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celticmoon_gw

To pay off or not to pay off mortgage - pls check my #'s?

celticmoon
15 years ago

I'm really drawn to paying off our mortgage, just to be debt free as we contemplate pretirement options for the next few years. There are no issues of liquidity or safety nets, those are all well covered elsewhere. This is a numbers question.

The mortgage has 3 years left. Balance is 50k at 4.75% fixed. (we prepaid some along the way). We are in 28% tax bracket with another 7% to the state = 35% total tax bite.

I had presumed from my reading here that paying this off would be financially dumb, given the excellent rate. And it does seem like the numbers are also telling me that.

For simplicity's sake, I'll use a secure CD type interest earnings rate of 5.25%

Option A: put the 50k into a CD and earn 5.25% over three years. Earns $8509, becomes $5530 after taxes. Pay the 36 mortgage payments totaling 54k, and pocket $1304 from the $3728 mortgage interest effect on taxes. At the end of the stretch, I've paid out 54k and netted $6835 in earnings and tax reductions.

Option B: Pay off the 50k mortgage and forsake the CD earnings and the mortgage tax deduction. Deposit the monthly 1500. With comparable 5.25% earnings, my 54k deposited over 3 years becomes $58347 with a net gain after taxes of $5425. I am out $1410 compared with A.

If I use the arguably more available 5% instead of 5.25%, I get $6551 net for A vs. $5284 for B. Still favors A by $1267.

Soooooooooo;

Botom line is that I need to want to be done with this mortgage badly enough to give up 1250-1400 cold hard cash to make it happen. True?

I realize I am not factoring in inflation (because 3 year horizon is short and inflation chews on both options, though moreso on B). And I am not considering opportunity to earn more money by taking more risk. (dollars in this scenario are in the accessible and most secure sector of holdings). Still, should I be using other rates? Anything else I am missing here?

I would love to hear there is a way to dump the mortgage without such a big dumb loss. Thank you for contemplating this.

Comments (38)

  • kudzu9
    15 years ago
    last modified: 7 years ago

    celticmoon-
    It sounds like you've really sorted through the numbers, and the only issue you're facing is: Is it worth throwing away several thousand dollars in order to gain the psychological satisfaction of not having a mortgage? I'm very financially conservative, but I don't think this makes sense in your situation. As I understand it, you have enough money to pay off the mortgage, but you know you can get a better return by not doing so. And since you would put the money in a CD, it's perfectly safe. In fact, the worst thing that could happen is if, for some reason, you had to pay the mortgage off you might need to break the CD and forgo some interest. I doubt that that is a situation you'll be facing. Besides, even when you own your home free of a mortgage, it's not "free": you still have to pay real estate taxes each year. I recognize that there is an intangible value in having no mortgage. I know, because I paid off mine early...then I moved a couple of years later and took out a small mortgage again! So here is the question I suggest you ask yourself: If I don't pay off the mortgage what is the worst thing that could happen to me financially? If the answer is: "Nothing that will jeopardize my home," then I think you would be doing something unwise financially by paying it off. However, if the less rational, more visceral part of your personality wants it paid off regardless of consequences, then do it!

  • dave_donhoff
    15 years ago
    last modified: 7 years ago

    Hi Celticmoon,

    May I toss another bone to the dogpack?

    Consider this;
    Your costs of leverage, after-tax (35%,) is 3.0875%

    You could place your $50,000 (and more, if you had it,) in a 72c Guaranteed Savings account (either equity-indexed fixed life contract, or annuity contract, as applies for your age,) and get from currently about 9.5% tax FREE yield.

    When structured from the investment perspective, these instruments offer a gaurantee of principal (can not experience a loss, as safe as a money market account,) offer a yield linked to the upside growth (but not downside risk) of a broad market index (S&P, DOW, and/or others,) and without any additional cost the "throw in" an insurance policy with death benefit that blossoms to multiples for your heirs.

    I say "throw in" (like a bank does with a new toaster for opening a checking account,) because their insurance "premiums" are less than the relatively equavalent fees paid to asset managers (mutual funds, hedge funds, wrap funds, etc.)

    IN ADDITION... contrary to cash-value life policies of old... these new accounts allow you to re-access your funds TAX FREE, INTEREST FREE, PENALTY FREE... by simply 'borrowing' from yourself on a no-repayment, no-net-interest 'loan' which remains on your account books, thereby never incurring 'surrender' charges.

    I realize I may have just thrown out some financialese beyond some readers... but... THIS, in my opinion, is the new "deal of the century" for conservative 'investors.'

    Of course... when it makes sense at $50k... the question then arises: How well does it scale up from there? And THAT is the structuring question to target.

    Cheers,
    Dave Donhoff
    Strategic Equity & Mortgage Planner

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  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Thanks Kudzu. The numbers look right to you then. Unwise is the right word. Strange how I can't offload a debt without it costing me other money. Odd.

    Hi Dave. Always good to see your enthusiasm for newer investment vehicles. I'm again curious to ask you how long you've been working in finance. Wonder if you were in the game for the inflationary 70's, the 80's stock plummet,and the seismic shifts in tax laws that undid 80's insurance and investment strategies, etc. The financial landscape can shift in ways unforseen. Certainly ways I never saw coming, and I learned a few things the hard way.

    I'm repeating myself, but that road of ups and downs behind me makes me look askance at the kind of product you describe. I'm sure you understand 2006 was exceptionally good for the equity market. So any equity indexed product will look very nice right now, i.e. "currently about 9.5% tax FREE yield". And while you say the principal is "as safe as a money market account" (whatever that means), fact is that there is no guarantee of *any yield at all* in a stalled equity market, right? And as for that 'bonus' life insurance policy, yikes, I shudder just thinking of reinvolving myself in another of those screwy policies. (Although when my 1984-2001 saga was finally over and the lawyers were done, I did come out with a very nice settlement of stock, fully paid life insurance and another 20k in punitive damages...not bad but still not worth the hassle)

    I guess I'm saying I'll take a pass on the "deal of the century" cause the one from the last century gave me a huge headache, LOL. But thanks for the thought.

  • Chemocurl zn5b/6a Indiana
    15 years ago
    last modified: 7 years ago

    Another thing to think of is that here in Indiana anyway, when one has a mortgage, they qualify (if they sign up for it at the courthouse) for a mortgage exemption on their property taxes. If you too have that, you might check to see just how much of a savings it is on your property taxes.

    I have had friends who did not sign up for it, as they weren't aware of it for years. When they finally did get signed up, there was no collecting from the previous years (b4 they signed up).

    Sue

  • dave_donhoff
    15 years ago
    last modified: 7 years ago

    Hi celticmoon,

    Hi Dave. Always good to see your enthusiasm for newer investment vehicles. I'm again curious to ask you how long you've been working in finance. Wonder if you were in the game for the inflationary 70's, the 80's stock plummet,and the seismic shifts in tax laws that undid 80's insurance and investment strategies, etc. The financial landscape can shift in ways unforseen. Certainly ways I never saw coming, and I learned a few things the hard way.

    Indeed, I have experienced significant shifts in the financial, regulatory & tax landscapes as well... but I believe the key is never allowing fear of the past to prevent learning in the present. The only guarantee is change, but that doesn't mean it deserves our fear.

    Your comments APPEAR to imply you are not familiar with the programs I referenced, and are merely backward-casting a meaning to them according to what you thought about something that happened to you in your past.

    Education trumps avoidance/ignorance, ESPECIALLY around finance. Knowing the past is immeasurably valuable... being constrained by the past is dangerous. The key is to keep a balanced but inquisitive healthy curiousity and willingness to be at the front of change, instead of being a victim of it.

    Given the parameters of your original post and questions, I was presenting prudent strategies with better returns, better liquidity access, better tax treatment, and deeper backing than CDs, making them safer alternatives to CDs.

    While I have my own memories of bruises and losses, I focus on safety and protection as the primary compass heading.

    Cheers,
    Dave Donhoff
    Strategic Equity & Mortgage Planner

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Dave, Dave, Dave...if it quacks like a duck and walks like a duck, well, I'm still calling it a duck. Or "backward-casting a meaning" that it is a duck, LOL.

    "these new accounts allow you to re-access your funds TAX FREE, INTEREST FREE, PENALTY FREE... by simply 'borrowing' from yourself on a no-repayment, no-net-interest 'loan' which remains on your account books, thereby never incurring 'surrender' charges..."

    The sound you hear is me screaming and running away as fast as I can. Been there, done that. Precisely that. Exactly that. All those words, every one. You can keep telling me that this is very different from your spanking new product, but I'm holding my ground on this one. You may be right that this is MUCH BETTER and completely UNLIKE prior universal/whole/magnificent/insurance/annuity/investment shell products. Sorry, still not interested.

    And history aside, it just doesn't seem an appropriate vehicle for this segment of my portfolio (representing my housing cost for the next three years). The return is a gamble, the loan feature and the life insurance componants are absolutely irrelevent and unnecessary, and being an equity indexed product it has a time horizon all wrong for the 3 year stretch in my OP question. Again, no thanks.

    Sue, I am unaware of a state mortgage exemption, other than the interest deduction, but will be sure to inquire of my accountant. Thanks for the tip!

  • landmarker
    15 years ago
    last modified: 7 years ago

    I don't get the same numbers --

    Option A -- 50K compounded monthly at an after tax rate of 3.4% (.65* 5.25%) is worth $55,381. Add the tax deduction of $1304 so your "net worth" is $56,685. Very close to what you get.

    Option B -- put 50K in the mortgage now, but invest the 1500 per month at 3.4% after tax. Compounded monthly the 1500 per month is worth $56,776 at the end of 3 years. This is a bit higher than your calcs.

    I used the FV function in microsoft excel.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Thank you so much, Landmarker!!! That is a very different outcome. Your numbers say I would be $90 ahead by paying it off. Intuitively that makes more sense.

    Now I just have to figure out why my numbers came out so different.......

    Is it because I am using Quicken savings calculators to compute sums for the end of the 36 months and THEN chopping off 35% to taxes. When in fact the chop occurs annually, affecting the base for interest each year? Or maybe these calculators are not compounding monthly?

    Cripes, now I gotta get my head around all this again, LOL. I was resigned to play out the monthly payments, not liking that getting out of the debt would cost me so much... now it is back on the table until I 'get it' completely.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Landmarker, again I want to thank you....though my head does hurt a bit now.

    Been crunching away here and do see that neglecting to chop taxes along the way did affect the outcome significantly. Hard to compound on money Uncle Sam took away, right? Duh.

    Next I considered that a guaranteed CD rate might be a bit higher than the rate for monthly deposits (figured 5.25% for CD, 5% for accruing account). Still it comes out pretty even up three years from now. 5.25% CD + mortgage beats payoff and a 5% monthly savings vehicle by $45. Shifts in interest rates up (to make the savings vehicle equal to current CD rates) flips the outcome and favors the payoff strategy by $91. Exactly what you got.

    Went ahead and even considered effects of inflation on all this (figured 3% given the short horizon). Cost of mortgage payments in todays dollars goes down, but so do those earnings! Still just a $50-75 swing favoring one route or the other depending on the drift of interest rates when all is said and done.

    A last consideration is that with the house paid off and no debt, I will likely be more agggressive with the monthly accrual money. The daily living expenses money (couple years' worth) will stay liquid and secure, but these other dollars could now start working a little harder. I'm more willing to take risk without a mortgage in the picture. (I know I could have drawn down that 50k as the mortgage got smaller, but that seemed too complicated with CDs). I've done OK with my non survival dollars, averaging returns of 9.6% over the last 5 years even with a lot of boring bonds for ballast. I suspect I could beat 5% with those new dollars.

    (Yes, I am extremely conservative about survival money = housing and living expenses. A divorce left me homeless for a stretch while in graduate school, and I'm a bit too old now to live in my car...)

    So we are agreed it is a wash to pay off even a very low interest mortgage with dollars current conservatively invested? Any dissent from other number crunchers?

    Whew, that was hard. But if it does make sense financially, I think it would be a sweet 23rd anniversary present next month for us to become debt free.

  • landmarker
    15 years ago
    last modified: 7 years ago

    Actually -- the taxes you pay do come only once a year. You don't pay income taxes monthly. It's just far easier to calculate using an after tax rate. But that affects both cases. So I think it's still a wash basically. Money is really not the driving factor in this decision.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    True, Landmarker, taxes are annual not monthly. I agree though it is still pretty much a wash.

    And that makes me happy. It was really bugging me that the first set of mumbers made it seem flat out stupid to pay off the mortgage. If it is even close to even I would choose to pay it off. After 23 years of paying on mortgages, I'm kind of excited, actually very excited, at the prospect of not having one!! Wheeeee!!

  • jlhug
    15 years ago
    last modified: 7 years ago

    I'm catching up after not reading posts here for a while. If you owe $50,000 and will have your mortgage paid off in 3 years, the interest you are paying annually must be fairly small. The standard deduction for married filing jointly is $10,300. Unless you are a very generous person, pay a large amount in real estate taxes or have some huge medical expenses, you are probably not itemizing or are very close to the point where itemizing isn't to your advantage.

    I don't know your specific tax situation, but, based on my experience, the tax benefits of paying mortgage interest are probably small or non existent given the low balance and short time frame remaining on your mortgage. Just one more plus on the side of paying off your mortgage.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Jlhug, you are right that the interest is small, around 3k last year and 2k for this year. BUT we do have very high property taxes, AND state income taxes, and we donate, so we would still definitely itemize even with no mortgage interest. (Unless we stop working and stop paying state income taxes, then we'd be closer to the standard deduction. But that is not likely for a while yet.)

    Good point though! Thank you.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Well, it is done. Just sent the certified check off for payoff Tuesday. That'll give me over a month to actually get the deed before our anniversary. I'm excited and believe DH will be happy as well.

    Thank you to all for your help thinking this through. And a special thanks to you, Landmarker, for picking up on my error figuring the tax effect and sending me back to the calculator. I was ready to drop the whole thing.

    BTW, the process of actually navigating the payoff process has been amusing and enlightening. The mortgage company had a bit of trouble getting their heads around this one. They most often satisfy a loan at a sale/closing or a refi, and were stuck on insisting I would need to buy a 'payoff demand' statement. I had to go up a couple levels, twice, to get those fees waived. My bank was a little perplexed also. Apparently I am pretty abnormal to prioritize becoming mortgage free.

    How the world has changed in the last 30 years, hey?

  • noocha
    15 years ago
    last modified: 7 years ago

    I wouldn't say you're abnormal. I, too, would love to pay off our house.

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Maybe I didn't say that right. What might be abnormal is making this the top financial priority. I'm choosng no mortgage over upgrading to a bigger, better house, having cable movies and HD TVs, driving cars from this century, indulging in a kitchen or bath remodel, or leveraging the funds toward a better paying investment prospect. (Hi Dave, hope you come back soon).

    Many people seem to be picking those other priorities given a choice. That's what is stypical I think.

  • knhav
    15 years ago
    last modified: 7 years ago

    Since you guys analyzed these numbers so thoroughly including tax ramifications vs income interest I am hoping you can help me clarify a few thoughts going through my head recently.

    I have heard a number of people put down accelerating a mortgage saying it is a mistake when a person needs to offset their income via the tax deduction of interest paid. Is is just me or is that not simply a 30 to 50 cent return of every dollar spent towards interest? And if this is true it follows that if we did not have to spend the dollar to begin with (i.e. no mortgage) we would just get to keep the 50 to 80 cents we did not have to spend to get the tax credit.

    Secondly could anyone clarify how an amortization schedule benefits the borrower in anyway, or if it is not just a way for the lender to always be ahead?

  • alphacat
    15 years ago
    last modified: 7 years ago

    Borrowing money merely to have a tax deduction on the interest is a bad idea, because even with the tax deduction, you're still paying interest.

    What's not a bad idea is borrowing money and doing something with it that is worth more to you than the interest you're paying. And the tax deduction effectively reduces the amount of interest you're paying, which makes it more likely for it to be worthwhile to do something else with the money than it would be without the tax deduction.

    A quick rule of thumb: Interest you pay is effectively reduced by the tax rate you pay on it if you can deduct the interest from your taxes. Interest you earn is similarly reduced if you have to pay taxes on it. In other words, suppose you are in a 25% tax bracket, meaning that you pay 25% in taxes of every additional dollar you earn. Then if you have a 6% mortgage, being able to deduct the interest from your taxes reduces your effective interest rate to 4.5%. Similarly, if you invest money at 6%, but have to pay taxes on the interest as you earn it, you are effectively making only 4.5%.

    If you have a 6% mortgage, and you're in the 25% tax bracket, one reason you might better off hanging onto the mortgage if you can find a way of investing the money that makes more than 4.5% after taxes. I know of no risk-free way of making that much, but I do think that a balanced portfolio would have a very good chance of doing so over the 30-year term of a typical mortgage, or even over a 15-year period.

    Therefore, if I had a 6% fixed-rate mortgage with 15 years to go, and I suddenly came into possession of a big enough pile of cash to pay off the mortgage, I would be inclined to invest the cash instead, withdrawing from the investments as necessary to make the mortgage payments. By doing so, I would be taking the risk that the investments might decline in value to the point where I would not be able to continue to pay the mortgage from the investments. However, the most likely case is that at the end of the 15-year period, I would come out ahead.

    As for the last paragraph, I don't understand what it means. Usually, when one asks whether X benefits Y, you have to present an alternative to X for the comparison. So when you ask "how an amortization schedule benefits the borrower," the only answer I can think of is "compared with what?" What alternative to an amortization schedule are you trying to consider as an alternative?

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Good explanation, alphacat. The key is whether that chunk of money can work harder invested, with all the accompanying risks and unknowns, than it would paying off the debt. The investment carries more uncertainty, but potentially a bigger payoff.

    Less of an issue when you get to the end of the mortgage term when most of the payment is principal. Also the time horizon is then too short for higher risk investment to be reasonable. That was my case. BTW, I remain surprisingly excited at the prospect of being mortgage free by this time tomorrow! Long time coming!

    Knhav, the amortization schedule isn't mysterious. At your closing, when the mortgage firm stepped up and gave, say, 300k to whoever sold you your house, you owed that mortgage company 300k. Interest is figured on all that 300k. Slowly pay it down to where you owe them only 50k, and you then pay interest on only 50k. Much less interest by then, so more of the payment can to principal. You can always pay extra on the principal, but that interest part is fixed by what you owe at the time of the payment. Pretty straightforward.

  • knhav
    15 years ago
    last modified: 7 years ago

    Thank you to Alphacat for the great breakdown on the tax breakdown both ways, makes a lot of sense. Since the risk to get the better interest than the mortgage is costing is higher, how much of a difference in interest being earned on the investment over the spread starts to make it worth it? After all if we are only getting a 1 to 2 % spread with moderately high risk how much are we really gaining? Also on these investments to get the higher return will our principal invested be at risk as well?

    Also thanks to Celticmoon for the breakdown of the amortization schedule (alphacat and I danced around this in another forum for a while now) but somehow it finally clicked with your explanation. And alphacat I don't know if I had an alternative it just feels like the current system is still slanted toward the lender in a big way, though I guess the minimum payment is mathematically generated by the term for the loan to go to zero at the end.

    Having finally grasped that (thanks for you patience again alphacat), when you pay off the mortgage earlier are you not then getting a guaranteed return of what ever your current mortgage rate is with no risk to the principal? I do agree that if the money in question is a large lump sum the best in most cases will be to invest it as you suggest.

    On the other hand if we are just cutting the mortgage down in smaller chunks of added principal over time and we could take the 30 year mortgage to 15 years, shouldn't we also include not only the interest we saved over the course of the loan, but also think about the 15 years of whatever our loan payment would have been as savings as well? Certainly if we continue for the next 15 years to take what we would have been paying the mortgage and invest it into our retirement fund we should amass much more wealth than the 1 to 2% spread on the higher risk investment, while keeping the mortgage.

    Realize I only feel this way to a persons primary residence, since this should be viewed as a liability on the homeowners spreadsheet since it definitely shows up as an asset on the banks sheet. Investment properties on the other hand since someone else should be making the mortgage payments (renters) I would say use as much of the bank's money as you can to invest.

    I know we are now going to enter the time value of money debate which again I agree with wholeheartedly, and I guess it comes down to balance. Just as a prudent investor is going to diversify his portfolio to limit risk, yet reap the highest reward, I feel the average homeowner should be balancing both paying down the mortgage faster and investing. The problem has been most don't invest or invest poorly, making it seem to me the larger portion of extra money may be best put towards killing the mortgage early, which will lower the effective interest rate on the money borrowed/paid keeping more money which fulfills the addage "it is not what you make but how much you keep".

  • alphacat
    15 years ago
    last modified: 7 years ago

    Khnav asks:

    On the other hand if we are just cutting the mortgage down in smaller chunks of added principal over time and we could take the 30 year mortgage to 15 years, shouldn't we also include not only the interest we saved over the course of the loan, but also think about the 15 years of whatever our loan payment would have been as savings as well?

    The answer is: Absolutely. But when we do that, we also need to do the corresponding thing when we compute the consequences of not paying off the mortgage immediately. In particular, when we invest money instead of using it to pay the mortgage, we get something from the investment. In general, we hope we will get enough that when we finally do pay the mortgage, we will have something left over. So we need to be sure to include that left-over amount as well as all of its earnings.

    Now, you ask: "Since the risk to get the better interest than the mortgage is costing is higher, how much of a difference in interest being earned on the investment over the spread starts to make it worth it? After all if we are only getting a 1 to 2 % spread with moderately high risk how much are we really gaining? Also on these investments to get the higher return will our principal invested be at risk as well?"

    The answer is "it depends." In particular, it depends on what the risk really is, and what the return really is.

    I agree that risking losing your house to make an extra percent or two would be silly. But in practice it probably doesn't come down to that.

    For one thing, we're talking about a situation in which you have enough extra money to prepay the mortgage! If you do prepay it, and then fall on hard times, the fact that you made extra payments earlier won't protect you from foreclosure if you can't pay now. So you should consider prepayment only if you have some wiggle room afterwards.

    For another thing, the spread may well be more than 1 or 2%. Take a look at Table 1 in the attached article. It shows that in the 35 years from 1970 to 2005, a balanced diversified portfolio that was 60% stocks and 40% bonds made an average of 11.6% per year.

    Now, the folks who put out this table say that for planning purposes, they assume that future returns will be about 2% less than past returns. So that reduces it to 9.5%. That's still 3.5% more than a 6% mortgage. Moreover, as we're talking about a 30-year term, and a circumstance where you have enough spare cash to pay off the mortgage, perhaps this might be a situation in which it would be worthwhile putting that money in 100% equities, which would give you a past return of 14.1%. Subtract even 3% from that and you still have a 5% spread between the mortgage and the investment. Over the long term.

    How does this work out in practice? Well, let's run a scenario. I'm going to simplify it a tiny bit, but I don't think these simplifications are material.

    Let's suppose that in 1970, you took out a 10% mortgage for $100,000, and that instead of computing interest monthly, they compute it annually (that's the simplification). That gives an annual payment of $10,607.92.

    Now, let's suppose you had the cash to pay off the mortgage right away, and look at two scenarios.

    In scenario 1, you pay off the mortgage immediately, leaving you with no money and no debts.

    In scenario 2, you invest the $100,000 completely in stocks and use that account to make the mortgage payments.

    For scenario 2, the actual earnings on that investment are a wild ride. I'm using the figures in Table 1 for 100% balanced equity. So, for example, in 1972, the addount made 27.7%. In the wretched bear market of 1973-74, it lost 19.5% and 24.8%, respectively. (I started the mortgage period in 1970 in my example so that it would include that bad stretch). Then it bounced back in 1975, earning 50.2%. And so on.

    Anyway, in scenario 2, you would have wound up with more than $255,000 more at the end of the mortgage, and the lowest balance the account would ever have had was $53,856 in 1974.

    Now, instead of a 10% mortgage, let's assume an 11% mortgage. The annual payment goes up to $11,502.46. And this time, scenario 2 loses big: The account runs out of money in year 20, and you're more than $298,000 in the hole at the end of year 30.

    This example shows that khnav is right to be concerned! Whether the risk is worth taking depends on your personal circumstances.

    Paradoxically, you are in the best position to take such risks if you have lots of money or almost none, and in a worse position to take them if you have just a little more than you need.

    Here's why. If you have lots of money, it doesn't matter what you do: If you take a risk and it doesn't work out, you still have more than you need. If you have almost no money, it may be that the only way to keep your head above water is if the risk succeeds, so you might as well take it.

    In this context, what I'm saying is that if you have enough money that it doesn't matter whether you hold onto the mortgage and your investments turn sour, you might as well keep it because you can afford the risk. If, on the other hand, you just plain can't afford to pay off your mortgage, then there's no point in thinking about whether you should.

    It's in the middle case, where these decisions are close, that you have a real choice to make. The point I was trying to make is that in that case, there *is* a real choice. It is not automatically better to pay off your mortgage than it is to keep it, nor is it automatically worse. It's a tough decision into which many factors, both financial and psychological, come into play.

    Here is a link that might be useful: Fine-Tuning your Asset Allocation

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Interesting discussion. I especially appreciate your taking the long view Alphacat. I do miss Dave, but not his passion that leverage is the road to wealth and security.

    I'll just add that having pulled the trigger and paid the mortgage off yesterday (pause for happy dance!), I'm not feeling at all risk averse in applying the monthly mortgage equivalent now to a higher risk investment fund -leaning toward Vanguard's Wellington, the grandaddy of balanced funds.

    I could never have done that with the whole 50k chunk. Dollar cost averaging is itself a very helpful thing for me.

  • alphacat
    15 years ago
    last modified: 7 years ago

    Thanks, celticmoon!

    Just so that people can understand where I'm coming from: I am *not* a financial advisor. That said, I'll also say that like you, I think highly of the Wellington fund. It has averaged more than an 8.4% annual return since 1929 (!), it has had only two down years since 1992 (and one of those was only a 0.5% loss, in 1994), it made 15% in 2006, and it has no loads or other fees and only a 0.3% expense ratio (and even less once your balance is above $100K).

  • quirk
    15 years ago
    last modified: 7 years ago

    "though I guess the minimum payment is mathematically generated by the term for the loan to go to zero at the end." --- exactly!

    "Having finally grasped that (thanks for you patience again alphacat), when you pay off the mortgage earlier are you not then getting a guaranteed return of what ever your current mortgage rate is with no risk to the principal?"
    --- absolutely. (Although here is where the tax issue comes in; if you are itemizing your deductions, your guaranteed return will be mortgage rate minus the tax savings you're giving up. Still a guaranteed return, but less than the mortgage rate.) So here is where you look at your return on paying off the mortgage vs. other things you can do with the money. The answer (as alphacat illustrated) depends on what your mortgage rate is, what kinds of returns you think you can get elsewhere, how much risk you are willing or realistically should take on, etc.

    oh, celticmoon, congratulations! (happy dance for you)

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Alphacat, I appreciate the Wellington comments. I'd looked closely at performance over scary times like 00-02 and liked its relative stability. I think it is right for my 5-8 year horizon where some, but not too much, risk is tolerable.

    FYI, minimum to get in Wellington dropped back down to 10k recently after 6 months at 25k because of too much interest. Guess the gatekeeping was effective. I also like Strategic Equity (recently reopened, but with raised minimum) and International Explorer (still closed) for my higher risk equities for the long term (on a core of index500, total market index and bond funds). Works for me.

    And I am no financial advisor either. Just a DIYer favoring an investment strategy of no load funds, balance and discipline, oh, and no mortgage! (one last happy dance and I'll stop, I promise!).

  • celticmoon
    Original Author
    15 years ago
    last modified: 7 years ago

    Just a follow-up to say paying off the mortgage was a great anniversary present. DH was as happy as I'd hoped and expected. We both keep looking around and saying WOW.

    Great feeling.

    It was the right thing for us not to leverage our home to make more money potentially down the road. Not the right thing for everyone, but right for us because the other bases are covered well enough. Having as much money as we possibly can later is not that important to me. We'll have enough.

    Thank you to all who helped me through the numbers.

  • demeron
    15 years ago
    last modified: 7 years ago

    Gratz-- cause for celebration!

  • scrapbookheaven
    11 years ago
    last modified: 7 years ago

    It is hard to describe the pure joy that the freedom of being mortgage free gives you. We bought a home in 1997 and through prepaying varying amounts most months (after the first couple of years), we paid off a 30 year mortgage in 12 years. Happy Dance. Then we started saving for some remodeling we wanted to do.

    THEN we needed to move closer to DH's work. Being mortgage free gave us great flexibility. With savings and no debt, we qualified for a new mortgage easily. Having no mortgage in our 1st home also gave us better flexibility in several other ways - unexpected to us.

    First: we waited to put the 1st house on the market since we had no mortgage or rent on it. That allowed us to accrue more savings for the new home while it was being built. (And allowed us to upgrade certain items.)

    Second: when we did put the 1st home on the market, we could afford to price it aggresively. Waiting till the end meant we paid no rental for a transition place, so we lowered the price till be were the BEST deal in the neighborhood. We got offers on days 2 and 5, best and final offer on day 6 and signed a contract. (The new owners REALLY wanted the house. They knew it was a good deal and wanted a signed contract before more bidders came into the picture.)

    The house sold for $9700 over list. The new owners allowed us to rent back for the six weeks until our new home is done. So, only one move!! Hurrah. We move into our new home next week.

    Now we have a huge amount we can put down on the new home. Still have a mortgage, but will have a much nicer home as well. We will be prepaying on the new mortgage this time around as well.

  • celticmoon
    Original Author
    11 years ago
    last modified: 7 years ago

    Good for you, Scrapbookheaven!

    And congratulations on the new home! Sounds like your plan worked out very well.

    Interesting to wander here and find my 3 1/2 year old thread resurrected. Turns out paying off the mortgage in 2007 was exactly the right thing for us to have done. I am so happy I didn't invest that 50k right before the 2008 market tumble. More importantly, we had unforseen medical issues impact our income for a while , and it was a huge relief not to have a mortgage in the picture. Both our physical and financial health came through fine.

    No regrets at all.

  • graywings123
    11 years ago
    last modified: 7 years ago

    I started reading this thread without noting the dates the posts were written. Dave, I don't want to put you on the spot, but I am wondering how the accounts you spoke of in 2007, the 72c Guaranteed Savings accounts (equity-indexed fixed life contract, or annuity contract) have weathered over the last three years.

  • dave_donhoff
    11 years ago
    last modified: 7 years ago

    Hi graywings,

    I started reading this thread without noting the dates the posts were written. Dave, I don't want to put you on the spot, but I am wondering how the accounts you spoke of in 2007, the 72c Guaranteed Savings accounts (equity-indexed fixed life contract, or annuity contract) have weathered over the last three years.

    Heh... you can "put me on the spot" in this regard *ANY* time ;~)

    Both the equity indexed life & annuity products have *VERY* strongly outperformed the unprotected stock index markets over the same periods of time (since 2007. In fact, going back from today to almost as far as you'd like.)

    Their design is that they capture & credit any annual upside (to a maximum gain,) and lock that amount permanently to your credit. On any years with a downside, your account sits tight with no losses at all (guaranteed by the insured backings of the company reserves and the state's guarantee association (each state's equivalent of a regional "FDIC" in essence.)

    If you put $100,000 in the S&P 500 for the last decade, you'd actually be holding a bit LESS than $100,000 today (not deducting the tax or management fees that may also be applied.) The same $100,000 in an insured indexing account would be approximately $211,768, net of everything (taxes & fees,) *OR* about an average annual tax-free rate of return of 7.06%

    Alternatively, those folks who decided to take their working capital OUT of growth, and put it into their real estate equity, have been double-stung; Not only have they gained nothing toward retirement, their equity values have decayed from 10-30% (depending on the area.)

    The clients who've been with us the last 3-5 years have been rather relieved, ecstatic, and pleasantly bored, all at the same time. Its a very nice financial reality to provide.

    Cheers,
    Dave Donhoff
    Leverage Planner

    (PS. to re-paraphrase celticmoon; When everyone else's retirement nest-egg is drowning deep underwater... its kinda nice to be riding on the back of a "duck" ;~)

  • celticmoon
    Original Author
    11 years ago
    last modified: 7 years ago

    Dave sez: Both the equity indexed life & annuity products have *VERY* strongly outperformed the unprotected stock index markets over the same periods of time

    Outperforming the stock market indices wasn't the question. I think greywings was asking what my 50k plunked into your equity indexed life & annuity products on March 1, 2007 would look like today.

    I'm curious too.

  • celticmoon
    Original Author
    11 years ago
    last modified: 7 years ago

    Greywings, you got me wondering so...

    $50,000 dumped into the Vanguard S & P 500 index March 2007 would have climbed to $55,770 before tumbling to $24,687 (ouch) by March 2009. Rebounded now to $42,500.

    Just a few random others for comparison purposes, Vangurd's total market index fund would be back to $43,900 Vanguard's Wellington would be back to $47,000 and JP Morgan's midcap growth would be $35,000.

    Those are quick rough numbers without figuring in fees or dividends, just price change. Primitive.

    And of course, I wouldn't have put it all into equity funds anyway.

  • dave_donhoff
    11 years ago
    last modified: 7 years ago

    Hope you don't mind January anniversaries... I had the data at hand for that.

    Here you go;

    Uncapped SP vs 2-13 caps indexed 1-07 thru 1-10

    As you can see, when the markets drop, you lose nothing, and when the markets rally you gain (to a cap.)

    Jan '07 through Jan '10 was almost 9% better (and over 6% to the positive) in the insured indexed accounts.

    CAVEAT: These are *NOT* flip-flop in & out strategies. Although I am showing what the real-world performance was the last 3 years, these are only for longterm investment money (especially mortgage freedom account timeframe money.) Although you have cash access to 90% of your balance at any time penalty free, it rarely makes sense to break into your piggybank earlier than 10 years.

    Cheers,
    Dave Donhoff
    Leverage Planner

  • sushipup1
    11 years ago
    last modified: 7 years ago

    Annuities always look good when compared to a short run when the market goes down.

  • dave_donhoff
    11 years ago
    last modified: 7 years ago

    In normal markets fixed-indexing looks much better over time.... but in crazy volatile markets they even look good in the short-term.

    Any timeframe from 3-10 years over the last 10-15 is a bit unfair in the advantages of fixed-indexing, frankly. There's just been so many dramatic down-spikes... and fixed-indexing naturally captures that volatility to the account holder's advantage.

    Long-run its going to chug along at 7-9% post-tax. Not sexy, not boring... just persistent.

    Dave Donhoff
    Leverage Planner

  • peter1110
    11 years ago
    last modified: 7 years ago

    Cratered interest rates, a still-scary stock market and the eroding real-estate situation make it vividly clear: The only decent, guaranteed return you can find these days is by paying off debt you've already incurred.

    If you're carrying credit card debt at 11%, for example, every dollar you pay off earns you an instant 11% return on your money. That's a great return in a world where

    Here is a link that might be useful: Mortgage Advice

  • sushipup1
    11 years ago
    last modified: 7 years ago

    Hey, Peter, are you selling anything in your link?

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