ok - here's another little financial planning gem from within the extended family...
Currently have a house worth maybe $200+ with a $100k mortgage @ 8.25% from 1992 and the balance is about $85k.
So... what would be the prudent path ?
#1 - They never refi'd - so could go that way at 6%... #2 - They could sell some of their stocks/funds and payoff the house. #3 - Combo ?
comments & observations ?
There is no reason to refi if they are going to pay it off. So #3 is out. Otherwise not enough information. E.g. age? Income? etc. etc.
Paying off house is one aspect of a big picture. What other debt exists (credit card, car, retail)? How long until retirement? How long does family plan to live in house? How many BR in house? How many kids? When will kids be moving out? How much is saved for retirement? what type of accounts (Roth, 401k, traditional IRA, taxable....)?
#1 could be done regardless of answers to above question. The question might be refinance to 15 year or 30 year... depends on other answers.
This is a recurring topic. The first question is this; do they have enough itemized expenses to pass the standard deduction, without the mortgage? If not, the mortgage is costing them closer to the interest rate than the mort rate X (1-tax rate) that we look at. Selling off one's savings to pay off the mortgage may be the way to go, if they wont have high taxes to pay on the gains, are committed to taking the payment they don't have to make and saving the money in a well diversified portfolio. But they have proven their lack of financial savvy by being in this mortgage in the first place. I bought in '96, and am on my 4th mortgage, lowering the rate or reducing the term each time on a no-cost basis. The last deal left us at 5.24% 15 year term. 3% adds up to some money even on a $100K mortgage.
At the very least, they should refi down to 15 yrs. JOE
16 years into 30 and the interest starts shrinking rapidly.
Well, OP said the current balance is $85K so it would seem the current year interest is $7012. It would take until year 21 for the interest to drop below $5K/yr.
Either way, we don't know their tax bracket or what other deductions they have. I'd think you'd agree that mortgage interest that's not deductible is more expensive that if it were. What I still can't fathom is how they ignored the headlines "rates at historic lows" for the time the 30yr mortgage rates dropped below 6%. If the house is worth 200K vs balance of 85K, certainly loan to value wasn't the issue. JOE
OMFG. Wow. That's pretty bad. Heh... Of course the prudent path would've been refinance that loan 3 years ago when 5.125% 30 year mortgages were available.
Age of these folks? Employment future? Forseeable expenses in the future? Felt direction the neighborhood is gonna go? Projected return/position of existing stocks? Value of the tax deduction for mortgage interest? All factor in.
Refi-ing to a fixed 15 year mortgage should be able to save some money regardless of the stock decision.
-- Todd H.
30 year fixed mortgage @ 8.25% on $100,000. Monthly payment is $751. Interest the first month is $687. Interest at the end of 16 years is $513. Loan balance is $68,567. This is much lower than OP states. Maybe they are adding in a second. 30 year fixed mortgage @ 6.25% on $68,567. Monthly payment is $422. 15 year fixed mortgage @ 6.25% on $68,567. Monthly payment is $588.
Not exactly sure what they gave me for numbers.... It looks like numbers from back in 2003 when I thought they refi'd... but didn't. On my spreadsheet, for $100k loan @ 8.25% your monthly + first month are correct. Since I'm not sure of the "years", now it might be 14yrs and it looks like maybe $79k is left outstanding.
BTW - on the mortgage interest expense... I looked at my own TurboTax for 2005 and changed our Schedule A. For 2005 (with, and then without mortgage interest, but still R.E. taxes) total deductions = $17,582 refund = $3,479 effective tax rate = 6.41% total deductions = $10,559 refund = $2,429 effective tax rate = 7.74%
So - in the context of the discussion, I'm not sure yet what this means..... and the effect of paying of a mortgage or not, vs keeping the money in an investing account.
17582-10559= 7023 (the mort interest) 3479-2429= 1050 (the tax difference based on the mort interest) 1050/7023 = .1495 = you are in the 15% bracket. After tax, the 8.25 mortgage has a cost to you of 7.01%.
You mention again paying the mortgage vs investing the money. If that the choice given here, I'd pay it off. But with rates still low, I'd refinance to a fixed, 15 year mortgage, and be sure to save the difference. Still not know the rest of the situation, 401/IRA savings, other saving, debt, etc., it's tough to give a well informed answer.
BTW, the 'effective' rate is ok to know, but the more important rate is the one I gave you, the marginal rate. This is what the next dollar costs you in federal tax, or the amount the next dollar of interest (or charity donation, etc.) your taxes are reduced.
JOE JoeTaxpayer.com
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