Our mortgage is around 3.75%. We itemize deductions. But if we didn’t would a total market index fund at Vanguard beat 3.75% over a 30% period? Maybe. Different people have different abilities to deal with risk. Some will profit by being leveraged with respect to equities in the long term. Since we don’t know what will happen we can only guess what will be better.
Another set of intangible but important factors is the average person’s willingness to take on risk, knowledge of investment strategy, and (what I think is the most important), ability to keep on track with saving for investment in the absence of coercion.
One of the benefits in the own vs. rent determination (that has nothing to do with pure rational financial calculation) of taking on a mortgage in the first place is that it acts as a sort of forced savings: it gets the payor used to living by taking off the mortgage payment ‘off the top’ and living on what is left. Once the mortgage is paid off, it is easy to simply keep doing that, and pay what one used to pay in mortgage into savings.
The advantage of making early payments is that it is a very safe and easy form of investment, for those who are not experts in investing, and consequently have a wisely low tolerance for risk. In theory, of course one can do better - but the experts advising that strategy are just that - experts - and so have a lot better chance of doing better than the average homeowner.
We can only dream, but some day we might get income tax simplification and do away with some of these oddities, such as mortgage interest deduction.
Then, we can stop these debates on if it makes sense to pay down your mortgage early. 
Nope the question I was answering was
Is the benefit of paying off your house worth losing the income tax deduction?
We had simplification in 1986, IIRC. The complexity has crept back into the tax system since then.
The mortgage interest deduction is effectively being phased out, in my opinion. The standard deduction has crept up over the years, and I think the intent of that is to make it so your typical middle-class family will no longer benefit from the MID, they’d be better off taking the standard deduction. The next step, once the Tea Party types no longer control congress, is to then point out how the MID is only applicable to the very wealthy, then it will be done away with.
True. I haven’t been able to itemize for several years, even when I was still paying mortgage interest.
I’ve heard some mutterings about removing the state tax deduction as well.
That would help in the simplification process. Next they can add on the untaxed income in the form of employer provided health insurance.
Probably a topic for a different thread. But keeping it GQ, I wonder about scenarios where you remove all of these deductions and fiddle with the brackets in a revenue-neutral way.
Bingo!
Nope. Paid my loans off over 20 years ago.
Though, as noted, things were different 30 years ago when I went to college.
Regarding the “Why don’t the banks do it?” concept and home ownership.
A couple times I have living in places where at the time there were large numbers of very cheap, nice houses available and the metro area was doing quite well.
At those times, I knew a lot of people who bought a cheap house for very little down, lived there a few years (even grad students did this!), and then sell the house for a nice profit.
Let’s do an example. Buy a $25k house (I’m not kidding) with $2k down. 4 years later, sell the house for $60k (again, not kidding). You just made $58k profit on a $2k investment. While you were making monthly payments, etc., even you rented you’d still have payments and the profit easily covers any extra expenses and then some.
Note that the bank doesn’t get any of the profit from the increased value of the house.
This is leveraging in action.
Why don’t the banks cut out the owners? Just buy up those cheap houses, rent them out for a few years and sell them for a profit.
Well … that’s not what they do. There are risks (what if property values don’t go up much?), extra hassles (they’re landlords now, they have to pay someone to manage and maintain the properties), etc.
So, not worth it.
Just because something looks good to someone doesn’t mean the banks think it’s a good idea for them.
That is how I look at it - we pay [for sake of argument] $2000 per year in property tax. If we were to pay rent or mortgage, that would be [also for sake of argument] $1000 per month. Seems to me paying $2000 after the mortgage is paid is way better than paying out $12 000 per year …
Though oddly enough, mrAru’s military retirement pay happens to just cover the mortgage and taxes on the property we currently have. IF we didn’t insist upon electricity, the annual pumping of the septic tank, internet or cell phones, and didn’t mind growing everything we ate and kept sheep for the wool [hey, I can process a sheep from walking around baaing to roasted and the wool turned into fabric…] we would have seriously minimal outlay. As it is, the place is supportable on minimum wage easily once the mortgage is paid off. Short of imminent domain, as long as the taxes are paid, we can’t be turfed off.
We are looking at retirement in 1-5 years and have lived below our means to pay for the kids college. We did not move up in house size when other friends did so early 2000s. Many of them took a bath others are just now getting close to what they paid.
Last one is done for us this weekend and all has been paid for so they all graduated debt free. That was the promise we made if they did well and all did very well. But that costs a lot but we had saved a lot to pay for it all. All had to work 5 hours or more for income at school for stuff they needed. So mid year we have no kids in school and have all cars and houses paid off. Feels good.
I have paid off two houses, only problem, one house was damaged by road/bridge construction to the point is was to costly to repair. So housing investments can tank on you. Now I own a lot.
“when it comes time to retire. If you have the house paid off then you don’t have the monthly obligation to make mortgage payments. This lowers your living costs.”
That is my current goal with low maintenance and use home for a base, doing some travel is the plan.
But does any of this get you to the Canadian model, where you pay zero capital gains on the sale of your primary dwelling?
That’s true, but it also means that you have less money saved up to live on and to use for emergencies. I’m lucky in that my monthly payments are trivial for the value of my house, and when we move and downsize I can pay cash out of our equity. And our intention is to live in a condo with no maintenance requirements so we can travel, so I hear you about that.
The value of your mortgage represents your capital. If you pay off your $200,000 mortgage and turn around and sell the property for $200,000 … there’s no gain on the original capital, so no capital gains taxes. In the United States, we don’t pay on the gains of our primary residence either, I think the test is living there for two of the previous five years.
That’s a separate issue from paying off your mortgage. Here we’re paying interest to some [insert Pit-worthy platitude] bank which we’ll never see again. Only the principle part is returned to us when we sell. I say better to pay off the [insert Pit-worthy platitude] bank and keep all your future money.
Disclaimer: I write off all my mortgage interest through my company, and claim standard deduction off my personal return … talk about double dipping hahahaha
You can generally exclude $250,000 of the gain on the sale of a primary residence in the US. Twice that if married filing jointly. That’s quite a chunk of gain for average folks.
I guess I was ninja’d slightly on this one (was I really reading this thread for a half hour?), but at least I had a link!
Well I have plenty of money since we never up sized our house. I stuffed the money into the bank. My emergency fund would last us no less that 3 years and more like 5 if needed. A larger house would have been nice. 3000 sq ft of living space is plenty for just the two of us.
Even when the kids were growing up we all has room to have private time when needed. My two friends who did go big one is still 100k under water they other is about even. This is after buying their houses new 13 years ago.