Mortgage interest ignorance

Guess Ill never understand it. Have a buddy that has the ability and means to pay his mortgage off early and refuses beacause he'll lose his tax break. Try as I might, cant get it through his head that he is far better off without that 'tax break'..! Lenders have done a great job at brainwashing folks that mortgave interest is a good thing. He's not the only one with that warped thinking....but in the end, he earns his money and is free to spend it.

i would think 2 minutes with a calculater would show him what your talking about. your friend may have other reasons for not wanting to pay early. if you want a good credit score for example you need to be in debt and have a continuous payment history.

I hear your buddy's reasoning all of the time. It makes zero sense to me.

Danny is right. Amazing how people no longer want to sit down with a pencil and piece of paper. Seeing is believing.

Getting out of all debt should be a major priority for every wage earner. As Dave Ramsey says "Debt is Dumb."

i get a kick outta being a credit risk pretty much when we own a whole lot-debt free.not a bill late in forever.

no credit cards and over 20 yrs without a loan,little cash in the bank.

if Hillary was a banker,they'd be callin me Epstein.

Agreed Green Bay

Is it possible that with the tax break, coupled with low interest rates, that his money is better off working for him in say the stock market or the real-estate market?

Folks have differing opinions on the stock market and investing, but I think it is safe to assume it is better than giving interest money to the bank.

Not always if you have4% interest and could make 10% on stock market (was easy to do with trumps market last 3 years) that equals a positive 6% in your pocket.

Ill be there with you in a few years. My mortgage is quite possibly my last loan ever and im only 41. Once it's paid in 4 years i only plan to make major purchases with cash. I do use a credit card but pay it off monthly. It's only for convenience. Im not sure how credit scores are calculated but if mine erodes away i couldn't care less. If something like insurance costs me more because of it, those might be fun conversations where i tell them i get the best rate or im out.

Flipper, why not pay off the mortgage and put 10% in your pocket...seems better than 6% to me.

4% compounded on a long term mortgage is way more than 4% simple interest on something short term. Find the calculators and run the numbers on a 30 year mortgage and tell me the actual dollars of interest payed versus the principal. It ain't 4% for dang sure! Total interest is more than total principal.

Unless there is more to the story . It is easy to see if it is a benefit to paying it off. FIRST he has to know how much interest his is paying per year or he wouldn't know how " much " the tax break is. But he can't be gaining more as the tax credit isn't dollar for dollar. Second with taxes almost entirely done on a computer program it is as simple as changing the interest amount paid on the form and recalculating with ONE push of a button. Boom there is his answer...... ONLY reason I can think of is he doesn't have the "cash to pay it off".

I have high credit score and have not been in debt for anything in past 20 plus years. A person can get a good payment history by paying his bills on time. Paying debt on time will help credit score, I’m just saying you don’t have to go in debt to get good credit score.

LOL yea IF the dividend interest was compounded like the mortgage interest was . But for some reason the publics receiving interest is different then the publics paying interest.......

Not just mortgages. Just had a conversation with one of my daughters about payroll with holding and tax refunds. The moochers in DC have done one heck of a brainwashing job that has most folks believing it's okay to give away money all year long in the hope of being given some back.

Our tax code is written with this in mind.

A personal finance course should be required for high school graduation. It should cover interest, simple and compound, simple stuff like managing your bank accounts and filling out routine personal tax returns. It is not rocket science but there is certainly no shortage of ignorance about managing ones personal finances.

We have had everything paid of for 10 or twelve years. Last spring I wanted my wife to get a new car. She decided to get a Subaru. We have paid cash for our last couple cars, but they were offering .9% interest on the loan. We put 5,000 down on the car, but that was dumb move on our part. We should have left the money in the bank, Even with CDs at today's rates we would have come out a little ahead.

There can be several reasons to not pay off a mortgage early...Lots of variables.

I only have a few years left on my 15 year at 2.875%. I have no intention of paying any extra and put extra money to work in other ways.

You haven't told us what his tax bracket is. It is possible that he is better off continuing to pay the mortgage. If the mortgage has a very low rate but he is in the top tax bracket, then he may indeed be better off with the mortgage.

Many Fortune 500 companies will borrow money at low rates rather than spend cash on hand. Why? Because it is tax deductible as a business expense.

If you want to get into the weeds you can also calculate the cost of capital today compared with 10-15 years from now. And lets not forget that the dollars he borrows today will not have the same value as the dollars he is repaying with, 10 years from now. Due to inflation, those repayment dollars 10 years from now will be worth less than the ones he borrows today.

IF.........he is looking for advice, he needs to have a CPA run all the numbers for him. That would be money well spent rather than just assuming it's better to pay off the mortgage.

There might be several reasons, but none of them are good. Not everyone has the means to pay off early, I understand that. But if they do, there is not a single good reason not not to pay it off. You need to factor in the risk of not paying off early also. Nobody can predict having health issues or accidents that might keep you from keeping up with payments. No worries about that if its paid off.

Here is a hypothetical mortgage loan:

200,000.00 Loan
4% interest rate
30 year term
no insurance or taxes figured in

Monthly payment - 954.83
Total paid back - 954.83 X 360 payments = 343,739.38 200.000.00 principal and 143,739.38 Interest.

You pay back way more than 4% of 200,000.00 which is only 8,000

Your savings or stock investment return would have to be extremely high to come out ahead of the compound interest you are paying out.

Because IF he pays off the mortgage he may not have any capital left to invest. Opportunity cost is the term in this instance. He has the opportunity to make 10% in the market or save 4% by paying off the mortgage. The 6% difference is the opportunity he has sacrificed by paying off early.

Appreciate all the different opinions..thanks

no doubt,i gotta get workin but its a great read.

I understand your point White, but what is the cost of risk? 100% of foreclosed homes had a mortgage.

The problem with this thinking is that he is actually paying a lot more than 4% because it is compounded.

And, once it is paid off, he would have 100% of what used to be the mortgage payment to invest.

This is essentially debtors prison. You need 20% down and no more than 15 years.

However, in this case it would probably make sense to pay as much as you can.

Risk is something we live with in different forms every minute. Insurance is the only way to hedge some of that away. One thing for sure is that everyone with a mortgage should know about PMI. Private Mortgage Insurance. Look at the terms of your mortgage.Most will include a monthly fee for PMI. You can get rid of this cost once you have paid down a given % of your principal. The other way to avoid it is to put 20% down when you buy the house. Many people are unaware of this, but could save a bunch just by checking onto it.

The risk of default is different than getting hit by a truck. I understand where you're coming from though. The only way to avoid the risk you're talking about is to never be in that position. But owning your own home is generally the best investment most people can make....over time.

Not really. Bankers use what is called the rule of 72...just as a rule of thumb when considering an investment.

If you have $200,000.00 and invest it for 30 years...as in your example.... you need only earn a nominal rate of return of 2.4% compounded annually, to more than double that initial 200K...to $407,407.20

So the rule of 72 says.....72 divided by 30 years, equals 2.4 % needed to double your investment

It's been quite a few years since I had a mortgage, so this may not be as today.......

My mortgage payment was heavy on interest at the beginning and towards the end, it was almost all principle. My statement had right on it this much of payment is interest and this much on principle. At the beginning like I said, it was heavily interest so I didn't see the up-side of paying it off once most of my payment was principle towards the end.

It's still that way Hippie. The bank gets its VIG up front. Usually you won't see much decline in principal for about 5 years.

The difference is in interest is simple versus compounded. The 4% and 6% discussion is on a short term simple basis. You can not compare that to a 30 year compounded 2.4%. It is not comparing apples to apples. Most folks can not see past next month much less next year and certainly not the next 30 years. Especially from an investment perspective.

Gotcha White.

Banker lady, neighbor who knew our family when we were still crapping our pants told me, if your gonna pay extra on principle, do it early, nog at the end.
Of course, until I had the means yo pay more, I saw on my statements why she advised that.lol

No. Both your example on the mortgage costs and mine on the investment results use compound interest.

The difference in the total is because in your example of the mortgage, the interest is calculated on a declining balance every period.

In my example the interest earned is on an increasing balance every period.


I agree that most folks don't consider the long term

Not sure about the tax bit sounds a little goofy. I have a great rate on mine and there’s no way I’m paying it off early when I can use my money somewhere else making more money. Might be wrong but that’s how I do things. Also I make them set all my loans up where the principal is paid up front instead of decreasing interest for the duration of the loan. Makes your payments higher in the beginning but saves a significant amount of interest money paid compared to a regular house or land loan. Some banks won’t do it and most have never heard of it.

Exactly ! And if you are going to make extra payments be sure your bank knows they are applied to PRINCIPAL ONLY. Otherwise they will take a bite of interest too.............assuming you are just making your next payment early.

Yes, you specified what you wanted extra to go against.

She would give me what she called "on demand" loans for lesser amounts when I needed. They were simple X amount of interest against the outstanding principle.
They'd send you a slip with interest owed which had to be paid, and you could pay all, no or anything in between on principle. Next month, you'd pay X interest on new principle amount, etc.I guess they could call the whole note whenever they wanted, the reason she called it on demand.

Maybe it's just me... But peace of mind is the single greatest incentive to be debt free. I hate being beholden to someone, especially where money is concerned.

I would like to see property taxes abolished for the same reason. My property taxes are dirt cheap here... I pay a day and a half's wages a year. But if I didn't pay for a few years the county could steal my house over basically a week's wages... And I sure don't get much for what I pay, even if it's only a day's wages.

I didn't buy my property to rent it from the @&#$ county over my lifetime.

Mike

If this is how you understand a loan, then you should stay away from mortgages. First the obvious, It is 4% per year, on the remaining balance, payed monthly.
Second, borrowing money at rates below the inflation rate just makes sense, add in a tax break and it is a no-brainer.

I'm sure he pays more in interest every year than what he gets from uncle Sam. Figure 4% for a 200k mortgage = $8000 yr. Put that 8k in retirement or mutual funds would be a much better idea.

I have no debt and it feels great. I have 1 cc for gas and 1 that is used mainly for vehicle insurance. Both are paid right away

I have borrowed more money over the last 15 years than I did when we bought our home. When I can borrow at 4% and that goes down each year on the balance and I can get 4 to 20% in investments that goes up, why would I take money out of investments and savings to say I am debt free. If I die tomorrow there will be money to pay the debt if needed and the final costs. If I don't have the funds to pay off my debt then paying ahead a little bit each month makes sense, because if I can't save money I have nothing to secure income if I lose earnings. At 72 I currently don't have any debt but if I want to upgrade vehicles, or home etc. I would not hesitate to take out a 20-30K loan instead of pulling funds out of investments. You can say the bankers have these people fooled but when you look at the returns and the capital gain tax treatment managed debt can make you money and help build wealth.

Bryce

My old man got it in his head that if you still owed on the mortgage, you couldn't lose your house in a lawsuit, (Alcoholic that would get behind the wheel crap faced), so he paid a couple of dollars in fee's every month for years instead of making that last payment.

It takes money to make money, unless you work for the man.

I wouldn't be in business for myself had I been scared to borrow money.

I would tend to agree Hippie, however, I just dont beleive the initial money has to be borrowed. Not condemning how you did it, but its not the only way.

I hear that a lot. But I don't think that's always the case. You still have to pay property tax or risk foreclosure.

Trapset, you are correct, however, I think that is different. You cant get out of paying taxes, they are with you for life..unfortunately. a mortgage on the other hand is a risk that you can control by eliminating it.

I looked at it this way.......

I could work for someone else until I had enough money to go on my own, probably I'd be well into my 40's or borrow the money.

I semi retired at 50 the way I did it, borrowing.

My mortgage balance is well under my investment balance. My investments made 27% last year, and has average over 12% the last few years. That interest and gains also compounds. My
mortgage interest is around 3%. Yes, that 3% does compound as well but I can also deduct that interest as a cost. I figure that if I am paying 3 times as much into my retirement as my mortgage - I am fine. Now, if the market drops and my gains end up being under 6% a year - then I will shift my money towards my mortgage more - maybe. I allow my money to work for me.......

You also pay taxes on interest earned, no?

Yes you do but if you invest in securities much of the income is capital gain which can have tax brackets as low as 0 if you are below about 75K married and filing jointly and never more than 15%. If banks make money selling my mortgage why should I not invest in the income earning venues that they do?
To me if one is paying off a mortgage instead of saving money then the house you are trying to keep may be lost if you don't have income even if you have it mostly paid for. Also sticking most or all of your monies into one asset, a house does not give one diversification. One of the reasons you see millions of younger families renting today is because they watched millions lose all to almost all in 2007-2009 by believing that houses were the best investments and many lost all of their principle payments.

Bryce

Agreed, just commenting on the fact that 100% of foreclosures do not have mortgages. I am all for getting mortgage paid off asap.

However, I have noticed that insurance companies can be harder to deal with on claims once they realize you do not have a mortgage. I had a flood insurance adjuster, after we had verbally agreed on claim amount, ask for my mortgage company's info. When I told him I owned the property he slammed on the brakes. He left then called later and started re negotiating the $ amount. Took another 30 days, endless estimates, pictures and receipts to get it back up to where he was when he thought he was dealing with me and the bank.

One other possible advantage to having a mortgage is in the event of an eminent domain case. I was low balled on an eminent domain case for a portion of my property once. I argued that the bank obviously valued the property way higher than the bias appraiser the county sent out, based on what I owed at the time and original loan amount . I was also able to argue that my mortgage stated that I could not allow the property to be devalued in any way during term of loan so I was unable to legally negotiate. Ended up with more than 1000% from original ridiculous offer.

Again, I'm all for paying it off asap, but a mortgage can have advantages that are not always obvious.

No on 66% but yes on 34% - currently am putting 2/3 into Roth, paying taxes up front - my growth is tax free.

Lets say your buddy pays $12,000 in interest that he may be able to itemize on his taxes. With the Standard deduction for married people at $24,000 now he may not even gain $4,000 or $5,000 in total deductions over the Standard, however we will let him take a tax break at the top bracket of 37%. So now the end result is he only spent $7.560 on interest. If he paid off his loan he would be spending $0 on interest and still have a $24,000 standard deduction. Keeping a mortgage for a tax deduction makes no sense. Other reasons may. IMHO

I am not sure how all the numbers work . But I hate owing money all the time . We started out with a 30 year loan without the PMI insurance due to 20% down We refinanced to a 15 year loan after 5 years .And than we paid it off in 13 years .Job losses due to company closing followed after the home loan was paid .Than I developed health problems . Because the home loan was no long part of our monthly bills we got through it all . Otherwise it would have been a major problem .The numbers are meaning less to me .I have my home because we paid it off early that might not be the normal .But I did not think it would happen to me either

My wife just ran the numbers on the accounts we mange ourselves (Main investment account and ROTH IRAs) She said we were up a little over 32% in 2019. That's the second best year we have ever had. If we had some major purchase to make this year, I think I would go ahead and borrow the money with interest rates what they are now.

One mistake many make is not paying the CC of EVERY month. We use plastic for nearly every purchase. We get a little cash back and discounted gasoline(8cents /gallon). It also makes it easy to track our spending.

i'm a redneck--got what i want,owe no one,good to go.

do have to wonder at times if somedy the government won't mke it so expensive o be that way that only a few can afford to own land.not n my time but i worry for the kids and grandkids.

Interesting discussion all the way round. My thoughts are that since I have no debt and my mortgage is paid I can stick even more into my retirement investments if I wish. If everything all goes down the drain (2008 - 2009) and we see a major drop again my house is paid for and I will have money on the side to swoop in and make some great deals on everyones toys (traps, guns, etc) that they are getting rid of.

Obama carry over in the third year , Impesssive.

The money we where able to save after paying off our mortgage and before the health issue happen was how we where able to get by .Like pcr2 said "got what I want owe no one"Too many people in today's society are spending money to buy things to impress people they do not even like to start with

Met a very successful dentist years ago. He owned lots of high value real estate. He said he could only use his two hands for so many hours per day. The key to his financial success came from other hands and money from other people.

We had in out school. It was called Business Math. Elective. I think i took it in 8th grade. Remember goofing off a lot a seeing how many spit wads i could get to stick to the clock.

MY sons(19,21,23) learned a ton more about money management and investing than they taught back in the day. They have ROTHs and they bought their fist stock share at 12 years old. We have also taught them as much as we know about money since they were small.

I hear all the time about the tax break of how they won't make as much in stocks etc. but even if you invest that in stocks and don't make a huge return, you still have that money if you want it back. Unless of course you lose it, but that's not too common unless you don't pay attention.

I say pay off all loans as early as possible. It's just that much more money in your pocket every month. You think I don't wish I had the $730 I'm paying in just interest for my mortgage monthly?

There would be almost no way to fund school districts and local governments in South Dakota, especially rural areas. We have no state income tax and counties don't have their own sales tax, only the state and municipalities. My property tax in bedroom town goes about 50% to the school district, about 48% (can't remember the split) to the county and bedroom town gov, and the remaining 2% to misc stuff. I like telling people I own a certain percentage of a teacher in our school district.

All earners are paid their wages by all the other earners. People will whine at board meetings if teachers get a raise. But the guys at the power plant make a lot more and nobody protests their wages when electricity rates go up. Truck drivers get a raise, shipping goes up. ......You get the idea.
Maybe everyone should have their wages posted in the local paper and websites as has been done with teachers by name in the past.

BTW, power plant workers and truckers were just used as examples.

I would rather they find some other funding mechanism than property tax,..don't know what that would be but would probably favor it.

Here are a few articles with additional ideas and info.

https://www.fool.com/investing/2018/12/23/why-you-shouldnt-pay-off-your-mortgage-early-even.aspx

https://smartasset.com/mortgage/mistakes-to-avoid-when-paying-off-your-mortgage-early

https://www.investopedia.com/articles/personal-finance/050115/mortgage-vs-student-loan-vs-saving.asp

So you're telling me South Dakota had no schools, roads, and bridges before someone came up with the idea to tax everyone and pay county employees to spend it on schools, roads, and bridges for you?

Mike

I believe there is a difference between "personal' debt and "business" debt. I agree that personal debt should be limited and payed up as soon as possible, business debt should be looked at totally different.

Just another reason to have a second home based business of which the mortgage becomes another partial cost of doing business. The tax code is set up for small businesses, farmers etc....not the working man who goes out and works, earns a paycheck, pays taxes and goes on. I encourage everyone to have a second business to build up net worth. My old tractors, rakes, balers, cows may not be much - but they are mine and can be sold if need be. If I pay 10k in taxes a year - what do I have.

When it comes to business expenses, why can't college tuition, or at least the interest on loans be written off?
My son got a very well paying job right out of college, but he also has pretty big loan payments which he cannot write off. A friend of his bought some heavy equipment and runs a small excavating business. He can write the cost of the equipment off because he needs it to make his money, just as my son needs his masters degree in order to be allowed to practice his profession.
If one is working in a profession for which the degree he eared is required, it should be considered a business expense. IMHO

This is so correct. Anything that can be "written off "is like getting a 30% rebate. If you have a farm, no matter how small, clothing, dog food, %of your house expenses, vehicles, insurance, etc. etc.

I'm pretty sure tuition and education loan interest are both tax deductible. I have always been able to write off continuing education expenses and loan interest on education debt.

I did some looking around and I think maybe one can write off the interest on the loans. I still haven't seen where he can write of the tuition. He'll have to find a good tax person,
Thanks, Trapperkeck

There also used to be an education "credit" at least for a few years when I was in grad school. Was not a write off but a credit - still helped

Mike, you're asking me to dive back into the history of SD state government which rather bores me to tears and certainly isn't want I want to do on a Sunday morning, but yes, it appears that a property tax in this state has been going on since at least 1906 (see the link to the SD state constitution). The founders of this state set up counties very quickly, even when the state was a territory. Why set up county organizations if you're not going to fund them somehow...? South Dakota became a state in 1889 and I don't know how it funded local governments (including school boards) the 15+ years before the state constitution appears to have been amended. maybe they were trying other methods and they weren't working.

How do YOU think they funded local governments without a property tax...??

https://ballotpedia.org/Article_XI,_South_Dakota_Constitution

PCFed, my local landscape is dotted with old one room schools that were paid for by the early residents of the area... Everyone paid what they could and built the school building and hired a teacher. So in effect, a tax. But not compulsory and the county didn't get your farm if you didn't pay.

Probably a little tougher to do today. However, my sister pulled my nephews out of public school and put them in home school with online classes... When you do that the state takes the money earmarked per student and pays it to the home school organization. It seems the money goes quite a bit further since there's not a building, maintenance, buses, superintendents, principals, vice principals, councilors, physical textbooks, lockers, and all the other added costs and infrastructure that go along with public schools.

And I don't buy into the "socialization" argument against home schooling... If I had it to do all over again I'm not sure I would want my kids exposed to the "socialization" social engineering going on in public schools today... My nephews know which bathroom to use.

Now, I realize not every mother can afford to stay home and monitor their kids in home school. But if people weren't paying tens of thousands of dollars a year in property taxes maybe a lot more moms could afford to stay home.

I'm not necessarily calling for the entire system to be scrapped. But we could definitely use an overhaul and it wouldn't hurt to take a serious look at how we can get more for our money.

Anyhow, I've drug this way off track from the original topic... My apologies to the OP.

Mike

^^^^^^^^^^^^^^ X2

There is no tax break. The standard deduction for married couple is now $24k. You have to itemize your defections more than $24k in order to receive any kind of break. What an idiot.

How do you know he doesn't have greater than 24K deductions and use schedule A rather than taking the standard deduction ? Idiot ??? I don't think I would assign that label to someone I know nothing about.

The tax break issue is far down on the list for me as to why I want to owe interest. Many state that they pay down quickly on their mortgage so they can put more money away later before they retire or age with additional health costs. Starting to invest early when I was working was the main reason I did so because the time value of money is huge. I don't know the exact differences but a $1 saved at age 25 is worth a whole lot more than several times that dollar at say 50, 55 or 60. Saving money and owing money while we are in our early working years also helps one live within means and managing budgets and learning to live and be happy with a responsible budget to makes life enjoyable. During the 90s and early 2000s I had many opportunities to prepay my small mortgage, I am so very grateful that I decided to increase my retirement savings and general savings more then to pay down debt. To me it makes sense to use money I have not yet earned to pay off debt when I have debt that I can manage.

Bryce

X2 ! Especially if those savings/investments are in a tax advantaged vehicle

Exactly! Put into words I couldnt.

Having a loan is not all bad as some portray.

Yes. Along with that, having an excellent credit history is a good thing , too. It can work in one's own behalf to get things done in life.

Similar to Kre

I rather continue to pay 3.5% and take what would use to pay off early to invest to earn 10%.