paying off mortgage. new tax law.

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Submitted by scaredyclassic on January 17, 2018 - 8:59am

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....

Submitted by flu on January 17, 2018 - 9:11am.

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.

Submitted by scaredyclassic on January 17, 2018 - 9:40am.

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...

Submitted by FlyerInHi on January 17, 2018 - 9:48am.

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

Submitted by scaredyclassic on January 17, 2018 - 10:07am.

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...

Submitted by FlyerInHi on January 17, 2018 - 10:22am.

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.

Submitted by scaredyclassic on January 17, 2018 - 10:54am.

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..

Submitted by scaredyclassic on January 17, 2018 - 11:06am.

...

Submitted by scaredyclassic on January 17, 2018 - 1:56pm.

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...

Submitted by harvey on January 17, 2018 - 3:27pm.

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.

Submitted by scaredyclassic on January 17, 2018 - 3:30pm.

45% state and fed.?

Submitted by spdrun on January 17, 2018 - 3:52pm.

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.

Submitted by harvey on January 17, 2018 - 4:09pm.

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.)

Submitted by scaredyclassic on January 17, 2018 - 4:41pm.

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?

Submitted by harvey on January 17, 2018 - 5:18pm.

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.

Submitted by scaredyclassic on January 17, 2018 - 9:46pm.

My numbers are way off. It’s 1100 and 650 p & I.

And I’m a little off the deep end calculating I’d need a 12 perc return when I’m basically counting not gains but getting back principal I’d have paid lump sum over many years,

OTOH

I fear this 200k could get spent quickly on home improvements.

Even a clean 3.375 perc is better than a new kitchen.

The money has to go somewhere. What’re my safer options. I can’t leave it in a money mkt fund.

Cali muni bonds?

I wouldn’t have thought interest rates would still be this low n 2018. It’s almost like I’m capitulating.

Submitted by FlyerInHi on January 17, 2018 - 10:30pm.

As Harvey pointed out, you can’t include the principal portion.

I would buy a rental property if I were you. You can find something that cash flows nicely in riverside county. High demand for rentals right now.
But sure, a good recession may cause your tenants to lose their jobs.

Or buy your kids condos where they work or go to school.

Will you enjoy the new kitchen or home improvements?

Submitted by henrysd on January 17, 2018 - 10:43pm.

Paying off mortgage actually makes some sense to you. Your mortgage interest is only $13K a year, you are only allowed $10K on SALT and property tax to deduct. If you don't have large charitable donation and you itemize, you have only $23K deduction, less desirable than taking simple standard deduction of $24K. The $10K SALT limit won't increase for inflation, but standard deduction adjusts for inflation(chain based). Maybe next year it becomes 25K, a few years later you will find it is a lot bigger than itemizing.

In another language your mortgage interest is basically no longer deductible in federal tax, even though still deductible in CA state tax.

Submitted by moneymaker on January 18, 2018 - 8:24am.

A lot of variables to consider, your age, your risk tolerance, kids (college fund), desires (possibly wifes desires here too), where is the money coming from? In my case I have less to pay off at a lower rate, however I can still deduct and not get hit by caps. Personally I would pay it off if the money is coming out of the stock market, but hey I've been wrong many times before so I think you should consult the wife. If the money is sitting in a money market account then I would say it is probably a wash and don't lose any sleep over it. Max out 401k/IRA/college fund and then count your blessings.
You should have already refi'd into a 15 year to get the best rate and deduction, if you didn't then that's one more thing you can kick yourself for.

Submitted by moneymaker on January 18, 2018 - 8:34am.

Isn't capital gains on the interest from the 370k only 15%? On the other hand if (when) interest rates rise the money market (bonds) is probably not a good idea. Buy some gold and make sure you have an alarm system!

Submitted by Ribbles on January 18, 2018 - 10:24am.

flu wrote:
there is a sense of relief not have a large debt load hanging over your head.
Agreed. If I had the wherewithal to pay off my primary, in this market, I would do that before buying a rental in the inland empire (buying a rental in flyover country is another story). Yes, you have the property tax responsibility, but you'll have that anyway. If you had to, you could rent out a room to cover it. Or rent the whole house out and get an apartment. We specifically bought our house because of the separate casita, currently rented to the inlaws.

In case I suddenly kick the bucket, I made my wife promise she will use the life insurance money to pay off the mortgage.

Submitted by Ribbles on January 18, 2018 - 10:28am.

FlyerInHi wrote:
You can find something that cash flows nicely in riverside county. High demand for rentals right now.
I've considered buying a couple rolling acres in Temecula, nicely landscape it, put in two restroom/dressing room buildings (bride and groom), and then undercut the wineries for weddings by half. Maybe wifey could become a photographer.

Submitted by flu on January 18, 2018 - 12:19pm.

moneymaker wrote:
A lot of variables to consider, your age, your risk tolerance, kids (college fund), desires (possibly wifes desires here too), where is the money coming from? In my case I have less to pay off at a lower rate, however I can still deduct and not get hit by caps. Personally I would pay it off if the money is coming out of the stock market, but hey I've been wrong many times before so I think you should consult the wife. If the money is sitting in a money market account then I would say it is probably a wash and don't lose any sleep over it. Max out 401k/IRA/college fund and then count your blessings.
You should have already refi'd into a 15 year to get the best rate and deduction, if you didn't then that's one more thing you can kick yourself for.

I think for those of you that can, you should take advantage of the tax free distribution of the 529 college savings plan, but working with a trusted relative that sends their kids to a private school, in which you pay for their tuition and they gift you back the cost of the tuition, so you can get all of your investment returns in the 529 plan tax free.

Submitted by hmc on January 25, 2018 - 11:05pm.

I may miss something, isn't mortgage interest for up to 750k is (income) tax deductable?

AMT kills property tax deduction but not mortgage interest deduction unless it's changed in new tax reform?

Submitted by Escoguy on January 26, 2018 - 8:41am.

It doesn't have to be all or nothing, you can pay down 50% of the mortgage and get a modification to keep the same term. Might cost $500 but you then get a 50% lower payment.

With the remainder you can invest in a combination of Vanguard Muni and closed end muni bond funds to make 3-5% tax free.

The monthly savings can the be put into two index funds 50% muni bonds and 50% total stock market.

I personally like: VPGDX Vanguard Managed Payout Fund Investor Shares

Later if you decide you want to pay it all off, you can or you can continue with stocks or used some of the funds to buy more property.

We paid off our first home about 5 years ago. It allowed us to rent it out and buy a bigger house (short sale) in 2013. The intersting thing was, the rent from the first home covered the mortgage on the new one. So we kept doing this three more times to get to 6 properties, of which 2 are free and clear. We owe about 1.5M on properties worth 4.2M now and the cash flow is good enough so work is optional.

I continue to work but to buy the things I wouldn't be comfortable selling assets to buy like vacations, new cars, water treatments, major landscape projects, additional solar panels etc.

So paying off a mortgage can be a great step to financial freedom, but don't sweat it too much as there are many options.

Submitted by scaredyclassic on January 26, 2018 - 10:03am.

i see that now. my mortgage co. has online calculator to play with new payoff scenarios and its easy to adjust payments.

cant seem to commit.

if i stayed here for another 25 years i think id rather keep the mortgage,as an inflation hedge.

if im leaving within 10 years, rather pay it off.

although irdational, partial payoff feels more futile, less gratifying.

temecula prob uninhabitable due to global warming by 2043

Submitted by flu on February 5, 2018 - 2:17pm.

This past week is one of the reasons why I chose to pay off the mortgage off of most of my properties. When panic hits the streets, and markets tank, and my 401k is off $80k+ from peak in a little less than 2 weeks....

No matter what, i still have a roof over my head with minimal strings attached to a bank.

In hindsight, it would have been good if I paid off that $39k balance on the last rental property too. Because that amount (after taxes) went out the door in two weeks. lol.

Market correction?
Bring it on.

Submitted by sellshomes on February 6, 2018 - 10:15pm.

For me paying off the mortgage is more of a peace of mind thing.

Not a lot of posts lately on what people are thinking the next year or 2 will bring to local housing markets, I’d love peoples opinions.

Lately talking to lotsa people that are tempted to cash out. But than where to move?? Market still has plenty of demand as I see it.

Submitted by scaredyclassic on February 6, 2018 - 10:48pm.

I think im ready to move to hawaii.

Submitted by carlsbadworker on February 7, 2018 - 9:47am.

scaredyclassic wrote:
I think im ready to move to hawaii.

So missile from Kim Jong-un is not on your scaredy list?

Submitted by FlyerInHi on February 7, 2018 - 10:50am.

scaredyclassic wrote:
I think im ready to move to hawaii.

We can become neighbors in retirement.
I like busy Waikiki where I can walk to restaurants.

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