Equity Versus Interest Paid

[Mike Lowe]

Wife and I are in the midst of buying a home...more details on that as they come...

My question is, for real estate being such a fine investment (with an * with today's market obviously), how is it considered so; even in a regular market?

I know it is, as someone would have proven otherwise but how does this get explained:

Purchase a home for $300,000 (after down payment) and you end up paying $247,000 in ADDITIONAL interest. That means, the house must be valued at more than $547,000 before you start making it a profit.

Is my thinking correct? I guess the idea is that after 15 or 30 years the home is worth-yes-even more than $547,000.

This is our first home purchase...we've been shopping since May and have backed out of two short sales. We currently have an offer out on a foreclosure property...we've done our homework and know the game I guess but I still have some weird thoughts/ideas running through my head late this evening.

Other thoughts to talk about once I'm not so tired hahaha:

Paying cash for a home? (100% financing)
Keeping mortgage rate to 25% of take-home pay (importance/realism of)
15 year payment plan instead of 30

[Eaglesfan27]

No, your home isn't necessarily worth 547k after that time. Interest has nothing to do with equity. Interest is the cost to you of a bank giving you a loan. It has nothing to do with the value of your home.

If you can manage to pay cash for a home, of course that is beneficial as it can save huge amounts of money. As for the other questions, there are people better equipped than me to answer those, however, I believe the 25% or 30% guideline is a good one. While I want to pay off my house early, there are some significant tax breaks for paying a mortgage, so it is not all bad news if you have to go with a 30 year (which most people do.)

[Flasch186]

plus the value of living under a roof.

[JPhillips]

A few things.

1) As EF27 mentioned, the interest deduction is a big advantage.

2) You'll have housing costs regardless, but this way you are at least building some equity.

3) I wouldn't be surprised if your home is worth more than 547,000 in thirty years. What were similar homes worth in your area in 1980?

[Mustang]

Paying cash for a home? (100% financing)
Keeping mortgage rate to 25% of take-home pay (importance/realism of)
15 year payment plan instead of 30

1. Assuming that the $300K isn't just laying under a mattress and you would invest it, you'd have to look at what the $300K might be worth in 15 or 30 years vs what you are paying in interest.

2. Depends on what your pay is really and other obligations and what you are wanting to do with your life. Obvously if you are making $20K a year after taxes, chances are you aren't buying a house for $5K which is a little more than $400 a month with a mortgage. On the flip side, if your take home is $1M a year, do you need a mortgage of $250K a year? I'm comfortable at around 30% of my take home so, just depends on the person.

3. Cheaper interest rate at 15 year plus the obvious benefit of paying it off early. We have an offer on a house, but if we don't sell in the next 3-4 months and interest rates are low, we are going to pull the plug, refinance at 15y and stick around for several years year.

[Marc Vaughan]

My take on mortgages is take out what you can afford and buy the house you can afford - also ensure you have a stash in the bank to cover any lean times for a minimum of 6 months (which should be enough time to get yourself back on your feet).

Where possible get a fixed rate of payment for as long as possible - don't stress over comparing this with other peoples and worrying if interest rates will go up or down, all you want to know is that you're able to make your payments and that your situation is predictable.

For every year where you might watch a neighbours flexible payment be lower than yours you'll have a year where rates are 'up' and you feel fortunate that you don't have to stress over things ...

Stressing over money isn't fun, avoid it at all costs by making things predictable.

(oh and try and over-pay on your mortgage a little where possible - you'd be amazed at the effect it'll have on reducing the interest payments over a few years)

PS - With regards to 'value' of a house, my families house has no value - its my families home not an investment per-se.
Its impossible to predict house price movements, in America traditionally they haven't been particularly agressive historically if you look over time (in comparison to say stocks) - however having a roof over your head is vital, especially in hard times and imho its better to pay a mortgage than to give the same amount of money away to a landlord.
Remember if you leave your house then chances are you'll be buying another one - thus if prices are up you'll end up paying more for your next one anyway, if they're down then you'll pay less - hence there are pro's and cons to moving in either market.

[flere-imsaho]

2) You'll have housing costs regardless, but this way you are at least building some equity.

I think this is the major benefit, to be honest. I think we've lost sight of this recently when homes have become somewhat "riskier" investments due to mortgages out on the bleeding edge.

3) I wouldn't be surprised if your home is worth more than 547,000 in thirty years. What were similar homes worth in your area in 1980?

Thanks, I feel old now.

Paying cash for a home? (100% financing)

Awesome if you can do it. Of course, you lose the tax deduction, but if you can buy a house outright, you probably don't need the tax deduction anyway.

Keeping mortgage rate to 25% of take-home pay (importance/realism of)

A decent rule of thumb for people congenitally averse to doing a budget. What I recommend (what we did) is to do a budget and decide how much per month you're willing to spend on mortgage+taxes+incidental upkeep. Adjust this number based on the likelihood of you or your partner losing your job (taking into account how quickly you or your partner could be re-employed). Pick a monthly number with which you're comfortable. Then translate that back up to a mortgage and go with that number.

15 year payment plan instead of 30

Depends on a ton of factors. Some people just hate paying interest and want to get it over with sooner rather than later. Some people want that tax deduction as long as possible. Some people are OK with the higher payment (or lower house price) on the 15-year. Some people don't care and want more hour (or less monthly payments) on the 30-year.

It's a judgment call.

[Marc Vaughan]

15 year payment plan instead of 30
A lot depends on your personality, the stability of your incomes and situation as well imho - for instance if you have a job which isn't overly stable then consider a longer term and make over-payments.

If you have a high paying stable job but are a spendthrift then get it over the shortest terms possible to force you to spend at least some of your money wisely etc. ;)

[chesapeake]

As has been noted, the math is more complex then you think in determining a "profit" because you need to factor in both the mortgage interest deduction and the money you would have to spend on housing otherwise.

With regard to 15-year and 30-year mortgages, my wife and I took out the former when we bought our current house because 1) it is a starter house and we expect to move before paying off the loan, and 2) the shorter term came with a better rate and a faster accumulation of equity, which will serve to give us more for a down payment when we decide to get a little more house.

Interestingly, I was looking at interest rates in December and the rate on a 15-year loan was actually higher than the rate on a 30-year loan. Things are really messed up right now.

[QuikSand]

Purchase a home for $300,000 (after down payment) and you end up paying $247,000 in ADDITIONAL interest. That means, the house must be valued at more than $547,000 before you start making it a profit.

Is my thinking correct?

Your thinking is very, very incorrect here, sorry.

The core concept you need to try to understand is the time value of money (http://www.investopedia.com/articles/03/082703.asp). Just because you pay interest over time doesn't mean you are paying *more* for the house in real terms. A dollar today does not have the exact same value as a dollar ten or thirty years from now. The linked site does a decent job trying to articulate this concept.

[Toddzilla]

I'm of the thought that you pay as little down as you can and you take out the biggest mortgage you can.

In terms of interest, you get a much higher return on your investment if you invest wisely, even if you invest somewhat conservatively.

The key here is that you *actually invest*. As Quik says, a dollar in your hand now is worth much more than a dollar in your hand 30 years from now.

Try this article (http://www.ricedelman.com/cs/education/article?articleId=232&titleParam=10%20Great%20Reasons%20to%20Carry%20a%20Big,%20Long%20Mortgage) on for size...

[DanGarion]

PS - With regards to 'value' of a house, my families house has no value - its my families home not an investment per-se.

DING DING DING. This is what I've been saying to my friend that used to work in the mortgage business and he always laughed and said I was crazy.

[path12]

DING DING DING. This is what I've been saying to my friend that used to work in the mortgage business and he always laughed and said I was crazy.

That's because the housing bubble was kept afloat by convincing people that a house was an investment rather than a long-term domicile.

I expect Marc's definition is going to be more popular as the upgrade every few years option goes by the wayside.

[DanGarion]

That's because the housing bubble was kept afloat by convincing people that a house was an investment rather than a long-term domicile.

I expect Marc's definition is going to be more popular as the upgrade every few years option goes by the wayside.
Everyone was looking for a quick buck.

I agree.

[CU Tiger]

Awesome if you can do it. Of course, you lose the tax deduction, but if you can buy a house outright, you probably don't need the tax deduction anyway. you DO NOT LOSE ANYTHING. Most people will never pay cash for a house, but please do not spread the tax savings myth. You can deduct ONLY interest paid from your taxable income. in other words if you pay 5,000 in interest in a year, your taxable income is reduced by 5,000. In a 36% tax bracket, that 5,000 reduction in taxable income equates to $1,800. So your stance is you would rather pay a bank 5,000 than pay uncle sam 1,800? Remember interest only is deductable and it is not a tax deduction but a reduction in tax basis....

[DanGarion]

you DO NOT LOSE ANYTHING. Most people will never pay cash for a house, but please do not spread the tax savings myth. You can deduct ONLY interest paid from your taxable income. in other words if you pay 5,000 in interest in a year, your taxable income is reduced by 5,000. In a 36% tax bracket, that 5,000 reduction in taxable income equates to $1,800. So your stance is you would rather pay a bank 5,000 than pay uncle sam 1,800? Remember interest only is deductable and it is not a tax deduction but a reduction in tax basis....
I know that my loan I'm paying about $14,000 in interest for the first 5 years or so, which means around $3500 less in taxes I will be paying each year, whereas if I was paying rent I wouldn't get anything. Not to mention the reduction in car insurance because the cars will now be in a garage.

I look at it this way. Right this second at our apartment we pay $1400 a month. With getting the house we will be paying $2000, but also we will paying just about $300 less a month in taxes, which equals out to $1700, not to mention we are actually putting the money into something we will own. So we actually get to own something from only $300 more a month. Seemed like a wise choice.

[QuikSand]

you DO NOT LOSE ANYTHING. Most people will never pay cash for a house, but please do not spread the tax savings myth. You can deduct ONLY interest paid from your taxable income. in other words if you pay 5,000 in interest in a year, your taxable income is reduced by 5,000. In a 36% tax bracket, that 5,000 reduction in taxable income equates to $1,800. So your stance is you would rather pay a bank 5,000 than pay uncle sam 1,800? Remember interest only is deductable and it is not a tax deduction but a reduction in tax basis....

I think you're really in the wrong here, and definitely are not so absolutely correct to merit CAPITAL LETTERS AND EXCLAMATION POINTS.

Let's say that I have two options, to pay cash today, or to buy my house with a mortgage today and pay it off over time. And let's say that I have a secure investment that matches the interest rate I'd get on my mortgage. In essence, I'm setting up a situation where the time value of money is washed out, and I should be indifferent between the two payment methods.

Using the mortgage is smarter in this case (where all else is equal) since I get to deduct my interest payments from my taxable income. The government has decided to grant favorable treatment to this kind of borrowing... and that makes it a better deal, all else equal.

The bottom line is that because residential mortgage borrowing is a special deal under the income tax law, it's an attractive method to use for pretty much anyone, even those who could pay cash for the home. It is a better deal, and it is because of the tax treatment.

[CU Tiger]

I think you're really in the wrong here, and definitely are not so absolutely correct to merit CAPITAL LETTERS AND EXCLAMATION POINTS.

Let's say that I have two options, to pay cash today, or to buy my house with a mortgage today and pay it off over time. And let's say that I have a secure investment that matches the interest rate I'd get on my mortgage. In essence, I'm setting up a situation where the time value of money is washed out, and I should be indifferent between the two payment methods.

Using the mortgage is smarter in this case (where all else is equal) since I get to deduct my interest payments from my taxable income. The government has decided to grant favorable treatment to this kind of borrowing... and that makes it a better deal, all else equal.

The bottom line is that because residential mortgage borrowing is a special deal under the income tax law, it's an attractive method to use for pretty much anyone, even those who could pay cash for the home. It is a better deal, and it is because of the tax treatment.

The great myth continues.... You deduct the interest payments from taxable income, not taxes paid. Again at best you only "get" 36% of your money back. If you invested the money....
lets use 5k as an example
(Again assuming the money is just laying around and you can freely pay off your house, and not taking risk matrix or unforseen circumstance into the equation)

mortgage scenario
you pay out 5,000 in home interest
this is a net of -5,000
Then at tax time you get to deduct the 5k from your taxable income whih result in an 1,800 (at 36% rate) reduction in taxes due.
For a net loss of -3,200

Cash scenario
You keep your 5,000 since you dont have to pay interest.
You invest in at a measely 3% (CDs will pay 3% if you cant get 8-10 in this economy you need to fire your investment broker but I digress)
At the year end your 5,000 is now worth $5,150 with its 3% income.
Now tax time rolls around...you have to pay 36% (keeping things even)
So you send uncle sam a check for $1854.
but you didnt spend your initial 5,000 so 5,150-1,854 = a net of +3,296


Now would you ratheer pay the bank 5,000 and at the end be at a net loss off 3,200 or pay unclee sam 1,800 and end at a net of 3,296?


This same thinking is what led us to the great housing crash....dont believe the rhetoric of realtors and bankers. its amazing to me when a guy comes on TV and waants you to buy a Shamwow for 19.99 you are immediately skeptical, however put him in a suit and let him sell you on an investment and you immediately think he is trying to help you...

IT IS WORTH CAPS AND EXCLAMATION POINTS !!!!!

[CU Tiger]

DOLA-
In other words you dont get a refund equal to your interest paid, you only reduce your income by the interest paid.

[flere-imsaho]

I'll let QS argue the cash-vs-mortgage point, but I'd like to say:

HOLY MISREADING BATMAN!!!

Let's review what I wrote again:

Awesome if you can do it. Of course, you lose the tax deduction, but if you can buy a house outright, you probably don't need the tax deduction anyway.

So, back in the real world, most of us can't afford to buy a house outright, so the tax deduction is really worth something. And since I pay considerably more than $5,000 in interest each year, and since I'm in a pretty high tax bracket, the deduction for my family is considerable. But please, go ahead and poo-poo that idea.

Still back in the real world, the point I was making is that if you have the money to buy a house outright, the question of cash-vs-mortgage, however you may boil it down, is almost certainly a moot one to you. A savings of a small percentage off of your taxes is, to a person in this position, likely pocket change and mainly irrelevant to their financial situation.

I do, however, look forward to the inevitable QS smackdown.

[QuikSand]

Well, of course if you assume that the available return from an investment is tiny compared to the massive interest paid on a mortgage, then naturally everything works out to say that borrowing is bad. But that's not necessarily a reasonable assumption.

Right now, it's very reasonable to find a municipal bond investment that pays around 5%, tax free. And a mortgage rate that is in the same vicinity. It isn't always the case that opportunities like these are basically the same... but it's certainly realistic. More so that your built-in assumptions that investing is only for a "measly 3%" as you start off with.

Bottom line is that both a pre-tax investment rate and a pre-tax mortgage interest rate should be discounted by the tax treatment. And in most cases, that means that investing reasonably will return a better yield than the net cost of mortgage borrowing. Not a stupid myth, not unsound logic, just pretty simple math. If I can do better socking my money away and using my yield to pay off my mortgage and still have money left over... I'm better off. Period.

[flere-imsaho]

That's a pretty weak smackdown, QS. I was expecting more capital letters. :p

[QuikSand]

DOLA-
In other words you dont get a refund equal to your interest paid, you only reduce your income by the interest paid.

Honestly, I don't think anyone is missing this point. There's no great myth that mortgage interest is just paid for by the government. Rather, there's a fact that the government essentially kicks in something like 40 cents for every 60 cents you kick in, when you factor in tax treatment. That's what makes it so different than renting, as we drift back to the simple example.

If two people with the same income are paying the same $1,000 monthly payment to own and rent, respectively... the owner is simply better off once everything is reconciled. He's probably paying $10,000 a year in interest, deducting that from his taxable income (just like you say) and ends up paying something like $3,000-4,000 less in taxes. Even before the potential for gaining equity in the property itself, the homeowner is better off, since he gets to pay for most of his housing with pre-tax income (in essence) while the renter pays in after-tax income. It's a big difference.

[Mustang]

mortgage scenario
you pay out 5,000 in home interest

Cash scenario
You keep your 5,000 since you dont have to pay interest.


You are using the logic of, would you rather keep $5,000 or pay interest. It doesn't matter if it is a mortgage, credit card company or loan shark obviously I'd rather keep my money, but you using a pool of money that people have earmarked for their living place vs a pool of just money for an example. Unless the person in the cash scenario is living in a van down by the river, that money they are going to keep is going to go towards some type of living quarters and if they are paying rent, they are not going to get any tax benefit or equity in relationship to owning a house if everything is equal.

[stevew]

I only pay about 6K per year in house payments and don't itemize so I guess I don't get the interest deduction. A what point does it become better to itemize?

My dad is anti borrowing and paid cash for their house about 18 years ago. I think they paid 93 and I'd say its worth about double now. No mortgage payments were nice but I wonder how much he came out ahead. The house basically gained about 4 percent per year if my calculations are correct. I dunno if this was a good move or not.

[DanGarion]

I only pay about 6K per year in house payments and don't itemize so I guess I don't get the interest deduction. A what point does it become better to itemize?

My dad is anti borrowing and paid cash for their house about 18 years ago. I think they paid 93 and I'd say its worth about double now. No mortgage payments were nice but I wonder how much he came out ahead. The house basically gained about 4 percent per year if my calculations are correct. I dunno if this was a good move or not.
If you own a house that you are paying interest on, I would think it's in your best interest to itemize...

[johnnyshaka]

You are using the logic of, would you rather keep $5,000 or pay interest. It doesn't matter if it is a mortgage, credit card company or loan shark obviously I'd rather keep my money, but you using a pool of money that people have earmarked for their living place vs a pool of just money for an example. Unless the person in the cash scenario is living in a van down by the river, that money they are going to keep is going to go towards some type of living quarters and if they are paying rent, they are not going to get any tax benefit or equity in relationship to owning a house if everything is equal.

His example of 5K of interest versus 5K cash is on the premise that the first guy bought his house using a mortgage and therefore had to pay 5K in interest versus the guy who paid cash for his house and therefore, theoretically, could use that 5K cash to invest because his house is already bought and paid for.

[Mustang]

His example of 5K of interest versus 5K cash is on the premise that the first guy bought his house using a mortgage and therefore had to pay 5K in interest versus the guy who paid cash for his house and therefore, theoretically, could use that 5K cash to invest because his house is already bought and paid for.

I still think it is apples and oranges. Person A might not have the means to pay cash for a house where Person B does and still has cash to invest? Obviously B is in a better position.

Then he needs to show the math for 2 people that both could have paid cash for a house... both start with $105000.. One pays 100% and the other 0% down. The 0% down person has a mortgage of $5000 a year on a $100000 house with $105000 cash leftover vs someone that paid cash for the house and has $5000 leftover.

Otherwise you are just showing why someone that is paying interest is losing money vs someone that is investing money is making money.

[CU Tiger]

Honestly, I don't think anyone is missing this point. There's no great myth that mortgage interest is just paid for by the government. Rather, there's a fact that the government essentially kicks in something like 40 cents for every 60 cents you kick in, when you factor in tax treatment. That's what makes it so different than renting, as we drift back to the simple example.

If two people with the same income are paying the same $1,000 monthly payment to own and rent, respectively... the owner is simply better off once everything is reconciled. He's probably paying $10,000 a year in interest, deducting that from his taxable income (just like you say) and ends up paying something like $3,000-4,000 less in taxes. Even before the potential for gaining equity in the property itself, the homeowner is better off, since he gets to pay for most of his housing with pre-tax income (in essence) while the renter pays in after-tax income. It's a big difference.

I do financial counseling at my church, and trust me people are missing that point. We have elder members who have enough in savings 3 fold to pay off their home but do not because of the "tax benefits".

Also many times I have heard the "if I won the lottery discussion" start with pay off everything but the house of course.... when it simply SHOULD be a respectable goal to own your home, though it is one few aspire to in their entire lives.

From a strictly tax stand point, in your above example thee owner would of course come out better, though if you are renting at mortgage rates, Id love to get you into one of my rental properties... a renter should be seeing a 15-20% break on a 15 year fix payment. To further disagree with your point however, the owner MAY be better off. If that 1,000 is a strapping payment and he is at the very edge of his affordability he would benefit from renting where someone else handles the risk (HVAC Unit, water leak, hot water heater, etc. large but non insured covered events) as a renter you make a phone call and the problem is solved, as an owner you now have to resolve (and pay for a problem)

I love home/property ownership, but it is not for everyone, nor is it a right of everyone, that thinking by and large is what caused led to our housing crisis.



Otherwise you are just showing why someone that is paying interest is losing money vs someone that is investing money is making money.


That was my exact point, unfortunately too many people insist that since you deduct that interest from your tax basis, that it is better to pay interest so that you have a tax deduction.

[Mustang]

Id love to get you into one of my rental properties...

And the truth comes out on why the crusade against mortgages...

:p :D

[Tyrith]

If you can afford to pay off your house in cash in many case you ought to just as a hedge against doing something stupid at some point in your life, because in some states (Texas for sure) owning your home outright makes it practically judgment proof. Mainly important for accountants, lawyers, doctors and such.

[Fidatelo]

I'd rather pay off my house and know that, aside from a zombie apocalypse, my family and I have a roof over our heads every night for the rest of my life. That seems more important to me than possibly saving a few hundred dollars each year (assuming I can find the right investment vehicle to do so).

[QuikSand]

The great myth continues.... You deduct the interest payments from taxable income, not taxes paid. Again at best you only "get" 36% of your money back. If you invested the money....
lets use 5k as an example
(Again assuming the money is just laying around and you can freely pay off your house, and not taking risk matrix or unforseen circumstance into the equation)

mortgage scenario
you pay out 5,000 in home interest
this is a net of -5,000
Then at tax time you get to deduct the 5k from your taxable income whih result in an 1,800 (at 36% rate) reduction in taxes due.
For a net loss of -3,200

Cash scenario
You keep your 5,000 since you dont have to pay interest.
You invest in at a measely 3% (CDs will pay 3% if you cant get 8-10 in this economy you need to fire your investment broker but I digress)
At the year end your 5,000 is now worth $5,150 with its 3% income.
Now tax time rolls around...you have to pay 36% (keeping things even)
So you send uncle sam a check for $1854.
but you didnt spend your initial 5,000 so 5,150-1,854 = a net of +3,296


Now would you ratheer pay the bank 5,000 and at the end be at a net loss off 3,200 or pay unclee sam 1,800 and end at a net of 3,296?


This same thinking is what led us to the great housing crash....dont believe the rhetoric of realtors and bankers. its amazing to me when a guy comes on TV and waants you to buy a Shamwow for 19.99 you are immediately skeptical, however put him in a suit and let him sell you on an investment and you immediately think he is trying to help you...

IT IS WORTH CAPS AND EXCLAMATION POINTS !!!!!

I just re-read this post, trying to follow your logic here. Seriously, if you're the one your congregation is coming to for financial advice... I barely know what to say.

Your little side-by-side construction is so completely ill-conceived I hardly know where to start. You completely ignore that the fundamental difference between the two scenarios is that in one of them you actually still have the money that you otherwise used to buy the house. Instead, you seem to be interested in some odd comparison with my having just that seed $5,000, investing it at a trivial assumed return, and then paying taxes on both the principal and interest of that investment.

How on earth could that possibly make any sense?

Keep it simple. Borrowing money is costly, in general. Overall, it's a good idea not to borrow if you can afford not to. But secured debt like a mortgage is less costly, since there's an asset behind it. That's a start. And since the government (not just federal but also state, which you are clearly skipping -- another 7% for most SC taxpayers from a quick search) allows home mortgage interest to be deducted from taxable income, that means that you're essentially getting something like a 40/60 "match" from the government on the costs of that particular borrowing.

If you get a 5% mortgage, you in essence are paying only about 3% of that yourself. That gets to the point where it becomes not only far less costly to borrow than most other debts, but in many cases a debt that you simply don't even want to pay off or avoid. This isn't trickery or witchcraft some sleight of hand that relies on complicated information way beyond you or your fellow congregants, it's just mathematics.

[CU Tiger]

QS: After this post you can rip away, we have successfully hi jacked this thread enough. As to the merits as of my financial advice, I can assure you my advice is sound and I have the training and record to prove it. But that is not the point of this discussion. I *think* where you may be struggling with what I am saying is you are so far more advanced than many people(not necessarily those on this board) on the financial ramifications of either decision the assumptions others have may be lost on you. Let me explain a bit. I can name no less than 5 people in our circle who are retired, have mortgages below 50k with 15%+ rates (from the 80s, remember those) and literally a million dollars in the bank. These people will not pay off their mortgages because "If I do I lose my tax break, and I am not giving all that money away" That is a sentiment that IS out there and one that is perpetuated by shady financial planners. Why do I fault professional financial planners? In many (most) cases these folks are commission paid and the more money invested the more they stand to make. There for they will advise against paying off any debt (we have even seen cases where financial advisors have convinced elderly people to borrow 30-40,000 on credit cards so they could invest it for them and make them more money) so that more cash is free to "invest". Granted in 15 years in the market I have averaged 14% returns (even at todays lows) and from a purely mathematical point any money borrowed below 14% should be profitable to invest. However that simple economic formula leaves risk and loss potential completely out of the equation. Any complex investment analysis must take risk into account wouldnt you agree? No, I am not arguing that if you chose NOT to pay cash for a house when you had the chance that the 100,000 would not be invested, of course it would and it would return a gain or loss. And again, given the choice between a high interest debt and a mortgage, by all means pay off the high interest. My entire post was aimed only at the "significant tax benefits to a mortgage" statement. To me and my reading, a benefit should indicate that everyone with a paid for house should run out and acquire a mortgage and interest payment so that they get these important benefits.

[CU Tiger]

I apologize that is near impossible to read....for whatever reason my formatting and spacing is being ignored

[flere-imsaho]

Quick question: for those elderly members of your church you mention, whom I assume are on a fixed income, would the loss of their tax deduction raise them into a significantly worse tax bracket (state or federal)? I'd imagine that could be a pretty big disincentive for someone on a fixed income.

Further, consider the question of liquidity. Some people may have a personal history (growing up in the Great Depression, for instance) that makes them averse to decreasing their liquidity for no good reason. Even if paying off their house reduces their liquid assets (i.e. cash) by just 5% or 10%, it may be something they don't want to do.

Just some ideas.

Anyway, your examples of the malfeasance of financial advisors, though considerably worrisome, are extreme and not along the lines of anything anyone is suggesting in this thread.

Let's remember, this all started when I said:

Awesome if you can do it. Of course, you lose the tax deduction, but if you can buy a house outright, you probably don't need the tax deduction anyway.

I'm sorry you took that as OMG DONT DO IT YOU'LL LOSE YOUR TAX DEDUCTION!!!111oneoneone when it was meant as "the only downside I can think of off the top of my head about paying your house off is the loss of the tax deduction, but if you have the means to pay your house off the loss of the tax deduction is kind of moot to you anyway."

[JAG]

CU Tiger, I think where you are missing Quik's point is taking into account interest rates. He's saying with interest rates so low today you're better off using the money you would to pay off the house for investing in something that should yield a higher rate of return to more than make up for the % interest you're paying, especially considering the tax break that makes the effective interest rate lower. If you bump the interest rate 10 points higher, that rather drastically changes the equation because it's a lot harder to make more than 15% - (tax break amount) in investments. But you're arguing one interest rate that's more relevant for the group of people you're talking about, he's arguing another that is more relevant for the majority of the board (and the original poster for that matter).

[Desnudo]

Another factor to consider is the opportunity cost involved. I'm assuming you need to pay to live somewhere. Assuming you paid $1500/month in rent, that equates to $540,000 in rent payments over 30 years, not discounted. With a house, you need to factor in additional costs for maintenance and upgrades, etc., so it's not a one to one comparison, but that should give an idea of the relative trade-off.

Also, I would look at purchasing a house in a down market as a potentially better investment opportunity than in a robust market as you are "buying low," and could potentially get better return on your investment.

[digamma]

Tell Dave we said hello.