zxcvbob wrote:
- quote -

Although you are correct that you need to take into account the income
tax deduction for mortgage interest when comparing paying down the
mortgage with other investments, the formula for comparison is not as
straightforward as you present.

The mortgage interest deduction can only be taken if you forgo the
standard deduction (which is something like $9700 for a married couple
in 2004). So, the real formula is:

Value of mortgage interest deduction = (Total deductions including
mortgage interest) - (higher of Standard Deduction or Total deductions
without mortgage interest)

Assume a married couple in the 25% tax bracket with low medical
expenses, no charitable giving, and low property taxes ($1500) and a
mortgage of $200,000 at 5.6% interest. The mortgage interest deduction
in the first year would be calculated as follows:

Total deductions = (200,000 * 0.056 interest) + ($1500 property tax)=
$12,700

less standard deduction of $9700 = $3000

Multiply by marginal tax rate = $3000 * .25 = $750 = Total tax savings

Divide tax savings by total mortgage interest expense = 750/11,200 =
6.7%

This means the break-even rate of return for them on an alternative
investment would be 5.6% * 1.067 = 5.98%

Andy

Dan Morton wrote:
- quote -

You can get a bridge loan to cover the period of time between the
purchase of the new house and the sale of the old house.

-Will

zxcvbob wrote:
- quote -


Oops, I should have multiplied by 1.3 instead of 0.7. (I hate it when I
do that.) So the 6% mortgage in the above example is equivalent to a
guaranteed 7.3% yield because the mortgage is tax advantaged.

And I thought of another reason one might want to pay down a mortgage.
3) If they have a spendthrift spouse and want assets to be as illiquid
as possible so the spouse doesn't squander them.

Bob


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.

In article <cvcrf5$bpi7$1[at]netnews.upenn.edu> ,
"Dan Morton" <morton[at]rad.upenn.edu> wrote:

- quote -

I think you are doing this backwards. You should sell your
current house first, then buy the new house. Yes, that might
mean putting your stuff in storage for a week or a month, but
it is better than getting caught with your pants down in the
event that there is a hick-up in the housing market. That
goes double since you are borrowing short-term against your
retirement to pull off this stunt.

In addition to reducing risk, you will end up saving money.
The reason is that you will have your house sale money in
the pipeline or in hand when you close on the new house.
This will let you adjust the mortgage on the new house to
be exactly where you need it. Many of the fees and closing
costs of a mortgage are based on the amount of the mortgage,
and if you reduce that up front, you save big on the closing
costs.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

Dan Morton wrote:
- quote -


1) You can't get the money back out of your house (without selling it)
if there's an emergency. This can be partially offset by establishing a
line-of-credit while you are still gainfully employed, using the house
as collateral. (If you lose your job, you will no longer qualify for a
new LOC loan)

2) If you are in, say, a 30% tax bracket and your mortgage is at 6%, you
can get a guaranteed return greater than 4.2% (6% x .7) somewhere else
(perhaps by retiring other debt that is at a higher rate)

That being said, about a year and a half ago, I paid off my 20 year
mortgage about 8 years early. It's amazing what happens to you monthly
cashflow w/o a mortgage payment. I was hit with several big unexpected
expenses last year was able to absorb them easily.

Best regards,
Bob

"Dan Morton" <morton[at]rad.upenn.edu> writes:

- quote -

Here's a couple:
* Liquidity/cash flow issues. If paying off the mortgage exhausts
all your cash, it's probably not the best idea.
* Leverage/alternative investments. You may feel you can invest
your money so as to earn a higher return than the mortgage is
costing you (paying off a mortgage is the same as investing in
something that earns you a risk-free return equal to the
interest rate of the mortgage).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Rich,

Thanks for your helpful comments.

- quote -

I'd be interested to hear what other valid reasons there might be, to not
pay off a mortgage.

Thanks
Dan

"Dan Morton" <morton[at]rad.upenn.edu> writes:

- quote -

She needs to start "listening" in better places.

- quote -

Good for you! In fact, you should't buy it no matter what bracket
you're in. Since all the brackets are under 100%, paying $1 in
interest will always reduce your taxes by less than $1, so you'll
always be better off by not having paid the interest in the first
place (assuming that the only reason you didn't pay off the mortgage
was to keep the tax deduction -- there are other, valid, reasons to
not pay off a mortgage).

Just to be explicit (and more general), you never, ever come out ahead
incurring an expense to get a tax deduction *for the sole purpose of
getting the deduction*. Or, alternatively, it's great if an expense
you had to incur anyways is deductible, but incurring an expense you
weren't otherwise going to make just because you want a tax deduction
always leaves you worse off.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

My wife and I are empty-nesters, and are "buying down" in moving from the
suburbs back to the city. We settle on the city house in June; our hope is
to sell the suburban house and settle in July or August. I'll be able to
borrow against my annuity for the short term at very low interest, in order
to swing whatever downpayment is necessary. But here's the thing: When the
suburban house sells, I'd like to be able to renegotiate the mortgage to
reduce the payment *amount*, and not the *number* of payments. i.e.: I know
I can pay off a substantial part of the loan, and thereby reduce the number
of payments. But I want to keep the term (15 years), and reduce the payment
amount as if we had mortgaged a lower principal at the outset.

Is such a thing possible, without a refinance (and consequently, additional
costs)? Might it be possible to take out two mortgages at no more cost than
for one, and pay off one at the conclusion of the sale on the suburban
house?

(I know that for a refinance, I'll need to settle within a month to preclude
additional title costs, but I can't count on that.)

Of course, there's the real prospect that we could simply pay off the
mortgage altogether when we sell. But my wife is reluctant to do that --
she's heard that it's best to have some interest payments to reduce the
amount of income tax. In the 28% bracket, I'm not buying the argument -- but
we'll consult a tax advisor to be sure.

At any rate, thanks for any advice you can offer...

Dan