My daughter asked me why we would carry a mortgage if we could pay it off. Why not pay off the loan and not have a PI payment at all? Well to start with, my dh and I have different financial positions. While I could come up with my 50% of the loan, it would strain dh's resources to do likewise (it's complicated). So we will continue to have a mortgage on our CA house. And, thanks to a tip from monkeymama, we are now in the process of refinancing to 4.875% and this will save about $225 a month from the current payment. But assuming we could simply pay off the loan, would it be a good idea?
To answer this question using the new 4.875% numbers, I started with a calculator that weighs various aspects of home ownership including the impact of property taxes, your standard deduction, and your tax rate. I also calculated the interest portion of our payment and what we could reasonably earn if we left the money in the bank. Here are the figures:
Annual payment (interest): $9263
Tax benefit by having a loan (per calculator above): $1936
Amount of interest earned on $190000 invested @ 4% = $7600
Minus 30% in taxes = $2280
Net investment income = $5320
Amount saved if we paid off mortgage: $9263 minus (5320+1936) = $2007
Bottom line: We could save ~$2000 a year we paid off the $190,000 loan, assuming my calculations are not flawed in some way. But we have decided not to for several reasons. Primarily, dh feels contributing his 50% of the payoff would deplete his cash reserves. We plan to live here only 5-6 more years, then we will sell our townhouse or rent it if we cannot sell. By not paying off the loan, we have access to larger cash reserves for future plans that include travel and possibly buying property in a foreign country. So, this compromise works for our situation.
In general, I think it is a good strategy to pay off your mortgage but everyone should assess their individual situation before doing so.
Why Do We Have a Mortgage?
December 11th, 2008 at 07:24 pm
December 11th, 2008 at 08:02 pm 1229025744
December 11th, 2008 at 08:15 pm 1229026555
December 11th, 2008 at 10:35 pm 1229034900
Congratulations on paying off your mortgage!
December 12th, 2008 at 01:02 am 1229043745
December 12th, 2008 at 03:15 pm 1229094911