Reduce Mortgage or Invest Funds?

[Unregistered]

We currently have a $200,000.00 mortgage, 30yr @6.0 interest on a new home. We have $185,000.00 funds extra from the sale of our home, and we were wondering if we should paid our mortgage down or invest the $185,000.00. The banker told us to invest the money. We are both covered by a tax deferred retirement plan at work. We are 48 and 50 years old if that makes a difference.

Thank you for any advise or how to calculate our savings on investing or mortgage reduction.

What to DOOOOOO...

[jimmcg]

For starters look at the projected before tax net return you figure you might get on investing the funds and compare that to the six percent before tax cost of carrying the mortgage. This calculation can get somewhat complex so I would suggest you have an indepenent financial consultant run the numbers. Get someone who does not stand to benefit by earning commissions on the investment of your funds. This rules out most bankers.....Good luck.

[jainen]

I'll bet he did

>>The banker told us to invest the money<<

I'll bet he did! and has the perfect fund for you! And your realtor has a perfect rental to sell you. And your best friend has a sure-fire multi-level you can buy into. For 185 grand, I got an idea myself!

The money question is whether you can earn more than 6% by investing. Obviously there are ways, but then you have to consider you own personal tolerance for risk. In the worst case, the banker embezzles all your money and you lose both your jobs and the housing market crashes at the same time, so you are homeless! In the best case you make a killing on the stock market and retire early! In the middle, you pay off your home so that no matter what happens at least nobody can take that from you.

You can also pay off half, and keep the rest for emergencies. Remember that as you pay down the loan, you lose the potential tax deduction too.

Whatever you do, make sure you BOTH agree 100%. None of this "I trust your judgement" nonsense.

[veritas]

My instincts tell me...

Large sums of money seem to find places to go quickly. I would say at you age paying down the mortgage makes sense. Keep some back for emergency fund and pour everything you can into your retirement acounts.

[S T]

Goal

I would think the goal would be to pay down the mortgage by retirement date. You can minimize the interest paid on a 30 year note, by adding additional principal payments. An amortization can be calculated to see how much additional principal payments would have to be made to pay the mortgage in either 15 years or 20 years.

So you could try to "safely" invest the $185,000, take that interest earned to make additional principal payments and reduce the interest paid out and shorten your term. I am not sure exactly how much the mortgage term is shortened by one extra payment each 12 months, but I want to say it is something like 6 or 7 years.

Continue to maximize your contributions to your deferred retirements at work. The goal is to be as debt free as possible at retirement and have as much in retirement accounts to systematically draw from during retirement years.

Sandy

[jainen]

This goal is popular

>>The goal is to be as debt free as possible at retirement<<

This goal is popular but by no means universal. Many retirees use insurance for security and prefer to remain heavily leveraged or have no assets.

[dyne]

Reduce Mortgage or Invest Funds

I wrote a newsletter which I give to my clients about this question.
From a tax approach I believe it is better to pay off or pay down your mortgage.
Consider that if you are in a 28% tax bracket, you only reduce your federal tax
by $280.00 for every $1,000.00 of interest that you pay. That is NOT a good deal!
Would you purchase a car or washing machine, etc. worth $280 and pay $1,000.00?
So, while there is some tax benefit for paying mortgage interest, it is not much.
Once your mortgage is paid off, you will probably not be able to itemize. But the
standard deduction is large and will soon be much larger so the differance between
being able to itemize or claiming the standard deduction becomes less and less of a
tax benefit. And if your income is high enough the itemized deductions are phased out,
further reducing the tax benefit of any mortgage interest deduction. Also consider that
interest or dividends upon money invested will be 100% taxed compared to the home
mortgage interest deduction of 28% or whatever bracket you are in. And most people
prefer the piece of mind of paying off a debt.

[dyne]

More re Home Mortgage

In my post above I referred to a 28% tax bracket. You should also realize that
the standard deduction reduces the actual net tax involved. Only itemized deductions
in EXCESS of the standard deduction provide ANY tax benefit. Imagine that your
total itemized deductions only total $10,100 and the standard deduction was $10,000.
Obviously you derived little benefit from itemizing, regardless of your tax bracket.
In addition it is expected that huge increases in the standard deduction are coming
in the near future, making it difficult or impossible for many taxpayers to even itemize.
Most people who are in the 28% tax bracket actually pay a much lower net federal tax of
perhaps 14% or thereabouts. This percentage is obtained by dividing the net federal tax by
the adjusted gross income. SO, a taxpayer in a 28% tax bracket will only obtain a
tax benefit of 14% of every $1,000 paid in interest or $140.00.

[Unregistered]

Consult a CFP

Although most of this is good advice, I believe you should consult a fee-based Certified Financial Planner (CFP). As with all professionals, getting a recommendation from a friend, business associate, etc. is best.

[jainen]

I agree

>>while there is some tax benefit for paying mortgage interest, it is not much<<

I agree, and it's why in my post I called it a "potential deduction." You are borrowing money at 6% but the effective cost might be only 4-1/2% in the 25% bracket. That makes it easier to invest profitably. You only need to get an after-tax yield of 5%.

[BOB W]

Quick Note.

You need to talk to all those people how were invested in the market in 1999- 2001 to see how " invest the rest" worked for them. Todays market is very uncertain as well. There is a WAR going on. Some people don't think there is, but hopefully most understand this.

Wouldn't it be nice to only have to pay your real estate taxes, utilities and food.

[sea-tax]

Look UR you need to do the math and meet with a certified financial palnner in your area. Certain facts which my fellow posters seem not to realize that in any 10year period in the market you have always made money( 1980 to 1990 and so on). The fact is that when you want the money it may be a down period wait a year or two it will be back up. Statistically the market will have 6-7 up years and 3-4 down years.

You need to make sure that paying off that mortgage is the right thing for you. There is a certain level of risk with this choice. First would be liquidity. Once you payoff mortgage you can not unring that bell if you need the money, you have to refi and pay fees and oh yeah you will have a mortgage again. Second would be the mortagage payment, just because you payoff principal that doesn't automatically make your payment lower. In your case I think this is less important because I think you will be paying the whole amount off.

I just caution you to think before you act it can be a life changing decision and you should hear all the angles. I would say that if you invested your money in a moderate risk level mutual fund setting and had a planner who was on top of it that at least this provides you with options. If it doesn't work out then you can always take the money a payoff the mortgage. Mutual funds don't disappear over night, specially when you are diversified and take a balanced approach. Good Luck!

[Bees Knees]

My advice is pay off the mortgage. It is a guaranteed 6% rate of return on the money. What other investment can guarantee that kind of rate of return?

Think of it this way...Next 9/11 tragedy, what would make you feel better? Having half your investment go away for 5 years until the market recovers? Or knowing you still benefit from the 6% mortgage you no longer have to pay? Even if you lose your job, you have more freedom to choose which route to go for your next job, if you are debt free and not forced to decide something quick because the next mortgage payment is due.

[sea-tax]

[QUOTE=Bees Knees]My advice is pay off the mortgage. It is a guaranteed 6% rate of return on the money. What other investment can guarantee that kind of rate of return?











What other investment can guarantee that kind of return?

Well guarantee no , there are few guarantees in life, but I can name alot that can get more than 6% with little to marginal additional risk.

Say Rochester Nationl Municipals fund from oppenheimer (ORNAX)
Since 1993 paying a sales charge you would have gotten 6.32% tax free. Thats like what a 8 to 9 % yield taxable.

This is just one example and I haven't even begun to scratch the surface. You could do Muni Bond ladders, some Vaiable annuities which have guaranteed rates of return. The point is that while paying off the mortgage might be the prudent thing to do we really have no clue as to the specifics of this case. What is the client's risk potential, how much savings do they have , what's their retirement look like . these are just a few things to consider.
UR like I said before go talk to a educated professional who knows your situation.

[Bees Knees]

Like I said, what other investment can guarantee 6% rate of return? You mentioned none. It is true...few things in life are guaranteed. Paying off the mortgage and saving 6% is one of them.