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Old 03-09-2015, 09:18 AM
 
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This is what we did: We had a 30 year mortgage with a 3.35% interest rate. We've never been able to beat the standard deduction so, in our case, we weren't deducting mortgage insurance. But even if we had been able to file a Schedule A, we are aware that the itemized deduction is the amount of our tax bracket (%) and never reaches 100% write-off.

I put all of our extra cash into paying off the mortgage. I paid the 30-year mortgage off in 3 years and 6 months. I then used the money that I had from not having to make the mortgage payment plus the extra money to invest.

Just to be certain, I ran a spread sheet to see which way I would have been ahead... by investing less money (extra cash only) for a few more years or investing more money (mortgage payment + extra cash) for a few less years. The second option gave us the greater amount with the lower risk.
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Old 03-09-2015, 09:36 AM
 
Location: Sarasota, FL
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Quote:
Originally Posted by LoriBee62 View Post
This gets at the heart of what I was originally asking. Maybe it should have been posted to the investment forum, because it wasn't really intended to be about how much I can afford to live on in retirement. It was about what would be the better return in the long run. Assuming one has plenty of equity in a home, the interest rate is under 4%, and mortgage interest can be written off as a tax deduction, wouldn't I be making more money if I invested the extra money we have each month instead of throwing it at our mortgage?

So far the only caveat I've read in that equation is risk. Though when the mortgage bubble burst, my home lost as much value as my 401K. All of them rebounded over the long run though, so if you are talking about long-term investing, I'm not even sure if risk is that big an issue.
I believe you've answered your own question. In order to beat your mortgage rate and tax consequences that go with the payments, can you find an investment with acceptable risk? That depends on your ability to deal with risk, and the length of time that you project for your investments. Also depends on what you believe will be your homes' appreciation over that period of time. There are no easy answers to these issues.
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Old 03-09-2015, 11:21 AM
 
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Quote:
Originally Posted by LoriBee62 View Post
Scenario: A couple is 55 with the goal of retiring in 10 years at 65. Currently paying $1,500 a month mortgage on a single family home with no HOA. Interest rate is 3.75% They have excess cash to work with each year. Should they:

1) Put that cash toward their mortgage with the goal of paying it off completely by the time they retire.

2) Put that cash in investment accounts while making the regular mortgage payments and then, the year they are planning to retire, refinance the balance of the mortgage back out to 30 years (assume the same or better interest rate), reducing their mortgage from $1500 a month to $500 a month.

3) Put that cash in investment accounts, leave their mortgage alone and continue paying $1,500 a month mortgage for the first 10 years of their retirement. The house would be paid off when they turn 75.

My husband likes #1. But I think there are tax benefits to #2, particularly if the excess cash we would have spent paying down the mortgage went into a Roth IRA.

Thoughts?
Hi Lori,

Financial analyst here, and I explicitly don't give financial advice on boards like this.

I will tell you some broad truths about a hypothetical person in that scenario.

Option 1 is a great option. If the person is using standardized deductions, option 1 is probably the best goal.

Option 2 is survivable, but I would suggest extreme caution in believing that in 10 years interest rates will be anywhere near their current historic lows. History suggests that in 10 years that couple will see significantly higher interest rates and might not save near as much as they had planned.

Option 3 is much safer than option 2. If someone was going to pick anything other than option 1 they should pick option 3 with their eyes wide open and keep option 2 in their back pocket so they could reassess their plans in 5 years and again in 10 years to determine which was better at that top. Since rates might go up, option 3 must be the default over option 2.

The reason option1 is superior if the person is using standardized deductions is that 3.75% is substantially higher than the risk free rate. If the person uses standardized deductions, there is no benefit to the mortgage interest. Your scenario suggests a roth IRA, so I assume the hypothetical person would be taxed on earned income but not taxed on interest income since it would be a tax advantaged account. By investing the money in anything except for government bonds (U.S. government, don't get cute with emerging market sovereign debt), the excess return is simply payment for the risk borne. Since the other investors may be comparing interest on those securities to the risk free rate, rather than to your mortgage rate, they have more to gain by taking the risk than your hypothetical couple. Therefore, the couple is getting less return for their risk. 10 years is not a long enough period to assume the geometric mean of markets averaging over 8% per year. There would be potential for significant loss.

The hypothetical couple may want to speak to a CFP. Note: This would be a fee only financial planner, not one that is paid commission to convince them to purchase certain products through the financial planner.
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Old 03-09-2015, 08:41 PM
 
12,825 posts, read 20,144,092 times
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I can't wait to pay off our mortgage and redirect that outbound cash flow into:
- Home improvements
- New investments we have not been able to invest in previously
- The odd feel-good splurge around The Holidays.

(Disclosure - I have been influenced by Dave Ramsey)
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Old 03-10-2015, 02:47 AM
 
71,596 posts, read 71,751,865 times
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what folks forget is that not everyone has the stomach to invest elsewhere , the knowledge or more important the discipline to invest on their own consistantly..

even if you do many folks do not want to invest as aggressively anymore in retirement or close to it .

while i was a 100% equities guy for all my investing life now that i amn retiring 45/45/10 is my allocation.

for some it may be even less equities so that is something to consider.

since we will need a about 2 years of withdrawals sitting in cash anything we do to cut our expenses means holding less cash.

we will likely buy a co-op next year instead of renting because the income we will give up on the money we buy with will not be generating that much anymore in retirement being divided up into bonds ,cash and equities.

the cost savings can be quite a few grand a year going forward.


you really have to think outside the box at the bigger picture and retirement plan both pre and post and not just plain old opportunity cost .
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