mortgage interest vs standard deduction

Another possibility is to pay off the mortgage and then regularly put the monthlty payment formerly needed for the mortage into an investment account. Or do that with half the windfall money, etc.

Thanks Will.

I'd also like to state that in general I seldom recommend that a client actually make extra mortgage payments. More often I recommend that they park the money for the extra mortgage payments somewhere safe and allow them to accumulate until they have enough available to pay off the mortgage with a single check.

The vast majority of my clients have no emergency fund let alone 3 to 6 months of living expenses. Hence, parking the extra mortgage payments allows them to accumulate cash to cover these things if needed. IF they need the money it is far easier to get it this way than to try to get or increase a LOC on the house. As an aside - I've seen at least half a dozen clients in the last week who had their LOCs reduced by the banks under the premise that the LOC was based on equity that no longer exists due to a decline in housing values.

When they accumulate enough to actually pay off the house they can then choose to do whatever they want to do - pay it off or not.

I think the most important that anyone who comes here looking for advice to understand is simply this - ONE SIZE DOES NOT FIT ALL. Every situation is unique and action must be tailored to fit the specifics of the situation. Every single one of these situations includes both the quantitive - the numbers involved - as well as the qualitative - the emotions involved.

The BEST investment, or advice, in the world is no good if the investor doesn't understand it or is uncomfortable with it.

Gene E. Utterback, EA, RFC, ABA

As an aside - I've seen at least half a dozen

My HELOC was reduced ~30% about 6 months ago. But this is the Phoenix metro area and we had about the steepest rise and fall in the US fueled by out of state speculators.

Chip

Given what you've just said about saving a lump sum for a mortgage payoff vs. making accelerated payments, vs. what I actually am doing, I'd certainly agree that one size does NOT fit all.

Basic scenario---I bought a house after I retired in Aug. 2001. You can see what happened to the stock markets the following winter before I bought. I took an 80% first mortgage and used margin to close a no-points 5.75% 30 year mortgage. A tight and well-controlled budget assured that I had positive cash flow.

Took about a year to cover all secondary debt and a couple more to build a cash cushion for liquidity. Those two items came first. At the same time, I moved assets in my investment portfolios to securities that payed enough to cover mortgage interest. Once I'd reached those targets, I started paying extra to reduce mortgage debt. How much is a month-to-month decision based on maintaining an adequate, but not excessive, cash pool.

As things stand, I've paid off about a quarter of the mortgage principal, am close to the point where standard deduction equals itemized, but would reduce monthly cash surpluses by liquidating assets to pay off the mortgage. In the meantime, I'm not sitting on a mountain of non-productive (at CD rates) cash. That would reduce my after-tax income by more than mortgage servicing costs.

I may be fortunate that where I bought, fair market value of the property is close to double what I paid. Nonetheless, that money leveraged by the mortgage principal is producing more income than it costs to carry it, and until and unless that changes, I'll stick with paying the minimum plus any free cash that I don't want to invest.

Hank

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