Should I put my money in mortgage?

There aren't really any "tax benefits" for prepaying your mortgage at any time. The reason to do so is because you want to reduce your debt, and/or because it makes sense from an asset allocation point of view.

-Sandra

No real tax benefits, but is that the best place for the $10K?

Depending on your mortgage interest rate that may not be so. Calculate your interest rate (adjusting for the mortgage interest deduction on your tax return) and if you can get that much or better AFTER TAXES from any investment that lies within your risk tolerance threshold, you will benefit mroe from the investment.

Cheers

One hears this kind of logic a lot, but it overlooks an important fact. The return on the supposedly superior investment always involves some risk and may not turn out as hoped. But it is "100% guaranteed" that the monthly mortgage interest will come due.

So, it is "100 percent guaranteed" that paying off the mortgage will have a yield depending on the interest rate and the tax calculations. No investment under the sun comes with that guarantee.

To rephrase what the first reply stated, there aren't any tax benefits to paying it during or after 2007 either.

Mortgage INTEREST only is tax-deductible, if you itemize and subject to a few other conditions. A lump sum of $10K applied to your mortgage will only result in paying down your PRINCIPAL, which has no direct tax impact whatsoever. In fact, by paying down your principal, you will actually lower your future interest payments, thereby lowering future potentially deductible amounts.

Even in my short time participating in this group, I see this topic comes up a lot, so check the archives. Besides after-tax return and risk issues, another way to look at it is, by paying down your mortgage you are trading a very liquid asset (after-tax cash) for a highly illiquid one (before-tax equity in residential real estate). If you need to meet a financial emergency tomorrow, cash in the bank will be available; equity in your home won't be nearly as useful (especially since there will most likely be other owners or lienholders involved).

-Mark Bole

My rate is 5.875% My YTD Interest is $9060 The 10K is currently in a MM at 2.32%. I could drop it in a 12 month CD locally at 4.55%

How do I calculate mortgage interest deduction?

You go to

find your marginal tax rate under "2006 Tax rate schedule". This is the tax you pay after deductions are taken, including 401(k) and any schedule A items (there are more, but this is my general reply).

I wouldn't be doing my job if I didn't ask; Are you funding your 401(k), at least capturing the company match if they offer one? Any credit card/ high interest debt? Is your long term savings on track? Need to save for any other long term goals?

In the end, you can do worse than paying the mortgage down, but a 5-7/8% mortgage is worth a second look, as we are near that rate in CDs.

In the end, it's your risk tolerance that will decide. There's no 'right' answer. JOE

Thanks for the link. I answered your questions below.

Yes, but only like 5%. You think I should maximize that?

No

I don't really have a long term savings, besides the 401K.

Just retirement.

Are you saying I should look at refinancing or .... I'm not sure I get your point.

Thanks!

to

and find your marginal tax rate under "2006 Tax rate schedule".>

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

Yes - we've discussed here that a worthy goal is 10-15% of gross pay towards retirement savings.

GOOD!

Well, you're actually off to a good start, no debt, low mortgage interest rate, and some 401(k). See my retirement page

along with the spreadsheet it links to. This is what I think of when talking about the long term numbers.

I'm really sorry for that choice of words. I meant to say, "given the choices out there, low interest rates on savings, and many bad places to put your money, paying the mortgage and getting a guaranteed 5-7/8% can be okay. On the other hand, even if you are very conservative (risk adverse), with CDs pushing 5-1/4%, you may decide to just hold on the money for now. I think that given the choice between the 401(k) or Roth IRA, and paying down the mortgage, I'd go with the first choices. I didn't mean to imply that you could refinance. If that rate is fixed, it's a beautiful thing.

JOE

What's your age and risk profile? A guaranteed "something near but really less than 5.875% due to tax factor" is pretty good if you pay down the mortgage.

The downside of sinking that money there is reduced liquidity (in case you have a job change, the car dies, huge plumbing problem at th house, or need to get your hands on that money for some contingency), but you can counteract that risk by having a home equity line opened on your home. Just because you open a HELOC doesn't mean you have to draw on it. Downside there is that HELOC rates are variable and certain to be above 5.875%. But, it's there if you need it. All and all, paying down the mortgage looks like a safe way to earn around 5% ish.

But, if your time horizons are long enough such that you can absorb more risk than that sure thing, you should be able to do a lot better than that.

The average market return in the stock and mutual fund markets is higher than 5.875%. There are a few ways you can tap into that.

The first thing may be to increase your 401k contributions significantly this year, max it out if possible. If you run into a shortfall on your monthly expenses, tap into that 10k until it runs down, and then readjust your 401k contribution back to a more sustainable level for yourself. This is a way you can load up your

401k which has tax advantages to it, and the potential for growth more than 5.875% if you choose funds wisely and have time.

Another non 401k option that isn't as tax friendly is to consider opening a brokerage account and tossing that money at index funds or reseearch a mutual fund or two that meets your risk objectives. With only $10k though (unfortunatley brokerage folks kinda sneeze at that), you may need to keep an eye on annual account maintenance fees with various brokerage places to make sure they don't undermine any gains you achieve. I think Schwab, for instance what's a total of like $50k these days to not hit you with maintenance fees. Not sure of the exact number.

Whatever you do, if you're relatively young, and are able to tolerate risk of losing money on paper in the near term, history says you'll want it in another vehicle than CD's and you'll be glad you did when it comes time to retire.

Read the prospectus. Returns are not guaranteed. I am not a financial planner, yadda yadda yadda. :-)

Best Regards,

-- Todd H.

Since I'm in Canada, the following logic might not appy. We can contribute to an RRSP which typically provides a tax refund of about

30%. So if you were up here, and had a contribution limit greater than/equal to that $10,000, you could contribute $10,000 and get $3000 back ... to put towards that mortgage ... the old "two birds" gambit :-)

Recently saw this article which cites a study that hints that folks paying down their mortgage vs putting more in 401k are often making a mistake:

-- Todd H.

It appears this thread which simply started with the question, "I have about 10K that I can pay against my mortgage. Are there any tax benefits to paying it before 2007?" has turned into a debate with two components:

1) Is it better to pre-pay one's mortgage or invest it in (whatever) 2) Is it okay to retire while still having a mortgage?

To #2, Scott Burns wrote an article which matches my view of 'it depends'. It was published 11/2/06 and the link is at

Dallas News urls tend to be 100+ characters which trip up many newsreaders.)

JOE

You're imposing YOUR risk adversity on the client. Maybe the client is okay with not having a guarantee. Neither you nor I can say.

That's why I specifically recommended that "the investment lie within your risk tolerance threshold." If the client is highly risk adverse he will not be able to find an investment with the necessary return and the mortgage will be in his best interest. But perhaps he is not risk adverse, in which case another investment would be better suited.

Thanks for the link, Joe. Some here may fall into the "Abundant" group, but suspect most of us will fall into the "Prudent" group. Note that in the Prudent group, they are far enough into the loan that not enough of the mortgage payment is interest to qualify for the tax deduction. May I add that while I was very glad to take the deduction when it was available to me, I wasn't stupid enough to think this was a good financial deal. I realized I could send $1000 to the bank or $280 to Uncle Sam. It always made me scream "Let me keep the $720!"

But it's interesting that even Scott Burns thinks you don't reach retirement with no mortgage, rather that upon reaching retirement you decide whether or not to pay it off. Why didn't the Prudents pay an extra $100 a month and have it paid off already?

Elizabeth Richardson

What if, in exchange for spending that $720 in interest, it'd allow you to make a couple thousand in gains in another vehicle?

Because if they were Prudent, they'd be funnelling that extra $100 a month into an investment vehicle that was outperforming their low fixed-interest mortgage rate so they'd end up ahead in the end with _more_ than enough to pay it off at retirement.

That's the point I'm not sure you're absorbing here. One can use borrowed money to invest with a relatively low degree of risk, and given historical gains of the market as a whole vs todays very low fixed interest rates, end up well ahead if you have a long enough time horizon.

Best Regards,

-- Todd H.

Sure, I live to serve. And given his wording "For them [the 'Abundants'], a mortgage can be a good thing. They are exceptions" I believe I've provided you a reliable author in support of your position.

Not that I can speak for Mr Burns, but it appeared to me that given the number of variables involved, and the way the question to him is phrased, he was really answering to what one should do the day they retire, keep or pay off the mortgage. BTW, since the Prudent's mortgage is so small, and interest so little, I agree they should pay it off, and more so, I agree with you, they should have planned to have it paid prior to retiring.

I like Scott Burns style on this matter, his reply shows some good insight, and that one size doesn't fit all. He both proves your point, and allows that there are exceptions which support my view. JOE

For that very reason it is misleading to simply compare yields without considering risk. As an extreme example: No one would switch from a conservative investment yielding 5% to an extremely risky investment having some chance of yielding 5.25% but probably no more. Or to put it another way, it would make more sense to pay off a loan with a rate of 5% than to invest the same money in something very risky that promises 5.25% but probably could never do better. So, if someone claims that a product can yield 10%, it is best to look at the risk factor, which is probably large, before comparing it to the 5% mortgage interest rate.

Agreed

'large' is relative. Even though the use of a bell curve is somewhat imprecise, the market (typically the S&P) is described as a bell curve with a mean of 10%+, and a standard deviation of 14%(?). One can tinker with the mix to bring down STD along with the return. I understand that as exhibited by the VIX, volatility has dropped, along with expected returns on the market as a whole. Either way, there is a trade off between a fixed return, and a risky return.

JOE

True, but too often a comparison is made between a product with negligible risk and one with substantial risk, solely on the basis of yield. For example, someone will say: "You are paying 5% on your mortgage, but the market historically has paid 10% over time, so it makes no sense to pay off the mortgage when you could put the money into stocks." This logic assumes that the 10% is a sure thing just like the 5% rate (among other questionable assumptions). I would prefer to pay off the mortgage first and then use the former monthly payments to invest in stocks.