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It's kind of hard to answer your hypothetical question without knowing a few more details. Do you plan to stay in your house? How stable is your income? Do you have a family, if so, how's their health? How's your health?
If you had $150K in stocks and mutual funds, I bet you had quite a bit more than that a few years ago.
The interest rate of the mortgage and the tax consequences are really not as big a deal as some make it out to be. If you plan on staying put in the house, income is stable, and health is okay, and there isn't some other strange financial concern, I'd pay off the mortgage and invest the house payment each and every month. If that's not the case, then I would keep the cash in investments and work to pay off the house as quickly as I could. Either way, you should thank your luck stars, you are in much better financial shape than most. Hypothetically speaking of course.
If you believe that the past will repeat itself then you should not pay the house off early as your investments will far exceed the rate of return of a paid off house. That is very simplistic, but then again the OPs situation/question is somewhat simple isn't it?
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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I don't do Ramsey (disclaimer)
I would not even consider paying off a 4.4% mortgage (even being retired... I have better use for that $$)
It does depend as previous poster mentioned. To me it especially depends if House will cash flow if you have to move and rent it. (I often use a 10% of value rule. = $200k home needs to gross $20k/ yr . That is for someone conservative (like Ramsey)
I'm in Chet's camp
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BTW -- MY personal opinion is that 4.375 is about as ROCK BOTTOM A RATE as one could ever dream of and you will NEVER AGAIN have a chance to borrow money that cheap even w/o a tax advantage and it would be pretty crazy to pay such cheap money off. If I was in that situation that would give me reason to consider MUCH MORE aggressive investment strategies (perhaps even career options...) with my pile of savings to get a return that is much better than any bank would pay...
I would get the max FIXED mortgage that would cash flow. In addition I would get HELOC's that I could write a check on for bargain (SURE THING, NOT SPECULATIVE) investments that come along that I plan to be my own bank (w' your 150k and other stuff (I use margin for that stuff too)). I allocate equity earned by real estate (like equity gained in personal home OR income properties) to flow to income real estate properties. I use HELOC's specifically as exclusive loans to income props and write off 100% of interest against income props (DO NOT co-mingle with personal funds). I would rather write off 100% of my interest against income props that DEDUCT interest as a percentage of marginal tax rate. (I can usually keep my marginal rate well under 10% with investment props) even when making $xxx,xxx in salary (when I had a job ).
This has worked for me for 30 yrs and 19 properties. Someone smarter than I will have enough properties cash flowing by age 50 to sell a few and live off the income (investment properties) that creates 100-200% of previous wages. (age 49). When they get to age 60 they start selling them off and carrying paper (with 30% minimum down). By age 70, they have them all sold and are selling the contracts to banks. By age 80, they are managing to get by on their substantial wealth holdings in secure investments.
I know... I'm living on borrowed time my 7/1 Arm (4.25%) finally rolled in 2009, now it's 4.09, and next yr 2.98 %(12m LIBOR +2%). 1 Year LIBOR | Libor Rate Current Interest Rates Index One 2% cap per yr, so I should be safe for a few more yrs. By then I will be able to tap 'qualified' $$ if necessary, but plan A is to have 3 investment props in tax free states covering all my expenses and to have NO personal residence (just an apartment / RV hookups at each location). If Obama-nomics reigns, I will keep a 'beater' personal residence that is zoned commercial and sell one every 2 yrs for $250k tax-free gain. While the law allows...($500k if married, which I can do if necessary to write off and additional $250k, I'm sure I could find some 'temporary' takers on that option.) So far I've only been over the $250k in 2 yrs twice. You can collect gain more frequently with special circumstances (Like multiple births) but never exceed $250k single or $500k joint each 2 yrs. (You can also change employment more than 40 miles FURTHER and take a gain). That shouldn't be too hard... my job went to India That is about 10,000 miles give-r-take. (I usually go via Singapore to get more miles and to grab a "Tiger Beer")
Good luck, keep asking questions. We all have a lot to learn (retired? pre-50, no pension, no healthcare, no nothing; but any good bridge beats working )
per OP
yes pay the house off.
most wealthy people i know did not get that way buying selling and leveraging real estate.
when they buy something they pay it off relatively quick and buy some more.
they are very frugal. in the long run--- no credit cards no mortgage nothing.
most wealthy are not into house flipping they are comfortable burger flipping and do their own housework and laundry.
the rich spend much more time taking their wallet out to put money in rather than take it out.
Keep in mind about the people who tell you it is a good idea to keep debt on your home and not to pay it off:
They have never been debt free. Misery loves company and anyone with a lot of debt is going to tell you to "invest" the money. The equity market, BTW, has produced a lot more losers in the last decade than winners. People with paid for homes are not worried about the economic meltdown.
They are looking to sell you debt or will make money off your debt. Bankers, Real Estate agents, brokers of all sorts, Investment "experts" etc etc etc. They become unemployed if they can't sell debt. It's like asking a shady used car salesmen if "this is a good deal" on the broken down hooptie he is trying to sell you. The difference is the car salesman usually has better ethics.
One final thing. Your residence is not a business investment. So business advice doesn't apply to it.
Pay your home off first. Then when you have money left over, then you can invest which these days mainly means gamble.
Our plan was to pay off the mortgage in a "reasonable" amount of time and AT THE SAME TIME increase our savings. We looked at each extra dollar coming in and where we were at that time. Often it ended up we used the 1/3 allocation; 1/3 to debt, 1/3 to investments, and 1/3 to current saving account for items like travel. But we held the discussion each time. If we had a good investment idea, the money could all go there. All this took a long term/short term financial plan for our family. We knew our time horizon, goals, and how we were doing.
As a result, we have no debt, retired with a pile of money in a well diversified portfolio, freedom, and we enjoyed our life along the way. Personal opinion is that if you soley concentrate on one asset or debt, you will miss the opportunities for growth both investment and personal along the way. Balance is best.
- The first one is the tax implications of cashing out the $150k. In the 28% bracket, that could be a hefty hit.
Where is that $150k coming from? Stocks? (I may be wrong, but) assuming it's all in stocks, and you cash out, you won't be taxed on $150k worth. You're taxed on your net gain for the year.
For example, assume you put in $100k a year ago, stocks have gone up a good bit, you made $50k. You can only be taxed on the $50K (again, I may be wrong, but this is my understanding). Also, if you've held for over a year, long-term capital gains is 15% so you would be paying $7500 in taxes.
Same if it's in a savings account, you are taxed for how much you made on the interest in that account.
You will be taxed on this no matter if it's now or later, personally I would pay off the mortgage.
"Now or later" is NOT the same -- the capital gains on holdings of less than a year are at ordinary income: Capital Gains Tax Rate Calculator
If one has a Federal high income tax bracket and high state income tax it is entirely possible that the effective interest rate on 4.375% is well below 3% -- and if tax rates increase that will sink even further. Similarly, should taxes rise there is a fair probability the yield on zero risk things like TIPS will also rise, the OP might be able to get essentially an "interest free" mortgage situation just be shifting the pile of dough saved up to something that is paying more than his effective interest cost... Mortgage Tax Savings Calculator - Financial Calculators from Dinkytown.net
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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Quote:
Originally Posted by lumbollo
Keep in mind about the people who tell you it is a good idea to keep debt on your home and not to pay it off:
They have never been debt free. ... People with paid for homes are not worried about the economic meltdown. Many of us have been debt free many times in our life, and could be tomorrow if that was smart. I wish I could tell the multiple older couples I'm currently counseling 'not-to-worry' - They have their entire assets in a 'paid-off' home and they all need higher levels of care. NOW, not when / if their home sells,... (Reverse Mortgages won't work, as they can't remain @ home (+ RM is the Ultimate scam))
They are looking to sell you debt or will make money off your debt. ... Positioning your assets intelligently allows you to be your own bank - this should be the case after age 40, you use banks ONLY when they offer beneficial rates and services. By age 50 you should have adequate assets that you could 'write-a-check' to pay off your home, any day you like, should that be the best use of your funds
One final thing. Your residence is not a business investment. So business advice doesn't apply to it. Your home is only a portion of your asset allocation and Stuff Happens, I have moved countless people from their homes under situations that they never had expected... (Sheriff tax sales on fully paid off houses (my taxes are 3x the highest monthly payment I ever had), eminent domain claims, health / accident / kids or spouse needing rehab,)
Pay your home off first. Then when you have money left over, then you can invest which these days mainly means gamble.
Gotta know your stuff, and if you don't, please avoid the game. There are plenty of solid investments that aren't gambling. Be an analyst at all times, no one cares about KEEPING your money, but you. Everyone else is trying to GET it (including 'brother inflation'). My house is nice to sleep in, and to enjoy, but I realize it could vanish in a flash. Motel 6 would do if necessary.
Assuming that the $150K mortgage has a payment of about $750 a month, if you paid it off and invested the mortgage amount at something that earned 10% interest you'd have your money back in savings in 10 years, when you retire.
It really boils down to what you are comfortable with personally. I'd prefer having a smaller nut to make every month, so I'd pay off the house and put all of that money toward savings and retirement. To me, having fewer monthly bills means that I not only can save more toward retirement but I can also focus my life on my family rather than on needing to make a certain amount of money each month just to pay the bills.
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)
) investments that come along that I plan to be my own bank (w' your 150k and other stuff (I use margin for that stuff too)). I allocate equity earned by real estate (like equity gained in personal home OR income properties) to flow to income real estate properties. I use HELOC's specifically as exclusive loans to income props and write off 100% of interest against income props (DO NOT co-mingle with personal funds). I would rather write off 100% of my interest against income props that DEDUCT interest as a percentage of marginal tax rate. (I can usually keep my marginal rate well under 10% with investment props) even when making $xxx,xxx in salary (when I had a job 
my 7/1 Arm (4.25%) finally rolled in 2009, now it's 4.09, and next yr 2.98 %(12m LIBOR +2%). 
) but never exceed $250k single or $500k joint each 2 yrs.
(You can also change employment more than 40 miles FURTHER and take a gain). That shouldn't be too hard... my job went to India 
That is about 10,000 miles give-r-take. (I usually go via Singapore to get more miles 
)
)
