You are hereForums / General mortgage discussion / Mortgage payoff philosophy
Mortgage payoff philosophy
A philosophical question for you do you think people should have their mortgage payed off as quick as possible?
Syndicate
You are hereForums / General mortgage discussion / Mortgage payoff philosophy
A philosophical question for you do you think people should have their mortgage payed off as quick as possible?
Some people seem to think that interest they pay into their mortgage to write off at tax time is a huge deal.
I paid nearly $12,000 in interest on my house last year yet I was only allowed to claim a small portion of it. Let's not forget that you don't get much of it back.
If you decide to not pay off your house sooner you get to say that you claimed very little of what you paid a lot into.
On the flip side, if you do pay off your house early, you can literally save thousands, tens of thousands and in some cases hundreds of thousands are saved in interest payments alone.
Those who know how the system works will earn the money. Those who are clueless about the system works will always pay the money.
Let me ask you this simple question. Do you want to be the person who works hard and continues to pay their mortgage for 15, 20, 30 and now 45 year or do you want to be the person who works hard, works smart pays off their house early and earns for the next 15, 20, 30 years.
Get your eyes opened to the possibilities of paying off your mortgage early.
I agree with you, but money merge accounts (this MMA not to be confused with MMA money *market* accounts which are a type of savings account) are not a magic pill to get there (there was a link to one I moderated out as spam).
Taking out a line of credit (a second or third mortgage) is a backwards step in home ownership, especially since no mortgage is fee-free to setup thanks to government filing fees. The home owner always ends up paying those fees in higher interest rates, rolled-in fees, or up front. Isn't the point to get rid of the mortgage, not get another one?
I never see a money merge account where they explain how to get out of their line of credit (secured against your home) when their "plan" is complete. They want you to keep it forever so they can charge you interest to use it instead of you charging a credit union interest to keep your money in a place like that.
Remember, the money merge and mortgage guys are in business to *earn* money, not give it away to your home ownership dream.
Paying a money merge company $3-4000 for some "magic" money software is much better spent on the principle to your mortgage or to keep in an emergency fund. The software isn't going to make your income go up, earn you more money, or get people to give it to you. Paying down on your mortgage principle and getting your income up to make that easier is the only way you're going to get your mortgage paid off.
I'm most familiar with about three major arguments when discussing mortgage payoff 1) as fast as you can - get out of debt 2) don't - the mortgage company is loaning you money you can invest in other places for a higher return 3) don't - you miss out on the tax write off. For the most part and for the majority of people, I think the actual math of 3) doesn't work out as a benefit. 2) does have benefits where you lose out on 6% on the mortgage, but earn 9% in mutual funds and make a net 3% (depending on the tax impacts of the returns). I think this argument is really only good if you have the actual mortgage loan funds invested and could pay-off the mortgage at any time (a net positive cash standing), where the actual outcome is most people spending it and living in debt, in effect promising 3x of their home value in salary to someone else over 30 years.
I tend to lean towards 1) - if the house is paid off you get the extra mental security of knowing no matter what you own it and though the benefits in the short term are fewer, you don't pay any interest to the mortgage company and can get the full 9% return for yourself.
It is not wise to put any money that you pull out of your mortgage into a mutual fund and I would never ever ever advise my client to do so. That is the job of Primerica. They tell their clients to use the mortgage to pay off debt and to take the savings and put it towards extra principle paid on the mortgage and money into a mutual fund, nice idea but for the most part doesn't work very well. Some things you want to keep in mind is that mortgage interest is deductible, and yes you want to have the money somewhere that if you got into a sticky situation that you could pay off the house or make the mortgage payments. Something that most people don't think about as they are paying their house off quickly as possible. For example, lets say you are paying extra principle every month, and then you lose your job, most people think that they can just take money out of their equity and make their mortgage payments. Wrong, banks do not loan based on the interest you will pay they loan based on your ability to pay. Nobody will give you a loan without a job. And if your house is almost completely paid off that bank will not hesitate to foreclose on you, they can take your house and make a profit. But if you are mortgaged to the hilt they will have to take a loss if they foreclose on you, so it is in their best interest to work with you.
So what to do with all that equity, put it into an annuity, or cash value life insurance, this is one of the smartest things that you can do for several reasons, one is that the cash can actually be used to make the mortgage payments if you lose your job, and outside of your equity it can earn more money, one thing that is guaranteed about equity is that it will earn absolutely nothing, year after year after year. And because of the tax advantages of life based products you can actually earn less then the interest rate you are paying on the mortgage and still come out ahead.
There is a little to crunch on.
Zack
I'm sorry for your clients that believe mutual funds are a bad idea. Companies like Vanguard and SSgA have ultra-low expenses, and no-load. Over time, the average fund earns 9% or so annually, and has done so for the last century (disclaimer: aggressiveness of the investment has a major impact on the volatility of the short-term).
I hadn't even considered the home equity consolidation loan aspect; most of the time I just assume that's such a bad idea people could figure out not to do it. When you pay off your credit cards and student loans with a home equity loan or refinance, you're turning unsecured debt into a larger lien on your home, a secured item. If you never paid on your credit cards and student loans ever again, there's nothing the creditors could do but ruin your credit. If you can't make your whole mortgage payment because you used up your equity to make a higher monthly payment, they take the place where you live, sleep, watch TV, and brush your teeth. The same goes for your car. It's a loan on your car; don't turn it into a loan on your house.
If you do out the math on the mortgage interest deduction, you need to have a household income of somewhere around $210,000 per year to be in a high enough tax bracket for it to offset the actual mortgage interest paid.
You can pay your mortgage with the equity in your home (which I consider on the list of last resorts), but you have to have the home equity line open before you get in trouble. When you get your mortgage, have the same people open a line of credit (of course you should have found someone with a good mortgage interest rate AND no yearly fee on an equity line). They already have your credit pulled, the property value assessment is done, and you're already sitting with a notary. Just let the equity line balance sit at zero and put the withdraw checks in a safe of some kind, out of sight, out of mind. When you get in trouble (again, last resort) write a check to yourself, deposit in your checking account, then write the mortgage payment from checking. As long as you're not late, they'll never notice a thing.
Equity earning nothing is also just a matter of perspective. If you have a 30 year mortgage, you're paying 6.25% year on current rates, so you could say you're not loosing 6.25% per year. Moreover, you could say the local real estate appreciation values are an unrealized profit on your equity. In another matter of perspective, money invested in a bank-ish type place is really just numbers on a computer somewhere and becomes something of value when you turn it into the tangible ownership of your home. I hope anyone reading this will research all the restrictions and fees associated with annuities. They are almost never the best place to invest money.
I will respond to your statements one at a time since they are varying topics.
Your disclaimer is the one selling point of annuities and why they are a better idea then mutual funds.
Lets say you have money invested money into mutual funds and they were earning 10 percent every year. And one year you took a loss of 10 percent, you need 11 percent gain the next year just to break even. That is something you don't need with annuities it resets and starts gaining again soon as the market goes back up. So while you might be ahead for a while one loss in your fund and annuities pass you up.
If you were to lose more money lets say 20 or 30 or even 80 percent, which many people did around 2001 you would need 25, 43 and 800 percent gains respectively.
On the rolling the payments into the mortgage you are missing the larger picture, you are taking higher monthly payments and making a lower affordable payment every month. But when we do this it is usually at the same time we use part of the equity to make an emergency fund. An emergency fund and the lower monthly payments make the client in a far better position then somewhere where they will ruin their credit or lose their car.
We are not talking about offsetting the mortgage interest paid we are talking about lowering your income by the mortgage interest paid, I realize that it does not completely pay for itself but that is also not the point, it is that you do not have to earn the same rate of return on your investments as you pay on your mortgage to come out ahead, as long as your investments are tax deferred.
I also agree that paying the mortgage with your equity is a last resort but consider that a line of credit is a very bad thing for your credit. It hurts your score to have it open, let alone to have a balance on it, which can sometimes be at an interest rate of 11%+, would you rather be paying that to a bank for the money you need or just be losing interest on your own cash. Yeah they will never notice a thing except for that nice rate they are getting off of you because you let all your money sit in your house.
First you are not losing 6.25% every year because it is deductible from your income, second it is earning nothing, that equity in your house does not gain your house will appreciate regardless of money being in it or not.
And those unrealized profits fluctuate when the market was up people were excited that they suddenly had more equity in their house, when the markets settled down to where they belong they suddenly lost money that they could have harnessed. The numbers in a computer somewhere is what could eventually pay off your house in one swoop some day, make your mortgage payment another, or pay for your kids college. Just because there are some limits and restrictions on annuities does not mean that is is the worst place to put money, but are you also forgetting that I mentioned cash value life insurance, EIUL's are a wonderful example of the mixture of life insurance and annuities. Though there are restrictions on both of these it is much better then a bank because you can actually get the money if you need it, even if there is a penalty, which depending on how much you take could be non-existent. Where as no bank will lend to you, except if you already have line of credit, if you are unemployed for example. So please do the research. Look into EIUL or annuities, and see that it is much better to borrow from yourself instead of a bank.
Zack
How is having an open line of credit so horrible for your credit score? If the balance is zero, it should decrease your debt to asset ratio - a good thing, and show you're able to be extended credit and manage it responsibly.
Its not because of your debt to assets ratio, it is because it is irresponsible to have one. I guess it is for a similar reason that if you opt out on those pre screened credit cards your credit score goes up too. If you don't need new credit cards and you don't need a line of credit you are more responsible and a better risk.
I don't have a moment now to give a nicely composed reply, but wanted to comment that I hope you're not steering people into whole life policies for retirement over an IRA funded by no-load mutual funds.
First I suggested annuities and cash value life insurance, by this I was referencing a EIUL or FUL as they are now called they are based on the s&p 500 and have no downside, when the market goes down some of them still credit 1% or more. The cash from a mortgage would be better put somewhere where it can be accessed before retirement age. Why would I suggest for anyone to put money into an account that has age limitations on when they can take the money out not time commitments, also IRA's have a required distribution after the age of 70.5 which is not known by most people.
Universal life is very different from Whole life. It would be worth some research to know the differences.
Zack
I actually know the difference - I got the Florida Legal Expense, Life, Health, and Variable Annuities agent license a while back just so I would be able to make decisions for myself.
First, let me put universal and whole life definitions out there as context for the rest of this comment. These come from the Florida Association of Insurance and Financial Advisors.
I'd hate to see your retirement portfolio if you don't believe in mutual funds or IRAs. The part of both whole an universal life you left out is their higher costs. Some people argue the extra cost is saved as the cash value of the policy, but that is as aforesaid, "after the company deducts its fee AND monthly cost" for the insurance coverage. While you can get your money out of a cash value life insurance policy, the cash withdraw is actually considered a loan from the policy, is bound by pre-prescribed limits, are deducted from the proceeds of any policy distributions at the time of death, and are penalized by interest fees. It's the policy owner's money and they're charging the policy owner interest to loan it back to them? That makes no sense at all! If you don't want to consider the distribution a loan, you have to cancel the policy and live without life insurance, which is the basic point of the policy in the first place. So really, it's still a life insurance policy, but with 2x the cost over a term policy.
Similarly, annuities are not great for the annuitant because of the gobs of fees involved with managing the annuity, in part because of the huge commission the salesperson gets to sell the annuity. Anyone confronted with an annuity sales proposal should run far away in my view. If you're curious, ask the salesperson how much their commission would be for the sale - that commission comes from what would be otherwise the profits the annuitant would receive over the period of the annuity contract.
If you're saving for retirement, putting the money in a tax-advantaged retirement account follows naturally. They money is for retirement, not a new car purchase, a new boat, college, a new watch, or the latest iPod. If you're saving for any of those short-term things, the money should be in a money market account or a Coverdell/529. Even if for some reason you had an emergency and needed the money out of your IRA before you retired the following reasons are considered legitimate withdraws without penalty:
In fact, since the contributions to a Roth IRA are after tax, you can withdraw all your contributions without penalty at any time for any reasons - it's only the earnings that are impacted by penalties outside the legit excuses. When you retire, the whole Roth distribution is tax free; in other words if all your retirement is in a Roth IRA, you'll never pay federal income tax ever again when you retire. Roth IRAs also don't have the 70.5 age requirement for distributions. Moreover you can invest IRAs as aggressively or conservatively as you like so where people might think the S&P 500 is too aggressive, they could invest in a mix of bond and money market mutual funds. For those people that start saving early, the majority of the funds they have at retirement are the result of compound interest and dividends anyway.
First I would like to say that the Florida commission of insurance is almost as bad as Minnesota, all joking aside down to business.
How long ago did you get your license, and are you still doing CE credits?
I don't know why you think that my retirement portfolio is a mess because I wont be paying taxes on most of my gains unlike mutual funds. And don't even start with IRA's the joke in the industry is that they are a ticking tax timebomb, unless your employer is matching an IRA is not the best way to go by far.
Higher costs? Oh are you talking about the death benefit, something my family gets that is higher then what I put in. I guess it is worth the $50 a month to me to make sure that while I am building my retirement that if something were to happen they get what I put in + some extra.
Also the rate of return on my EIUL is high enough and with the amount of cash I am putting in that the costs are paid by the interest earned, while still letting me keep the extra. Ok, pre-perscribed limits, what is a loan again? Of course it has limits, and of course the proceeds are deducted from the death benefit. What do you think will happen if you die and have a mortgage, the bank will start looking at your assets like a ravenous boar. While some insurance companies charge a heavy interest rate and only give you part of the interest back when you pay the loan in full, I do not work with them. The companies I work with simply put the cash you take out of the policy into a side account where it does not earn interest for you. It earns for them. But should you choose you can pay back the principle and the interest lost. Which does not count towards your 7 pay restrictions. So would you rather have the ability to pay interest to yourself or just give it away to a bank.
You do not have to cancel your policy to get money out of the account, it is called a partial surrender and is LIFO, last in first out. Which means you will be paying tax on the gain. I am beginning to wonder how long ago you took that exam. You can surrender most of the cash value as long there is enough to make the premium payments every month.
Twice the cost of a term policy? For whom? Depending on when you open the account it can be the same cost initially as a term policy depending on age, health and benefit amount. But lets talk long term here. When you are young term is cheap, so is universal life, but term expires and now you have to pay new rates at your attained age, and god forbid if something happened to your health and you didn't feel like adding that guaranteed renewable rider on the policy when you got it. Also that cash you are building in your UL can pay the policy when you are low on cash. Without a costly rider term insurance cannot do that.
Huge commission for an annuity are you on crack? Average commission on an annuity I see is around 3-8 percent. That is not much since I see much higher commissions on life insurance. Yes run away from someone showing you an annuity and he will be laughing when you are paying taxes through the nose on your mutual funds.
While those are advantages of Roth IRA, tell me how much can you put in there every month? Last I checked it is 4,000 a year, considering that I would about $450,000 to live if I started at 65 and took $30,000 a year as income for 15 years, living until I'm 80, I would need to contribute for about 80 years to get to where I need to be. And So what if the S&P 500 is aggressive, YOU ARE NOT LOSING MONEY WHEN IT GOES DOWN, so why watch your 401k become a 201k, pardon the joke, and just sit where you are at until the S&P goes back up.
Post new comment