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Why Do We Have a Mortgage?

December 11th, 2008 at 11:24 am

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 http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/c... 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.

6 Responses to “Why Do We Have a Mortgage?”

  1. homebody Says:

    Okay give that tip to me! I live in California, who is offering that interest rate?

  2. lartiga Says:

    homebody - The tip was that there were loans at 4.875% to be had. So I called Countrywide @ 1-800-586-9780 and they offered me a good deal. And guess what? Today's rates are EVEN LOWER! I see they are at 4.625% but ours is locked in @ 4.875%. Maybe I'll call to see if there is anything to be done.

  3. Mr. GoTo Says:

    I don't see how you can get a tax benefit of $1936 with only $9263 in mortgage interest. Your standard deduction as a married couple is $10,900. You must have some huge deductions in other categories.

    You are giving up a lot of guaranteed return in exchange for some speculative use of cash reserves. You could do quite a bit of nice traveling on the just what you will save each month with no mortgage. I would think about it more. We are pulling the mortgage payoff trigger this month.

  4. lartiga Says:

    Mr. GoTo - Yes, we have large deductions, one of which is very high property taxes (we live in Silicon Valley). This is the figure the calculator gave when I put in all the data, including the $10,900 deduction. My dh and I have a unique financial situation, where the majority of our household assets are my sole and separate property. He used a large portion of his liquid assets to pay for half of our 2nd home which has no mortgage. Our CA home is jointly owned, so he would have to come up with 50% and he is not comfortable doing that. If it were just me, yes, I would pay it off.

    Congratulations on paying off your mortgage!

  5. homebody Says:

    Thanks Analise. We are at 5.375 for another 5 years. I would love to lock in a rate like that. I will try calling them.

  6. monkeymama Says:

    Yeah, our mortgage interest is similar but our itemized deductions are more like $20k. Welcome to California! Wink I'd keep the mortgage...

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