower* my mtg balance.

- Gave up in 2003 and just paid it of.

- House is only a portion of my assets, not the bulk of them.

- I own all my cars outright. I have the same problem as the other guy and pay way more for insurance than I do for gas..., but I don't want to go unprotected for liability.

- I bought gold, and yes guns just in case....

Anonymous said...

Borrow all you can aganist the house. Rates are low. If you could find a assumable loan, it could be worth more than the house. Many people are in the mistaken assumption the fed controls the interest rates. The world controls the interest rates. As the dollar loses it's shine, the only way to attract lenders will be the interest rate card. When I was studing Econ in school, prime hit 21%, this time it could go higher, the scenario set up is much worse, interest rate increases will totally destroy the deficit from horrible to unmanageble. Buy silver with your proceeds, the SLV with a margin account will give you safe leverage and absurd returns. Also warrants on a few of the precious metal stocks long term are priced much more attractively than Leaps. This is a no brainer, even if your house depreciates substantially your silver of precous metal warrant will more than offset any loss in home value and you will not have to move.

Anonymous said...

"$200,000 compounded at about 8% for 10 years will produce nearly 1/2 million dollars. There are plenty of good mutual funds that can easily do this. "

funniest thing I read all day...

uknowwhoiyam said...

Why do so many people come here for financial advice? Lord help us all!

Lord help them!

This one, especially, is a no brainer.

Even forgetting the tax break on primary residence interest, if you aren't getting a better return on your investments than your mortgage's APR, you're probably too dumb to begin with.

keith said...

uknow - what's your ROI since 2000? thought so.

past performance does not dictate future returns.

paying 6% interest on your mortgage, you'll be lucky to earn 6% in the stock market the next 10 years annually.

C in ABQ said...

I'm free and clear on my ABQ condo, and I'm planning to be mortgage-free for my house & ranch I'm working on building for the near future. If not mortgage-free, then I will finance as little as possible. While there may be tax benefits to financing, I prefer to pay cash or pay it off ASAP. I just don't like paying interest.

Worried about the USA said...

I think Keith has read a few of my posts recently about paying off and getting out of the 401K. Also about boomers and X/ Y'ers being hosed.

Yes, I just pulled 50% of my gov't 401K out via a 5.125% loan and used the money to pay off the balance on my 20 ac land loan on the property where I live. No more debt. the "loan" gets repaid over 5 years back into my 401K and i get the interest. the rate is what i would have if I was in the gov't bond fund, but I have the money now, not them.

I would like to build the nice house (I have plans drawn up) on the property (I am single, the slum trailer is just fine for now and serves as the airstrip rec room) but the costs need to drop. That will probably happen within a few years. That time will tell how things are working out around here.

Was talking to a neighbor who is a electrician. he also thinks the economy is on a thread. he was going to build too but thinks the same way, keep powder dry and wait this out and see.

One other thing he mentioned is that the wiring that cost $20 a year ago is now $89. Better than gold! I should have bought a bunch (hundreds) of boxes of construction Romex. Esay to store, easy to sell (no transaction records) commodity. I bet there is a lot of 14-2 going in where there used to be 12-2. When will they start putting in aluminum wire and not telling about it?

Another thing I see is the kids needing to be more serious about their education. Things will get rough and these kids better be ready to compete.

Anonymous said...

$200,000 compounded at about 8% for 10 years will produce nearly 1/2 million dollars. There are plenty of good mutual funds that can easily do this.

"funniest thing I read all day... "

Mine have been beating 8% on avg for 20 years... you mean you haven't?!

Now that's not so funny.

Anonymous said...

Your funds may very well have returned 8% for the last 20 years, but be aware it is NOT guaranteed going forward.

The period from 1966 to 1982 saw the market go sideways. Most markets, including equities, move in secular bull and bear cycles lasting around 18 years in length. We had one of those from 1982 to 2000, and are probably in a secular bear cycle since 2000.

The 2002 to now bull move is within that bear cycle, in my opinion; and rolling over now. Unless you're a pretty good stock/fund picker the next 10 years could be disappointing.

Anonymous said...

On the tax deduction, why pay a bank/mtg company $.75 to save $.25 on taxes?

You really need to look at return on return directly, and going forward, you will only do better than the mtg rate by taking on more risk.

douglasbtrain said...

Why not compromise? Cash out half the money, pay down half the mortgage, refi into a 15 yr of 30 yr fixed. Your cash flow improves and you still have a lot of liquidity.

Worried about the USA said...

Done deal on paying off the balance of the last debt I had, the HELOC loan on the land I live on. I feel pretty good right now.

Any money spent on doing improvements will be saved up and paid for as they go.

Only the tax man can get me now.

Anonymous said...

Anonymous said...
"On the tax deduction, why pay a bank/mtg company $.75 to save $.25 on taxes?"

I have always wondered about this. I would like to see a calculator that compares the tax deduction to the cost of the interest...taking into account tax bracket, and the interest you could possibly make by investing the money instead of paying off the mort.

Yes, you MIGHT make more in interest should you invest, than you are paying to the bank...but that's a mighty big might.

uknowwhoiyam said...

uknow - what's your ROI since 2000? thought so.

Only 4 years in the past 26 years have I had a yearly ROI less than my mortgage APR.

Anyone who can't make the same claim is either bad at investing or bad at refinancing.

uknowwhoiyam said...

Yes, you MIGHT make more in interest should you invest, than you are paying to the bank...but that's a mighty big might.

You don't even need to be smart enough do as well as the APR.

Figure in the 28% deduction for primary residence interest and as long as your ROI exceeds 72% of the APR you're doing better investing the $ than using it to pay the mortgage off early.

Smart homeowners who paid attention during the last 3 years are sitting on 5.5% (or even lower) fixed-rate mortgages.

Heck my savings acct pays 4.5%.

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Anonymous said...

uknowwhoIam does not really have any money, and *has not* invested and beaten the mtg rate. He is a pretender...

How do I know? Because he does not include the taxes you must pay on the income *earned*. I will use easy numbers:

Borrow $100,000 at 10%. Pay 10,000 to bank, but get a tax deduction against income.

Invest the $100,000 at 10%, and get a 10,000 income, subtract tax deduction of 10,000 == 0, no tax to pay.

Make 1% more than the mtg rate, and you get a 1,000 income. But, this is more than your deduction, so now you pay your tax rate. The only chance the mtg deduction helps you is to possibly keep you in a lower tax bracket a little longer.

You could try and buy tax free investments, but due to the efficient markets, these trade at yield discounts about equal to the after tax average of all investors. So the only way to clear the hurdle is to go more risk....

uknowwhoiyam said...

Who here sees the 2 flaws in anonymous' post?

Anonymous said...

The only one I see is if you take advantage of compounding, and get the long term cap. gains rate.

Anonymous said...

I actually did something similar to this. I had some money on a credit card (mostly from buying furniture and from medical bills) that felt to me like a noose around my neck. Between interest rates rising and the market being wishy-washy, I did the math and found that at the end of the year, I would have paid more in interest on the card than I would pay taxes in taking the money out of an IRA and just paying the darn thing off.

Results? The debt is gone, I'll save money in the end, and more to the point I FEEL better. The card is going in the freezer now, to pull out for emergencies only. This is on a smaller scale than a mortgage...but at the end of the day, if you'd do better with the mortgage paid off, and you'd feel better with the mortgage paid off, then pay it off. If you'd do better with the mortgage and the investments, do that.

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