paying off mortgage. new tax law.

[scaredyclassic]

limited deductibility might change analysis for paying off mortgage early.

AMT kills that deduction anyway. wrote about this a few weeks ago, but tax law was in flux.

i owe about 370k at 3.375.

i think its about 13,000 a year im paying in interest? to get a 13,000 return id need to earn about 24,000 pretax. thats over 6% of 370k.

6 perc pretax return sounds damn good, even for the stockmarket. is it really so conservative an investment to pay off mortgage? 6 perc pretax sounds good, even longterm.

why is this paying off mortgage considered conservative move…. longterm isnt 7 perc considered an optimistic, perhaps unrealistic avg stock mkt return? it is when discussing pension plans projected rates of return, anyway…

i think im gonna do this….

[Coronita]

there is a sense of relief not have a large debt load hanging over your head.

My good friend and ex-VP once said something during my annual bonus/review cycle like “I guess being that you are debt free and more or less financially independent, we have to treat you nicely otherwise you might give us the finger and leave….”

I smiled and said, “yeah, pretty much”…

İ ended up getting the largest RSU stock grant ar my level that in my department that year.

[scaredyclassic]

its not the debt im worried about, its the terms.

3.375 sounds low, but thats paid with posttax money. its not really that low.

im just not confident i can earn 6 perc pretax anywhere else.

i guess my “problem” is we are earning much more than we are spending and i need to do something…first world problem, i guess, but fuck, capitalism is stressful…

[FlyerInHi]

Weren’t you thinking about building on your land? Can you subdivide or build a couple guest houses you can rent out?

[scaredyclassic]

My wife still wants to do that but jeez. It sounds risky and how much more than 6 percent could we really make?

Too scared…

Another way to look at it. I pay about 2100 a month p and I.

Figure 25,000 a year. If I pay off 370k, it’s like I’m getting an annuity of 25000 a year assuming we remain employed…. For the next 25 years. That’s 625000, Plus I get to own the house.

Not sure how much a 25k yearly annuity is worth but it’s probably expensive.

However I was looking forward to making monthly payment with inflated pocket change in 2035.

I really want to do the rational thing…

[FlyerInHi]

Do it. Temecula wine country is becoming desirable.

I know a lady in Sonoma who easily makes $5000/mo renting out a cottage to vacationers. And the cottage is nothing — old house of junk that is marketed as “historic”.

If I were you, I’d build to the max allowed by zoning. Build an extension to the house as a guest wing (much easier to permit). Then build companion units.

[scaredyclassic]

A decent recession and that’s over.

Incidentally the amount of building in Temecula and murrieta is insane. Far from freeway. They’re getting built so fast..

[scaredyclassic]

…

[scaredyclassic]

an annuity sales website estimated id get a lifetime annuity of 1550 a mo if i gave them 370k.

paying the mortgage id be saving 2100 a month p and i for 25 years remaining on loan plus 370k in equity TODAY. almost like getting a better annuity FREE.

seems like a Way better deal than the annuity. 25 years is likely close to a lifetime annuity for me.

or maybe its more like a,25 year bond. thats currently at 2.8 perc. less than 2 perc after taxes. the mortgage payoff is at least double that….

Maybe im overthinking this, but…where am I going astray in my calculations…

If I didn’t have a mortgage, I’d be up about 2,100 a month from p&I I did not pay.

That’s about $25,000 a year I’d have extra in the bank every year.

In order to get $25,000 in the bank ordinarily, I’d have to earn $45,000 (minus taxes, would leave me with 25k)

$45000 a year from 370,000 is about a 12 percent pretax return. There’s no way in hell any investment is going to spin off a guaranteed 12 percent pretax a year.

I’m not sure how I got to 12% froma 3.375% mortgage…I suppose I’m partially just getting my principal returned. But I do get the equity in the home.

Argh. Not sure….

Am I double counting or miscounting here? Have I simply gone mad???!!@@@

i think my heart really wants to pay it off, but my mind is looking for justification that this is a smart and not overly conservative financial move.

the reality is if i dont move fast my wife will probably spend 75k renovating the kitchen…

[Anonymous]

I never understood the idea that risk has been eliminated by paying off a mortgage.

They can still take your investment if you don’t pay property tax.

If the mortgage is paid-off, what they take has more value.

If you own property, you need an income to keep it.

PS: I haven’t done the math but your numbers seem off. How do you get from 3.375% to 6% ? Your tax rate is not that high.

[scaredyclassic]

45% state and fed.?

[spdrun]

Property tax rate is about 1.25% of purchase value + (capped at 2%) appreciation. If you can’t get a 1-2% cap from renting it out, worst case, you have bigger problems…

And if it’s free-and-clear, the terms of a loan can’t prevent you from renting it.

[Anonymous]

With that interest rate, I think the number you need to beat is less than 5%. Not easy to do consistently year after year, but very likely to average in a 30 or even 15 year time frame. It’s the basic long-term vs short-term trade.

I also wouldn’t use an annuity rate as a point of comparison. Annuity rates are not rates of investment return. (You don’t get your principal back when you die.)

[scaredyclassic]

I do not see how a 5% return on 370,000 would beat paying off the mortgage.

5% on 370,000 is 18,500 a year. Minus 45% taxes leaves me with about 10,000 extra in the bank every year after taxes.

Paying off the mortgage leaves me with about 25,000 extra in the bank every year (2,100 p&i x 12) after taxes.

What am I missing here? Am I being obtuse to something obvious? How in the hell is 5% return anywhere close to matching the return on paying this off?

[Anonymous]

The $2100 mortgage payment is also paying off the mortgage.

You probably won’t pay your full 45% tax rate on any long-term investment.

[Author]

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