Advantages and disadvantages of paying off a mortgage early.

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dave holl

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That is my question. We owe approx. $40K on our home mortgage and are able to comfortably pay the balance, the money coming from an account which is drawing 5%-8% interest. Tax would be paid upon withdrawal.
I am 73 and wife is 66 and have no other debts other than a small truck loan. The interest on the mortgage is 4%

Monies could be withdrawn monthly or as in one lump sum and applied to the mortgage. Taxes would be paid accordingly.

Both of us dislike being in debt and wish to pay it off, but is that the correct decision, being that we gain no tax advantage from the mortgage interest, falling into the standard deduction come federal tax time?

I realize the best answer to my question necessitates getting in the weeds so to speak........income, long term plans, etc.

Just thought I'd ask you financial advisors, people who have done it, or are thinking about it to see any pitfalls or things to be aware of when contemplating such a payoff.
Thanks for your time and consideration.
Dave
 
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One variable would be, what is the interest rate on your mortgage?
I would assume it is far less than what you are earning on the money.

Normally I would say pay off the mortgage but it appears that you would be leaving money on the table if you did.
 
Maybe Not

We live in long term inflationary times and inflation tends to favor the debtor as you're paying off your obligation with cheaper dollars. What you need to do is consult with a financial planner to ascertain if it is in your best interest to retire the debt. Also, mortgages are front loaded with interest payments, giving you a larger tax refund in the earlier years when you need it most.
 
dave holl said:
That is my question. We owe approx. $40K on our home mortgage and are able to comfortably pay the balance, the money coming from an account which is drawing 5%-8% interest. Tax would be paid upon withdrawal.
I am 73 and wife is 66 and have no other debts other than a small truck loan.

Monies could be withdrawn monthly or as in one lump sum and applied to the mortgage. Taxes would be paid accordingly.

Both of us dislike being in debt and wish to pay it off, but is that the correct decision, being that we gain no tax advantage from the mortgage interest, falling into the standard deduction come federal tax time?

I realize the best answer to my question necessitates getting in the weeds so to speak........income, long term plans, etc.

Just thought I'd ask you financial advisors, people who have done it, or are thinking about it to see any pitfalls or things to be aware of when contemplating such a payoff.
Thanks for your time and consideration.
Dave
Click to expand...

We both retired (me 02, her 05) and our goal was to have no mortgage to contend with. It does make your financial life much simpler without a payment to be made. Of course we have other bills like taxes, insurance. We fit into the bolded above! We also put our property in trust utilizing a lawyer that specialize in elder issues and did other legal paperwork that is appropriate for our age to protect our assets.

Some of that has up to a 5 year time before it goes into effect, We started the clock rolling 7 years ago so we and our children are good to go.
 
If your income % rate is higher than your mortgage rate (which it sounds like) I'd keep the money making money. Getting 5-8% these days is hard to do, and if yours is in some form of guaranteed rate (like a bond), even better. Otherwise, paying off the mortgage is a nice relief feeling - we finally did ours by paying more early every month for 3 years and now don't have to worry about loss of a job quite as much.
 
For most people, there is no tax advantage to having a mortgage, unless you have a big one which takes you somewhat over the standard deduction level. However, if you have your reserves in some investments with a high return rate, it is probably better to keep them there. Think of it this way. If you have that $40K in some investment paying 10% (and yes, that is possible), you are making $4k per year. That will stop when you use that $40K to pay off your mortgage. But if you have $40K sitting in a bank account paying essentially nothing, then you might as well use it to pay off your mortgage.

I am not a believer in having a mortgage, and the few I have had, I have paid off as quickly as I could. Having some considerable experience in banking, I hate most financial institutions and want to have as little as possible to do with them.
 
As ONEOUNCELOAD noted, as long as your savings and investment ROR's are above the mortgage rate, keep the mortgage. You're using the bank's money for the net difference.

Now, I will disagree with the desire to pay off the mortgage early. As long as you're net ahead in interest, you're taking capital from your investment base to service debt. Never a good idea (IMHO). The more capital you have at higher interest rates, the more you'll accelerate your earnings. You never want to diminish the capital base without a really good cause.
 
dave holl said:
We owe approx. $40K on our home mortgage and are able to comfortably pay the balance, the money coming from an account which is drawing 5%-8% interest. Tax would be paid upon withdrawal.

. The interest on the mortgage is 4%
Click to expand...

AS long as you can comfortable pay the mortgage without taking money from the account. I would not withdraw from it.

Your would be spending 5%-8% money to save an a 4% debt.

Simple math for me. I have investments paying me higher interest than I am paying on a loan.
I just make regular monthly payments on the loan using current income.

Bekeart
 
Don't like the comment you will own taxes to withdraw the money to pay off the mortgage.
Paying off your mortgage and getting completely debt free is a good feeling!
Now when I calculate my net worth, it's all adding!
No subtracting in sight!
 
Most of the interest on your mortgage was paid in the earlier years.Im assuming you're quite a few years into this mortgage.Add up the payments left and compare that number to the payoff amount.Then compare that number to the penalty you'll pay on withdrawing from your retirement acct and the interest that won't be earned
 
FWIW, here's my take:

By paying 4% interest from an account that has been returning 1 to 3% more interest, you would be losing money by taking that money to pay off the mortgage. If possible, you are better off using money that has been taxed (pension, SS, earnings) and leave the other money in it's account. 5 to 8% interest is better than you will see from any bank savings account, out side of promotional specials which will lock the investment in for XXX number of months or years.

If the interest on your investment was lower than the mortgage companies 4%, then I would say go for it!

While it certainly feels great to no longer be in debt to a mortgage company, knowing you could, if necessary, pay them off anytime should feel equally as satisfying.
 
No one can give you an answer without knowing all the information, which of course is better left to your financial advisor, accountant or whatever.

How long is the mortgage, , how long is left( how much is principle and how much is interest) how much per month, what tax bracket etc, etc.????
 
Back when I was working and we had a mortgage, I did a Excel spreadsheet to calculate principle and interest paid each month. The interest was astounding on the front end of the loan. It kept us motivated to pay additional principle each month, and with the Lord's help we were able to pay it off after 12.5 years.

Have a blessed day,

Leon
 
I paid both of my houses off at right around 15-16 years which saved me many thousands of dollars.Of course,my alcoholic business partner/wife managed to blow it all to hell anyway, including the equity!!
The best laid plans...
 
Financially you're better off keeping the mortgage...the 5% - 8% return on the savings is more than you're paying on the mortgage, and if you itemize your taxes and deduct the interest then the relative difference is even greater. That being said, there is peace of mind associated with having your house paid off.

I'd pay off the truck loan...i bet you're paying higher interest on it and its probably not tax deductible.
 
You are making more on the money than you would save in interest by paying the mortgage off. Plus you would have a bump in income the year you paid it off so you need to put that in the calculation of extra taxes due.
 
The best way to save money on a mortgage is way back when the debt is originated. By making more principal payments in the beginning can take thousands off the back end. Doesn't have to be double principle payment, but at least something. I discovered this about 5 years into my last mortgage. I started making additional principal payments of $100/month and paid off my mortgage 12 years early. This was all before the housing market blowup and insane home prices. Now, I get to keep all my pension & SS money in my dirty lil grubs except for Federal Withholding which they take before I ever see it. I don't even have to move into town. Town is moving in all around me.
 
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