$200K - pay off house, invest or buy toys

[chuckw951]

In the next year or so my wife's grandmothers estate will be finalized (after 10 years). Basically the estate consisted of 100 acres of land that may finally be sold soon.

We owe about $200K on our house and have a good combined income so the monthly bills are not bad. The mortgage is a 5.625% fixed 30 year mortgage with 28 years to go.

I think the conservative thing to do would be to pay off the house and own it "free and clear." Freeing up money used to pay the monthly mortgage could allow my wife to stay home with the child we are trying to have.

On the other hand, we could invest the money and hope for a good return over the next ten years and then pay off the house. I suppose she could still quit her job but some of the toys would have to go. Or she could take time off and go back in 3-6months....but she doesn't want to work and I suppose I don't blame her.

So, our goal is to get by on one income for the forseeable future.

Another idea might be to pay off $100K of the mortgage but keep the same monthly payment so as to pay it off early. I think refinancing to get a 15 year mortgage or something like that might not be cost effective.

Or we could throw caution to the wind and buy a big boat and a faster Porsche...and both of us keep working.

[Rodeo]

That $200k is cheap money, I would keep the mortgage and find a good investment advisor. You should be able to make very conservative investments that will return 8% in the near term.

You are paying $11,300/year in interest on your mortgage

At 8% return, you will earn $16,000/year. Let that compound and you'll have some serious scratch in 10 years.

And I think rates are going to keep going up, so your "spread" will only get better.

[RallyJon]

Paying off the house would be a very conservative thing to do. It might give you a better nights sleep, if you worry about things like that. Also, if you are a timid investor, and don't feel very comfortable in the stock market, why tempt fate.

But I wouldn't do that. I might do the extra payment a year thing or add some extra principle to each payment, then invest the rest of the money.

[Rick Lee]

Also depends on how old you two are. Unless you're nearing retirement, I can't see paying off an already cheap mortgage. Refinancing into a 15 yr. note doesn't give you any immediate benefit at all, it might increase your payments and it will run a few $k in closing costs.

[chuckw951]

Originally posted by Rick Lee
Refinancing into a 15 yr. note doesn't give you any immediate benefit at all, it might increase your payments and it will run a few $k in closing costs.

We are both 35.

Re: refinancing. That's what I figured...plus rates have gone up...we'd probably get the same rate or high if we refinanced.

[RANDY P]

Originally posted by Rodeo
That $200k is cheap money, I would keep the mortgage and find a good investment advisor. You should be able to make very conservative investments that will return 8% in the near term.

You are paying $11,300/year in interest on your mortgage

At 8% return, you will earn $16,000/year. Let that compound and you'll have some serious scratch in 10 years.

And I think rates are going to keep going up, so your "spread" will only get better.

Ditto this thought. Put it somewhere to gain.

If you want a 15 year loan, no need to pay the fees, just up the payment. Same thing - 15/fixed close to where you are now...

rjp

[chuckw951]

Originally posted by Rodeo
That $200k is cheap money, I would keep the mortgage and find a good investment advisor. You should be able to make very conservative investments that will return 8% in the near term.

You are paying $11,300/year in interest on your mortgage

At 8% return, you will earn $16,000/year. Let that compound and you'll have some serious scratch in 10 years.

And I think rates are going to keep going up, so your "spread" will only get better.

I think we do have a good rate on the loan. Our original loan was 8.625% and we refinanced when the rates came down which was probably one of the smart things I've done...

We have probably $500K equity in the house and property. My wife owned the land (2 acres) and we built the house in 2001-2003. Since then property values have gone through the roof in our area.

We are paying $11,300 in interest per year and I like the deduction...but on the other hand if we paid off the mortgage we would not be paying out $1170/month...which would help with the cash flow issue...and we could get by comfortably on one income.

A couple of weeks ago at a party I was talking to a guy that thinks we are crazy for having so much equity. Bascially he recommended cashing in 80% of the equity, getting an interest only mortgage and investing the money...and insisted that we could get 10% per year on the investments. Of course he wanted to sell us something. I don't really view the house as something that should be gambled in the stock market.

Thanks for everyone's thoughts on this topic. I can see where the wrong decision could be costly in the long run...and that with risk there is reward.

[Tobra]

If you look at the entire picture, tax consequences in particular, eliminating your only tax deductible interest likely will not add up to being a good idea. Invest, max out your IRA, buy a rental property, become a loan shark, something.

[RANDY P]

Originally posted by chuckw951
.

A couple of weeks ago at a party I was talking to a guy that thinks we are crazy for having so much equity. Bascially he recommended cashing in 80% of the equity, getting an interest only mortgage and investing the money...and insisted that we could get 10% per year on the investments. Of course he wanted to sell us something. I don't really view the house as something that should be gambled in the stock market.

For that to work you'd have to be able to afford the payments. If cashflow is the issue better to hold some as savings and just invest the remainder.

rjp

[Rick Lee]

Chuck, I forgot to add that you can take 7 yrs. off your current loan by making one extra P&I payment per year. Take your current P&I, divide it by 12 and add that much more to each monthly payment. That will shave 84 payments off the end of your loan - a HUGE savings AND it doesn't incur any closing costs or refi headaches.

[Jared at Pelican Parts]

two chicks at the same time

[id10t]

Put it in a high yeild savings account (IGN I think has good rates) and have the mortage paid out of that monthly. No mortgage, still get tax credit for interest, and you earn interest on the money sitting there.

[Rodeo]

Ing has a special rate of 4.75% right now, but it expires April 15. After that, I expect the rate to be somewhere around 4%, maybe a bit more. HSBC has a special right now of 4.8%, but it's also for a limited time.

Neither of those rates would cover the mortgage payment, but you could buy an Income Mutual fund that might get you monthly income equal to your payment.

Re taxes, it pretty much washes out in the end if you need to take the income to pay the mortgage. So you get your mortgage deduction, but you also pay taxes on any income you receive.

If you can aford it, the beter option is to let the money grow tax-free (unrealized gains) while paying the mortgage out of your pocket.

[Jay H]

Originally posted by Tobra
If you look at the entire picture, tax consequences in particular, eliminating your only tax deductible interest likely will not add up to being a good idea.

Can someone please help explain this reasoning to me? (no flaming intended, I'm just really curious on this topic) If you get a $11,300 tax deduction for mortgage interest, you save about $3200 in tax (figuring 28% tax impact) when the $11,300 deduction reduces your Adjust Gross Income on the 1040.

However, in this situation, paying off the mortgage allows for a $1170 increase in monthly net income. After about 3 months, you're now aproximately even with the tax deduction savings if you save the amount that was formerly your mortgage payment.

Each year, the mortgage interest deduction goes down (assuming a simple interest loan), so it takes less time to regain that reduction in Adjust Gross Income.

I assume that if you can invest at 8% and have a mortgage at 5.5%, that's where the advantage is of keeping the mortgage and investing the lump sump while taking the tax deduction on top of it. Assuming you can invest at a rate higher than your mortgage rate.

Is the advantage of keeping the mortgage around strictly limited to whether or not you can invest this $200k payout at a higher level of return than what the mortgage is costing you in interest?

Thanks in advance for any insight...

Jay
90 964

[Rodeo]

Originally posted by Jay H
Is the advantage of keeping the mortgage around strictly limited to whether or not you can invest this $200k payout at a higher level of return than what the mortgage is costing you in interest?

Yep, the money to be made is in the "spread" between the interest he is paying and the return he could relize on that money.

If you are going to put the $200k under your matress, and keep your mortgage because of the tax deduction, that is not a good idea.

[nostatic]

Originally posted by chuckw951

I think the conservative thing to do would be to pay off the house and own it "free and clear." Freeing up money used to pay the monthly mortgage could allow my wife to stay home with the child we are trying to have.

I can't believe I'm saying this, but knowing what I know now, that's what I'd do. Well, I'd pull out a chunk to blow on toys, but having had a large mortgage contribute to the death of my marriage, I think there is something to be said for having low/no mortgage payments and the flexibility for one spouse to not work.

[Jay H]

Rodeo, thanks for some clarification!

I agree that I'd pull out a small amount like $5k and piss it away on Porsche mods, big TV, vacation, etc and invest or pay off the mortgage with the rest. Life is short.

However, if you have children, there is nothing like having your wife spend all of her time with the kids verses shuffling them off to daycare all day while the two of you work your tails off 9-10 hrs a day to continue the mortgage payment and day care invoices. That time the parent spends with the child during the day is essentially priceless and probably is worth the loss in mortgage interest deduction and loss of the 8% investment income.

Good luck! This is a good 'problem' to have!! Life is good.

Jay
90 964

[Evans, Marv]

If you feel better paying off the mortgage and the feeling of being free of that load, you could do that and max out a Roth and contribute to an IRA with maybe half or more of the money you are currently paying out for mortgage. You might also think about putting the difference between the Roth & the rest of the percentage into an account to help pay for education for your kids later on.

[BGCarrera32]

Pay off the house, have a spouse stay home with the kids.

4.75% is crap for a return.

[Rodeo]

Originally posted by SoCal911SC
Could you point me to where I can get 8% return! Not "potential" 8%, a REAL 8%.

Preferably tax free (so that the 8% isn't reduced to a net 5%).

Thanks!

I am in a blend of large cap domestic equities, a few mid cap domestic equities, and foreign funds. Also have a few odd stocks and some GMAC Bonds at 5.7% (which you could buy on the open market now for a much better return, maybe 10% or more). Last year, with a pretty conservative portfolio, I did like 10%. And it was a level year for the markets. But who knows what is going to happen tomorrow.

On taxes -- if you take the income from the investments, you pay taxes. If you let it sit and appreciate, no taxes until you sell, and then hopefully at LT capital gains rates.