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Old 08-11-2018, 10:54 PM   #1  
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Default Should I pay off my mortgage early? :D

So paying 4.5% interest the bank is charging me almost the same amount of money for interest than what's going out of the loan.

The main question I have is if I pay the remaining off with my savings, will I get hit for my income taxes at the end of the year that I won't have a mortgage? How much.?
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Old 08-11-2018, 11:08 PM   #2  
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I had to adjust my withholding to account for the loss in itemizing. Sure I could have used my savings in a vehicle paying higher interest/return.

For me it was simple as to why it was more important to not have a mortgage over our heads. I hate my job. Some days a lot more than others. It feels great knowing that if they **** me off enough, I could walk out any day.
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Old 08-12-2018, 12:22 AM   #3  
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Well, it would sure be nice not to have to throw 3k to the bank every year just because they loaned me money. I just don't know how much my income taxes would be affected if the mortgage is gone when I file.
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Old 08-12-2018, 01:54 AM   #4  
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For a definitive answer, you need to pull up last year's taxes and rerun them, removing the number..

For a quick answer, take your adjusted gross income and look up your marginal tax rate. Take the total annual interest and multiply it by that tax rate, and that's the amount of tax you're not paying. Assuming IL has state income tax, do the same thing for the state marginal rate. There are a few assumptions in here, specifically:

- your mortgage is below $750K (or $375K if married filing separately). With $3K of annual interest, that seems likely.
- your income isn't high enough to turn on deduction phaseout (around $250K for single, more for MFJ, less for MFS)
- you have enough additional itemized deductions to exceed the standard deduction amount

Any of those will mean you're not getting the full deduction benefit from your mortgage interest, and thus means that losing it won't cost you as much as the simple calculation above.

I'm sure there are a zillion other exceptions that could change it, but these should be the most likely ones.

Standard disclaimer here, I'm not a CPA or a tax attorney or anything like that, so this opinion is worth what you paid for it.

--Ian
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Old 08-12-2018, 07:32 AM   #5  
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The mortgage interest deduction is usually worthless. You don't get back 70 to 80% of the interest you pay. Your deduction is a small fraction of what you waste in paying interest. If your savings is actually in a savings account you are likely making less than 1% interest anyway and it would better serve you saving you the four and a half percent.

You've done a good job saving money and I believe that you will do a good job saving money again. Don't leave yourself without some emergency money for a replacement air conditioner, plumbing, or roof.

If your money is in actual retirement accounts (401k,IRA), then don't touch it. It will not be worth interest and penalties to withdraw it.
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Old 08-12-2018, 08:49 AM   #6  
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The mortgage interest deduction is usually worthless. You don't get back 70 to 80% of the interest you pay. Your deduction is a small fraction of what you waste in paying interest. If your savings is actually in a savings account you are likely making less than 1% interest anyway and it would better serve you saving you the four and a half percent.

You've done a good job saving money and I believe that you will do a good job saving money again. Don't leave yourself without some emergency money for a replacement air conditioner, plumbing, or roof.

If your money is in actual retirement accounts (401k,IRA), then don't touch it. It will not be worth interest and penalties to withdraw it.
Fringe case: If your job is stable, take the no fee/no cost 401k loan and pay it off?
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Old 08-12-2018, 10:10 AM   #7  
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With the higher standard deduction starting this year and the limitations on the state and local taxes deduction you may not be itemizing going forward. In that case you aren't getting a federal tax benefit for the interest you pay. Might still get a state tax benefit depending on local law.

Whether it makes sense to pay it early is less of a tax question and more one of what the alternative uses for the money are. I would be maxing out any tax deferred or tax advantaged retirement space before I even considered prepaying my mortgage. Then I would consider the term remaining on the note: if you have say 5 years left it might be a good idea given the state of the stock market currently. If you have 20 years left it might not, as historically equities have outperformed 4.5% over longer time periods.
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Old 08-12-2018, 10:13 AM   #8  
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Originally Posted by z31maniac View Post
Fringe case: If your job is stable, take the no fee/no cost 401k loan and pay it off?
No 401k loan is no cost. Even if they don't charge you interest or fees you have the opportunity cost: what that money would have earned inside the 401k.
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Old 08-12-2018, 11:26 AM   #9  
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You are only losing the interest paid deduction, since you will no longer have interest to pay, once the mortgage is paid off.

so let's say you paid 4500 in interest, and your tax bracket is 33%. You will now pay $1500 more in income tax. But you are still saving not paying $3000 in interest to the bank.
I'm all in favor of paying off mortgage and have that weight listed off my shoulders. Then live a happier worry free life knowing that now even a low paying job will be enough to live on.
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Old 08-12-2018, 12:58 PM   #10  
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On many loans, if you make extra payments, you must designate it to go to paydown of principal. Otherwise, you are just making part of the next payment early, and not changing the amortization schedule.

Make sure with your loan institution if you need to specify in that manner.

Otherwise, I think the other guys have answered it.
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Old 08-12-2018, 01:08 PM   #11  
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Quote:
Originally Posted by borka View Post
But you are still saving not paying $3000 in interest to the bank.
This. So much this.

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Originally Posted by borka View Post
I'm all in favor of paying off mortgage and have that weight listed off my shoulders. Then live a happier worry free life knowing that now even a low paying job will be enough to live on.
This. So much this.
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Old 08-12-2018, 02:56 PM   #12  
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Another plus: your credit score will jump. Even if you have good credit now, it will post a big neon sign that your credit is strong. People will want to lend you money, at better rates than you see now.

When I paid off my mortgage, the banks were tripping all over themselves to offer me money at stupid low interest rates. Home equity line of credits for $50,000 and half a point over prime. At the time, it was something like 2%.
That's when I bought my Miata. Got the HELOC, bought the car and started home improvements with the money I was paying on the mortgage. New windows, porch addition, new driveway, roof, etc. All stuff to raise the price of the house.
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Old 08-12-2018, 03:06 PM   #13  
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Another plus: your credit score will jump. Even if you have good credit now, it will post a big neon sign that your credit is strong. People will want to lend you money, at better rates than you see now.

When I paid off my mortgage, the banks were tripping all over themselves to offer me money at stupid low interest rates. Home equity line of credits for $50,000 and half a point over prime. At the time, it was something like 2%.
That's when I bought my Miata. Got the HELOC, bought the car and started home improvements with the money I was paying on the mortgage. New windows, porch addition, new driveway, roof, etc. All stuff to raise the price of the house.
This goes totally against my goal of paying off mortgage and living debt free.
Paying off mortgage, just to turn around and get another mortgage in the form of a HELOC?? a heloc can still take your house away if defaulted on, just like a primary mortgage.

I used to be in credit card debt, a chapter 7 later (7 years ago) i am now debt free, totally pay off credit cards when the bill comes, and have only 5 years left on mortgage.
Once the mortgage is paid off (2-3 years). i will be in zero debt, and will not buy anything with credit. Aint got cash? im not getting it.

Any left over money stays in the bank, then if i want to make a large purchase (miata, motorcycle etc...) its all cash. no loans.

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Old 08-12-2018, 03:11 PM   #14  
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Not having a mortgage is a pretty good feeling.

Paying it off with a 401K loan is a pretty risky way of doing it. It limits your career mobility, and if you happen to get hit with a job loss youíll still need to pay back the loan and some companies donít let you pay into the 401K after leaving so the IRS is going to hit you pretty hard in early withdrawal fees + taxes.
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Old 08-12-2018, 04:33 PM   #15  
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Prior to paying ours off, I was super conservative with decision making at work. The weight of that mortgage on my back would always be there, saying, "hay, dont forgot about me." "Screw up and then whatta ya gonna do."

Now I am on the other side of that fence. Oozing with confidence, borderline arrogance. My risk vs reward tolerance is totally on the risk side. I have been using that mentality for years now and can ride that line comfortably. It's not in my DNA to slack off.

I have been paying myself back after taking that chunk out to pay it off. I made sure I had sufficient rainy day funds before taking the plunge.
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Old 08-12-2018, 05:36 PM   #16  
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If you decide to go through with it, dont tell anyone. Maybe your parents but especially not your work.
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Old 08-12-2018, 05:53 PM   #17  
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I switched from a 30 year to 15 year. Best decision i ever made.
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Old 08-12-2018, 10:20 PM   #18  
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as an entry-level player in the "adult" expansion of this "real life" game, I don't remember any of this terminology or ideas being mentioned during the tutorial stages...Did I miss something?
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Old 08-12-2018, 10:35 PM   #19  
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I switched from a 30 year to 15 year. Best decision i ever made.
It was for me, too. Paid off now. Much quicker without so much going to interest and not principal.
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Old 08-13-2018, 10:33 AM   #20  
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I switched from a 30 year to 15 year. Best decision i ever made.
Any particular reason for doing a 15 year mortgage rather than a 30 year and just making additional early payments against the principal?
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