When we first got married, our first house cost $20,000.00. All I remember is we had to pay 3 points to get the loan down to 12.5%! [img]/forums/images/icons/shocked.gif[/img] We borrowed $18,000.00. If we would have payed it off over 30 years, we would have paid a total of $68,000.00 for a $20,000.00 house! [img]/forums/images/icons/shocked.gif[/img] [img]/forums/images/icons/shocked.gif[/img] [img]/forums/images/icons/shocked.gif[/img]
Needless to say, we paid it off very fast. Our 2nd house was also very inexpensive, so again, paid off very fast. Same thing when we bought our land. We are very fortunate that the cost of living in Northern Indiana is dirt cheap, thank goodness.
Now we are considering building a new home. Are there any advantages to paying a mortgage slowly VS paying off the house as fast as possible?
One thing I have heard is taxes. I know you can deduct the interest from the taxes, but on our last three mortgages, the interest never exceeded our standard deductions. We itemized several years in a row and the closest we ever came was $14.00 less than the standard deduction. It wasn't worth the aggravation keeping the books and all that work and we came up short of the giveaway. [img]/forums/images/icons/mad.gif[/img]
Another thing I have heard is interest rates. If you can put the money to work and make more in interest than the mortgage costs you, you should do it because you are using someone else's money to work for you. If this is possible, it sounds too good to be true. Is it?
So, can someone explain to me in simple terms any advantage to having a mortgage VS paying it off as fast as possible. I would really appreciate it. Also, any links to good reading on this subject, or book suggestions would be appreciated.
The only thing that I can tell you about taxes is that it is best to pay as little as possible, but why spend money on something so that you save a portion on it in taxes?
For example, you pay 16,000 per year in interest, another 2,000 in real estate taxes and another 2,000 in other deductions. Also assume that the standard deduction is 6,000 and you are in the 30 percent tax bracket. Your net deduction of interest over the standard deduction 14,000 and you saved 4200 in income taxes, but it cost you 16,000 to do it.
Any investment that the average person can get into that yields more than the mortgage interest rate is going to have risk. Pay of the house first, then you can afford the risk.
>>Another thing I have heard is interest rates. If you can put the money to work and make more in interest than the mortgage costs you, you should do it because you are using someone else's money to work for you. If this is possible, it sounds too good to be true. Is it?
If somehow you could magically GUARANTEE that the money that you don't use to pay off your mortgage, can be invested in a *100% risk free* in a product that provides higher returns than the mortgage rate, than by all means take a mortgage and invest your "cash" and make money on the spread. (difference between what you are making on your investment, versus what you are paying on your loan).
I will submit to you that right now there is *NO* product that can give you a 100% risk free, guaranteed rate of return that will pay more than a typical fixed rate mortgage....so my advice, now and always (to everyone), is don't use a mortgage unless you have to. and if you have to, pay it off as fast as you possibly can.
Sounds like you have already been "mortgage free" at least a few times in your life already, so you know what a good feeling it is. I am have been mortgage fee for about 3 years...it is a very, very nice feeling. [img]/forums/images/icons/smile.gif[/img]
As far as the tax advantage of having a mortgage, that is a ludicrous claim...if someone can argue that a reason to have a mortgage is to get the tax deduction, then by extension, it would make even more sense to get a mortgage with the highest interest rate possible so that you can pay the most in interest, and get an even bigger tax deduction...that doesn't make any sense at all does it?
Avoid the mortgage, or pay it off as soon as you can...you'll be glad you did.
If you do not need a mortgage then there is no advantage in having one with a few exceptions.
If you need to have a sum of money from time to time say the cost of a new tractor then a home equity line works well. The interest is deductible and usually lower in rate than any other loan. Just don't over use it just because it is there.
If you are able to invest the money at a higher return then it makes sense to have the mortgage. As already said there are always risks. The conventional mortgage is expensive to start out while a equity line can be free of any charges.
I used the line of credit on my previous home to build our new home. We did not want to be tried to a monthly payment. There was an equity line set up on our new home as soon as the bank would let us. I used that to buy equipment needed for the new house and a new van. We pay as much as we can each month and will pay it off as soon as possible.
Now in business it is another story. Leverage is very important and having mortgages on your business property allows you to control more and hopefully make more money. An example would be if you had 100k to invest in rental property, you could just buy one 100k property and collect the rent. Then again you could leverage and buy ten properties at 100k each and carry mortgages of 90%. That would give you control of ten times the property. If the rents are used just to carry the expenses you are much farther ahead as the tenants pay the mortgages and your equity grows.
The bottom line is if you do have a mortgage what are you going to do with the money.
I have an old friend that built a new house and took out a mortgage. He invested in the stock market and lost half his equity. He still has the mortgage and now has the remainder of his money in CD accounts earning far less than he pays every month in mortgage interest. His net worth decreases every month. Not what you or anyone needs to do.
The main reason for any mortgage is to buy more house than you could afford with cash. If you can pay cash then you are most probably better off without a mortgage. The exception is where your cash is better served in a higher paying instrument of some sort.
The tax/interest deduction comes in to play once you've decided to go the mortgage route. Deductions and homestead exemptions are all ways to get even more out of your borrowed money (or borrow less money).
Of course, then there's the whole question of what kind of mortgage. I'm a little rusty on the subject but there's probably a "Mortgage for Dummies" book out there [img]/forums/images/icons/smile.gif[/img]
So does all this mean you're close to building [img]/forums/images/icons/laugh.gif[/img] [img]/forums/images/icons/laugh.gif[/img] [img]/forums/images/icons/laugh.gif[/img]
We own our 160 year old farmhouse. Heck, it was built by the Wife's relatives! But recently we considered taking out a mortgage on this property in order to purchase outright another in a less "civilized" part of Vermont. Part occupied by real people, in other words. The idea was to rent out our existing farmhouse and cottage, using the rental income to pay off the mortgage.
Used that way, a mortgage might be sensible. But in the end we decided being landlords was not something we excelled at, and we stayed put.
<font color="blue"> So does all this mean you're close to building </font color>
I think so. Time is right. Kids are out of day care so that means we can afford a mortgage(think I'm joking? Newborns cost $160.00 per week and you supply the diapers and food). Our two kids were $220 per week! That's $880 per month and that = a pretty nice chunk of house payment!
So, we will be talking to builder very soon and see which ones give us the warm fuzzy feelings.
As for the mortgage thing... YIKES!!! I'm the world's biggest tightwad and don't want to cough up any interest to any one. [img]/forums/images/icons/grin.gif[/img]
Mossroad,
the real trick on the mortgage thingy is how it's set up. the interest that you pay is loaded on the front end. for example, say your payment is $500/month, when you look at a 30 year amortization schedule you'll find that at the front end of the loan payments, the money is going hugely to interest and very little to principle. if you go to re sell in 3 or 4 years you'll find you've not made a great deal of progress on paying for the house itself. during the last several years this fact tends to be hidden because property values have increased, so when you sell, you still make money.
i don't believe a mortgage is a good deal ever if i can avoid it, but if for some starting out it can sometimes be hard to avoid. a few things you can do: go for a 15 or 20 year mortgage insted of 30. that's 10 years of interest you are saving. many can't deal with 15 years, but 20 is fairly do-able. go conventional instead of fha. one requires pmi insurance the other mip. when i last checked (things may have changed) the insurance on an fha loan can be financed into the loan (nifty, 30years interest on insurance!), but then you also add about half a percent on to your monthly interest as a premium. coventional is more expensive up front but doesn't add a monthly premium in the form of that half percent. also once you have 20% equity in the home, the conventional loan no longer requires the insurance, the fha lasts 30 years (again, last i checked).
the best trick i've found is pre-payment. most people have heard of adding money to a payment, but don't really understand why it's beneficial. the fastest way to pre-pay is when you initiate the loan. lets say you have 10k to put down on a 30 year 100k loan but are only required to put 5k down. rather than putting the 10k down and financing 90k, you put 5k down and finance 95k, but after signing the paperwork for your 95k loan, you immediately make a principle payment of 5k. this will make it as though you've been paying on the mortgage for about 5 years (check your amortization printout, it's very enlightening). if you figure your p & i payments are say $700, with an average of $650 of that being interest the first 5 years of the loan , that would mean you just saved $39,000 in interest with that simple maneuver. it'll drive your banker nuts [img]/forums/images/icons/grin.gif[/img] hope this helps
paul
Yeah, the amortization table is a real eye opener. On our first house the payments were about $250 per month for 30 years. That's 250 X 12 for a total of $3000.00 per year. Then you take 3000 X 30 and you get $90,000.00 [img]/forums/images/icons/shocked.gif[/img] On a $18,000.00 loan!!! YEOWY ZOWIE!!!
We always made double payments, so $500.00 per month X 12 months = $6000.00 per year. It payed of the house in 5 years! 5 X 6000 still = $30,000 for an $18,000.00 loan, but it sure beats $90,000.00.
The first $250 went towards the interest and the second 250 went towards the principle. That first extra $250.00 knocked of 29 payments at the end of the loan. 29 X 250 = $7250.00 that we did not have to pay on the loan. We were amazed. Had someone not told us about that we might never have known. The bank sure isn't going to tell you that stuff. I remember that I use to take the amortization table and cross that priniciple off every month. It was great fun. [img]/forums/images/icons/grin.gif[/img]
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