property mortgage question

Buckcreek · Mar 23, 2006

I would like to get some opinions on somthing thats is realy stressing me out . I have a loan on my property, it is not alot of money and i am paying it with dividents from a mutual fund. I have made enough money to pay this loan off and have enough money to work on they property. I am unemployed at this time. I am thinking of taking enough money from the fund and gettting out of debt . and putting the rest back into the fund. my financial advisor wants me to keep this money in this account because it is makeing more intrest than i am paying out. But if i dont take this money out i will not be able to do this work. It is not alot of money well it is to me but it is a small portion of what is invested. I also have medical bills i am falling behind on. I have seen others get good advice on here, i would just like some opinions. I Have to pay taxes on this money whether i take it out or not. And i am in a low tax bracket at the moment. I do not know alot about taxes and fees , that is why i always talk to my lawyer and finacial advisor. Thanks .

Jimbrown · Mar 23, 2006

Well I think we would need a lot more info to give any real advice but this is what I did. When my wife and I retired we built a new house. We sold enough stock to pay for almost the whole cost of the house and land (80ac). We financed just enough that my Social Scurity pays the motgage. I look at that as sort of a free loan.

Humbleto · Mar 23, 2006

Hey Buckcreek, it's your money, do what you want to do. I think the last sentence is really your answer. Once the money is out and spent, it's GONE! That's my 2 cents.

Buckcreek · Mar 23, 2006

It would be $22,000 out of $235,000 The rest would go back into the account. I know all too well about once its gone its gone. Then i would be debt free. and work done. untill next time /forums/images/graemlins/frown.gif

EddieWalker · Mar 23, 2006

Buckcreek,

Your piece of mind and situation is unique to you alone. But if I understand your question, you want to know if it's a good idea to pay off your loan and not have a mortgage anymore?

I've had several homes in my life and always paid a mortgage on them. People told me it was smart to have a mortgage because you get more back on your taxes, but when I add up my interest versus my returns, it doesn't make any sense.

I had the oportunity to pay off my mortgage on my land by selling off a big portion of it. I even had a little left over after the sale to build a house with. Not allot, but enough for a small, simple home.

I did this and don't have a mortgage any more. I weighed the options of having the cash and financing the house versus paying it off and NOT having to make a monthly payment ever again. For me, it was an easy choice.

I'm self employed and work jobs when they come along that interest me. So far it's worked good for me. I'm able to spend more time working on my place without any preasure to make a large monthly payment. I've also done some math and can live very nicely for less than a thousand dollars a month.

If my plans fail to materialize to build an RV Park, I still have the land, the house and equipment. I can get a job at just about anyplace making ten dollars an hour and not have any finiacial worries.

This might not sound like much money, but the freedom I have is just amazing. There really is no way to describe what it's like not having to worry about money when you don't owe anybody anything. I don't have much, but I don't need much.

Again, it's your choice,
Good Luck,
Eddie

kensfarm · Mar 23, 2006

Maybe talk w/ a bank loan officer to refinance and consolidate your debt.. your "investment dividends" may still cover the consolidated payment.

Not sure what work on the property you want done.. build a house?.. I'd delay any major $ expenditures while in your current employment status.. having the $ saved & invested will give you options if needed.. hope it works out.

gsganzer · Mar 23, 2006

If you're savings is gaining a higher interest rate then your mortgage rate, then why would you want to pay the mortgage off? You'd be throwing away money. You can always pay it off if the rates get upside down (lower savings rate then the mortgage rate). In the meantime, the money is working for you by gaining interest that exceeds the interest you're paying on the mortgage.

When I bought my home, I had enough saved to pay cash. However, it made more sense to borrow the money at a lower interest rate (mortgage). I put down the minimum needed to avoid the PMI (principle mortgage insurance) and borrowed the rest. That saved money has been a great asset when refinancing and getting a home equity line of credit. It shows you have some financial stability and they'll likely give a lower interest rate because of lower risk.

HomeBrew2 · Mar 23, 2006

Sorry but, not sure I'm following all the way. But, from what I gather, this is what I'd do:

Keep as much in the fund as possible because if the dividends are paying more than your loan interest rate, that's a good arbitrage (use of someone else's money to your advantage). Plus, by writing off the interest on your taxes, the cost of your loan is actually less than the face value interest.

If you need some money for whatever, just sell some of the shares of the fund to cover it. You don't have to sell all the shares, i.e., your whole fund investment at the same time. Thus, no need to "put any back in the fund later".

You will only pay Fed capital gains tax on the profit you made on the shares you sell. If your in the low tax bracket, the tax is only 5%. Dunno how your state handles cap gains though.
If you bought shares of the fund at various times in your life, as opposed to buying all at once, you may be able to sell certain lots that show a profit and some that show a loss to avoid tax (unless you have already sold some using the average cost method).

If you do something like this, make sure you watch how much profit you make by selling fund shares so you don't put yourself into the next tax bracket.

These are just food for thought. I'm not a financial guy. Just try to take care of my stuff as efficiently as possible.

Cheers!

Alan L. · Mar 23, 2006

For $22K don't place too much stock in the fact that the interest is deductible. Keep in mind that the interest income in the savings account is also taxable. Also keep in mind that the standard deduction for married couple is more than $10K, up to $11K if one of you is over 65. Bottom line the interest on a small mortage is probalby not saving you a penny of taxes.

If your money is truly in "savings" I doubt seriously the return is more than your interest rate on the mortgage. Its probably in something like mutual funds with a better return. Keep in mind this return can vary depending on the market, whereas you know what the return on paying off the mortgage is. Plus, being in mutual funds the principal could go down whereas the mortgage is a known figure.

On the other hand its a lot easier paying off debt on real estate than it is re-borrowing it if you need it someday, and there are costs involved. Right now you have this loan and it is at a favorable interest rate. Paying it off leaves you with less cushion for bad times.

Its pretty much a wash, but I probably would not pay it off if I was in your position.