What affected your net career income most?
05-29-2020, 02:41 PM
#81
Perennial Reserve
Joined APC: Jan 2018
Posts: 12,147
I don't understand why people would keep a mortgage just for the tax break. I get using the tax break if you have a mortgage, but keeping one doesn't make any sense. Mortgage interest is a tax deduction, which reduces your taxable income. So if you pay your bank 10k in interest, you don't pay taxes on that money, which for most of us would be about $3300. But your net loss is still $6700 out of your pocket. Or you keep your 10k by not having a mortgage, and yes you'll pay the gubmint $3300 more dollars, but you still get to keep more money in your pocket in the end.
Plus you can only write off your home mortgage interest if you itemize, and given the new tax law the vast majority of people are now just using the larger standard deduction anyways.
Plus you can only write off your home mortgage interest if you itemize, and given the new tax law the vast majority of people are now just using the larger standard deduction anyways.
It’s a little more complicated than that. I have about $250,000 remaining on a 15 year mortgage at 2.5% interest. I could have paid it off years ago out of my mutual fund investments. But to do that I would have had to take out more than $250,000 because the formerly unrealized but now realized capital gains would have had to be paid. So it would have cost my investments say $275,000, depending on the basis and the selling price on the market. By doing that, I would have ‘saved’ $250K x 2.5% or roughly $5800 annually. Except if I itemize (and I generally do) the ‘Gubmint’ as you call them will give me about a third of that back, so my actual cost of that interest is only about $4K.
Well, that’s still $4K, you say, over what it would cost if you paid off you mortgage. And it is, too, but then You have to look at opportunity cost.
That $275K I had to withdraw from investments to pay off the mortgage was MAKING well over 8% in dividends and long term capital gains. That is roughly $23,000 a year I will forgo if I use that money to pay off the mortgage. What is more, since capital gains are taxed at a lower rate than my regular income, and not taxed at all until they are realized, I’d have to MAKE about $26,000 a year to offset that loss.
So practically speaking, by having a mortgage rather than paying it off, I’m saving myself about $20,000 a year ( $26,000 - 6000) and increasing every year which is already damn near equal to my house payment. 15 years of that and I’m over a third of a million better off than paying off the mortgage.
05-29-2020, 02:51 PM
#83
Gets Weekends Off
Joined APC: Feb 2014
Posts: 209
We paid off our house about a year ago. I thought long and hard about it, and my financial advisor told me not to do it. I did it anyway, and honestly was having second thoughts. Then coronavirus hit and I was worried about Delta going under. Having no mortgage payment to make sure helped me sleep at night. Was it a smart financial decision? Probably not. But it helps my peace of mind.
05-29-2020, 03:05 PM
#84
Gets Weekends Off
Joined APC: Sep 2014
Posts: 4,999
Of course I wouldn't change having them, but having to buy a house in a neighborhood with good schools (or pay for private) elevates expenses, as does feeding and clothing them and their mother, while possibly taking on the financial burdens send time suck of an extra set of grandparents. Add in family vacations that offset or replace adult getaways, college savings if you're going to cave to the college expense madness, and passing on premium flying and lucrative upgrades so you can simply be home with them all...it adds up quickly.
Divorce is definitely expensive and that's a good one to avoid. I'd offer the youngins advice not to fall behind in the beginning, since future familial needs often pop up. Jump on Crewdawg's real estate magic to set that outside income on autopilot early and you'll definitely benefit in the long run.
05-29-2020, 05:50 PM
#86
Roll’n Thunder
Joined APC: Oct 2009
Position: Pilot
Posts: 3,850
It’s a little more complicated than that. I have about $250,000 remaining on a 15 year mortgage at 2.5% interest. I could have paid it off years ago out of my mutual fund investments. But to do that I would have had to take out more than $250,000 because the formerly unrealized but now realized capital gains would have had to be paid. So it would have cost my investments say $275,000, depending on the basis and the selling price on the market. By doing that, I would have ‘saved’ $250K x 2.5% or roughly $5800 annually. Except if I itemize (and I generally do) the ‘Gubmint’ as you call them will give me about a third of that back, so my actual cost of that interest is only about $4K.
Well, that’s still $4K, you say, over what it would cost if you paid off you mortgage. And it is, too, but then You have to look at opportunity cost.
That $275K I had to withdraw from investments to pay off the mortgage was MAKING well over 8% in dividends and long term capital gains. That is roughly $23,000 a year I will forgo if I use that money to pay off the mortgage. What is more, since capital gains are taxed at a lower rate than my regular income, and not taxed at all until they are realized, I’d have to MAKE about $26,000 a year to offset that loss.
So practically speaking, by having a mortgage rather than paying it off, I’m saving myself about $20,000 a year ( $26,000 - 6000) and increasing every year which is already damn near equal to my house payment. 15 years of that and I’m over a third of a million better off than paying off the mortgage.
Well, that’s still $4K, you say, over what it would cost if you paid off you mortgage. And it is, too, but then You have to look at opportunity cost.
That $275K I had to withdraw from investments to pay off the mortgage was MAKING well over 8% in dividends and long term capital gains. That is roughly $23,000 a year I will forgo if I use that money to pay off the mortgage. What is more, since capital gains are taxed at a lower rate than my regular income, and not taxed at all until they are realized, I’d have to MAKE about $26,000 a year to offset that loss.
So practically speaking, by having a mortgage rather than paying it off, I’m saving myself about $20,000 a year ( $26,000 - 6000) and increasing every year which is already damn near equal to my house payment. 15 years of that and I’m over a third of a million better off than paying off the mortgage.
In scenario 2 you use your 275k to pay off the 250k mortgage up front, then starting right away invest your old house payment (just principle + interest) at the same 8%. Over 15 years that will grow to 563k, so the net result actually isn't really that different.
I think your numbers get off because the point of paying off your house quickly is to be able to invest more money on a monthly basis. Yes your 275k makes 23k/year, but you are also paying 20k in mortgage payments as well. I definitely agree that if you pay off your house then just start blowing more money that you would have been better off with the investments, but if you "pay yourself" the house payment instead and invest what otherwise would have been going to principle and interest your spread really isn't that big, definitely not the 750k number you put out there.
If you see any glaring errors in my numbers please point them out. I also didn't really factor in taxes, since either the mortgage payment or investing amount both come out of after tax dollars.
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