This is my first time, so be gentle.
I owe $52,000 on my mortgage. I have that much in my savings account.
Should I pay the mortgage in full? Also I want to sell this house and move to a smaller one in another state. I think that the new house, even though smaller, will cost as much or more than my current home.
Will it make any difference to me financially if I sell my home in the next year, if it is paid for or not?
Thank you
I wouldn’t bother paying it off if you’re going to sell it soon anyway. Extra cash is always wonderful to have available when selling one house and buying another. For example, if just the right deal came up on the new house, you might be able to buy it and move before your old house sold, if you wanted to.
Personally, I like to keep myself in the following two positions:
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Have a 30-year mortgage with the lowest possible interest rate available at the time I purchase the property; and
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Have enough liquid-ish capital to pay it off in full at any time.
Mortgage interest is one of the few remaining tax deductions, and in my personal situation tax-wise (self-employed sole proprietor), I’m glad to have it. I can invest my liquid funds to make more money than just letting it sit in an equity position in my property. Plus, as pointed out by Fruitbat2, liquid capital gives you a lot more flexibility in terms of what you want to do going forward.
Unless you have some immediate need to have no mortgage, I’d stand pat as you are. Let your money work for you. Any mortgage broker will easily see that you are in a position to pay off your current mortgage if you choose, and will not hold it against you in determining your eligibility for a mortgage on the new property.
Good luck with the new plans!
These are more troubled times than usual. I’d prefer, at the moment, to have liquid capital.
I agree with the above, with one caveat: how much MORE do you have in savings than the $52k which could pay off your mortgage? If you don’t have much more than that, hang onto it, you might need it. But if you have several hundred grand socked away, and your mortgage rate is north of, say 5 percent, then by all means pay it off now; you’re losing money.
ETA: if you do pay it off now, you’re going to have to handle property taxes on your own, rather than let your mortgage company escrow it for you.
Good points.
I do not have a great deal more in savings.
It is just that so many people tell me to pay off my debts if at all possible.I do not have Credit Card debt, or car payments or any\loans besides the house.
But I do think I will sell the house before the year is out. And I hope to buy a new house for cash (the $ I will get by selling this one) and not have a mortgage in future/
Is there any advantage to buying a house for cash?
There’s your answer, then. The first thing you need to do is make sure you have a comfortable, liquid, emergency fund. Experts differ on how big the fund should be but numbers like 3-6 months of income are commonly cited.
If questions like, what do I do if my car dies/I lose my job/a tree falls on my house/etc. make you nervous, you need to have more money in savings.
Yes there’s some advantage in paying cash for a house (not spending money on interest) but it’s a good idea to have some cash in the bank as well. So I’d recommend financing the new house, although perhaps with a short mortgage term.
The other advantage to a mortgage is that you have someone on your side (the bank or mortgage company) making sure you’re not getting screwed. Because if *you’re *getting screwed, *they *are also getting screwed. And they know enough to prevent it even if you are not that sure.
This makes me wonder: My itemized mortgage interest deduction is never more than the standard deduction. . . . . Or am I doing something wrong?
Depending on the amount of interest, there may not be enough by itself to make it worth itemizing. On my Schedule A, there are three things that make it worthwhile: mortgage interest, property taxes, and state income taxes. Obviously your situation may be different.
My home is paid off, and it’s a great feeling to be in my position. That said, from your post I will agree with most above that you should keep your liquid assets liquid. When you sell your current place you will have a bargaining chip with the cash you have on hand for a down payment on the next.
From what I understand, keeping a mortgage for a tax deduction is bad math. Let’s say you paid $4000 in mortgage interest for the deduction. If you’re in the 25% tax bracket you just paid the bank $4000 to avoid sending the government $1000. You’re better off paying off the house.
The OP may want to stay liquid for now though if selling soon. Also, unless you have other savings for emergencies, you don’t want zero savings.
Yeah. If you, gawd forbid, die tomorrow, you will have $52,000 to leave your family, and mortgage insurance will pay off the loan. So I wouldn’t spend the whole nest egg on the house.
This actually happened to my parents. They had five years left on their mortgage, and a very low interest rate they had gotten back in the 70s. They had enough in the bank, that they could have paid the mortgage in full any time in the last five years, but decided not to. By brother had just finished college, and might have wanted to go to grad school.
Then my father died suddenly, with five years left on the mortgage. It turned out to be very good they had not paid the mortgage, because they had insurance that paid it off in full if either one of them died even if the other one was still alive. So suddenly my mother owned the house outright, with about $60,000 in the bank, and all their investments intact. She had lots of bills associated with his death that put a dent in the savings, but didn’t wipe it out, and once his life insurance paid off, she was ahead.
That may be a very mercenary way to think of it, but you need to do what has the best outcome, so you have to think in terms of what is the best financial strategy in the event that one of you dies, and better to talk about it now, than when one of you is actually dying of something, and it’s too much to deal with.
But aren’t you overlooking the offset of how much (s)he earns by investing his/her liquid cash, instead of sinking it into a fixed asset? If the OP has $52,000.00 to invest, and (s)he beats the amount she’s paying in mortgage interest by, say, 4.5%, don’t his/her annual earnings of (approximately) $2,340.00 in investment earnings also count against what’s being paid to the government?
And doesn’t this gets better the larger your mortgage and the more cash you have to invest?
Everyone’s situation is different. For me, having the mortgage deduction and liquidity works out far better than paying off the mortgage. It’s nice to be mortgage free, but it’s not always the best choice for everyone.
I am sure you are not doing anything wrong. Given where you live, however, I’m a little surprised if your mortgage interest and property taxes don’t exceed the standard deduction – but that’s obviously dependent on your interest rate, the amount of your outstanding mortgage balance, how long you’ve owned your home in California (Prop 13 rocks!), and what other deductions you can include on your Schedule A.
Wait until you have built up a 6 months emergency cash cushion in any event. Then there are two fundamentally different schools of thought: One point of view is that owing money is something to be avoided if reasonably possible (so you pay the mortgage off). The other point of view is that you look at the dollar cost numbers comparing interest costs and tax deductions and alternative investment possibilities. So the answer depends entirely on your priorities.
This. Plus if you’re in a state without an income tax you can deduct your estimated or actual sales tax amount instead.
There are a couple of other oddball situations, but for most people these 3 are the vast bulk of the potential deductions.
Actually, it’s worse than that.
Assume the OP is single. For 2016 his standard deduction is $6,300.
Ref Troy above, let’s assume for simplicity that the OP’s property taxes & state income taxes total $3,000. If, per your example, his mortgage costs him $4,000 in interest his total itemizable deductions are $7,000. Which means he is deducting $700 more than the standard deduction and sees a tax reduction of 25% of $700 which is $175. Bottom line: he spent $4000 on interest to save $175 on taxes.
Now what if the OP’s property taxes & state income taxes only total $2,000? now his total itemizable deductions are just $6,000. Which means he’s smarter to take the standard deduction. Bottom line: he spent $4000 on interest to save $0 on taxes.
If we ignore all deductions other than mortgage interest, a single person needs to have a 4% mortgage bigger than $157,000 to beat the standard deduction. A married couple filing jointly need a $314,000 mortgage to beat the standard deduction. Realistically, anyone with a mortgage will have a property tax deduction and a sales or income tax deduction. But this does demonstrate it takes a good-sized mortgage to get much tax benefit, at least under current interest rates. Clearly the OP with his $52K mortgage is not there.
This is correct, from a purely tax-analysis POV. If you have to have a mortgage anyway, then the deduction is a nice perk, but you don’t save money by paying interest on a loan.
Orthogonal to the tax deduction issue are the liquidity question and the investment return question. If you pay off the loan now, that’s a lot of cash which could be in (potentially) more valuable investments which is now tied up in your house. Additionally, you now have a much smaller liquidity cushion if an emergency should arise.
So you want to ask yourself: if I pay off the mortgage, will I have enough cash left in the bank to deal with any reasonable emergency that might occur?
If the answer to that question is yes, then the next question is: if I pay off the mortgage now, will I be giving up an opportunity to invest that cash elsewhere for a rate of return that is greater than my mortgage interest?
If the answer to that question is yes, you need to consider the emotional value of having your debt paid off. (This is a value calculation often neglected by financial writers.) For you, it might be worth more to have the knowledge that your house is yours than to get a couple extra points of return on your assets. In that case, go ahead and pay it off, assuming you can afford the liquidity crunch.
But in general, I agree with the others here and say if you have a good interest rate, keep paying the mortgage and use the cash for building liquidity and/or other investments.
If you’re planning on moving and selling soon, there really is no benefit to paying it off early. This was similar to me in 2008, except the payoff was smaller. We did move to a more expensive house in a different state. I didn’t do the payoff as I would have a new mortgage anyway, and moving has many overlooked costs. I preferred the liquidity as I tend to be financially risk averse and want to be able to cover unexpected vehicle, health, house, etc costs.