What are the pros and cons of paying off a mortgage? We am in a
position to pay off our mortgage (about $115,000)and really want to.
It's a thirty year loan at a fixed rated for five years and then
varies with the market; we have 21 years left. I am 45 and my spouse
is 53. We are being told that for tax purposes we should not pay it
off. I don't get that because if we do pay off our mortgage that's
over $11,000 (most of which is interest) a year we can bank/invest
that we are otherwise wouldn't have. Any info would help.

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Request for Question Clarification by denco-ga on 01 Dec 2005 11:09 PST

Howdy momofthree-ga,

It might help researchers to know if you use a standard deduction, or if
you itemize your deductions.  If the latter, it might help to know your
tax bracket.  Also, the current interest rate you are paying might not
hurt to know.  Thanks!

Looking Forward, denco-ga - Google Answers Researcher

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Clarification of Question by momofthree-ga on 01 Dec 2005 18:16 PST

Here are the clarifications I think you suggested, denco-ga.  We don't
itemize so I guess we use standard deduction. The current interest
rate on our mortgage is 5.25% but that's only good for about another
20 months and then we either have to refinance for one rate or go with
the variable. I don't think we are in a high income bracket. We are a
family of four and our annual income is about $58,000 before taxes. We
are coming into a fairly large sum of money. It's a one time thing and
does not increase our annual income, once it's gone, it's gone and we
live paycheck to paycheck. One other thing, I made a mistake in my
original question. We actually have just under 25 years left on our
mortgage. Our annual interest per year is about $5500.  Honestly, in
the four years we have owned our home (or owned our mortgage i should
say) I haven't noticed any real difference in the amount of taxes we
pay.  Thanks for the comments so far and I hope this extra info helps
someone give us an answer.

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Request for Question Clarification by denco-ga on 01 Dec 2005 19:38 PST

Howdy momofthree-ga,

A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."

Greatly appreciate the clarification that you provided.

As you are taking standard deductions, which no doubt makes sense in your
case, you are getting no tax benefit from your mortgage, specifically from
the interest that you are paying on that mortgage.

Also, it is doubtful that you could take the money that you are going to
receive and invest it in a guaranteed manner so as to produce more than
you are paying on your mortgage.

The point in favor of paying off the mortgage is that you can then take
that $11,000 a year, and put it in IRAs, 401(k)s (as suggested by the
commenter) and other investments.

This online calculator tells us how much $900 a month placed into a 5%
interest rate investment will yield after 25 years, and you might be
surprised at the result.
http://www.ici.org/cgi-bin/calcs/SAV14.cgi/investment_company_institute

"You will have $539,006 at the end of the time period."

You do need to make sure there are no penalties to paying off the mortgage
early, which could be the downside.  You also need to have the discipline
to get into the rigorous habit of investing the money that you save.

Automatic deductions for the IRAs/401(k)s or other investments would go a
long way to that discipline.  If you have any credit card debt, then that
needs to be paid before you pay off the house, as that almost certainly
has a higher interest rate than your mortgage.

My family was in similar circumstances as yours, except without coming
into any amount of money.  What we did do was to make double, and even
triple payments on our mortgage, and then took a lump of savings to pay
off the balance.  Best thing we ever did!

With the proper investment discipline, we have taken that money we did
not give to the bank, in the form of interest on the mortgage, and have
done pretty good for ourselves.  Also on the upside is the amount of worry
that is lifted by not having to carry that monthly burden until you are
both over 70.  Priceless!

If you need any clarification, please feel free to ask.


Search strategy:  Personal experience.

Looking Forward, denco-ga - Google Answers Researcher

Howdy momofthree-ga,

Apologies, but I should have posted that second request for clarification
as an answer, as this posting. 

A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."

Greatly appreciate the clarification that you provided.

As you are taking standard deductions, which no doubt makes sense in your
case, you are getting no tax benefit from your mortgage, specifically from
the interest that you are paying on that mortgage.

Also, it is doubtful that you could take the money that you are going to
receive and invest it in a guaranteed manner so as to produce more than
you are paying on your mortgage.

The point in favor of paying off the mortgage is that you can then take
that $11,000 a year, and put it in IRAs, 401(k)s (as suggested by the
commenter) and other investments.

This online calculator tells us how much $900 a month placed into a 5%
interest rate investment will yield after 25 years, and you might be
surprised at the result.
http://www.ici.org/cgi-bin/calcs/SAV14.cgi/investment_company_institute

"You will have $539,006 at the end of the time period."

You do need to make sure there are no penalties to paying off the mortgage
early, which could be the downside.  You also need to have the discipline
to get into the rigorous habit of investing the money that you save.

Automatic deductions for the IRAs/401(k)s or other investments would go a
long way to that discipline.  If you have any credit card debt, then that
needs to be paid before you pay off the house, as that almost certainly
has a higher interest rate than your mortgage.

My family was in similar circumstances as yours, except without coming
into any amount of money.  What we did do was to make double, and even
triple payments on our mortgage, and then took a lump of savings to pay
off the balance.  Best thing we ever did!

With the proper investment discipline, we have taken that money we did
not give to the bank, in the form of interest on the mortgage, and have
done pretty good for ourselves.  Also on the upside is the amount of worry
that is lifted by not having to carry that monthly burden until you are
both over 70.  Priceless!

If you need any clarification, please feel free to ask.


Search strategy:  Personal experience.

Looking Forward, denco-ga - Google Answers Researcher

Thanks denco-ga, that your answer came from personal experience makes
it even more valueable to me. I really appreciate it.

If you have the money to pay off this mortgage, then I am assuming you
are in a fairly high income bracket.  Knowing this, the tax deduction
is probably worth a considerable amount.
I'll guess your interest per year is about $8,000.  If you're paying
about 30% taxes, that is a $2,400 tax deduction (assuming you already
meet the minimum to itemize deductions without this deduction).
In essence, the mortgage is costing you $5,600 per year rather than $8,000.

The other big thing to consider is what else you can do with the
money.  Namely, you should be maxing out any retirement accounts you
can.  That includes $4,000 in an IRA and likely $15,000 in a 401k. 
(Possibly $8,000 in IRAs and $30,000 in a 401k if you both work).  Not
only is all of this invested money tax deductible, but it will also be
earning you interest that isn't taxable until you take it out.

Once you max out these retirement vehicles, then you should wiegh your
options... What else would you use the money for?  How else would you
invest it (how much interest would you expect to earn)?  If your other
options are not worth $5,600 per year to you then paying down (or
paying off) your mortgage is a good option.

Best of luck in your mortgage adventures!

In addition to Denco's splendid answer, I'd like to add one
non-economic "pro" to paying off your mortgage. There is an emotional
plus that is beyond valuation. My husband and I own our house free and
clear, and it's a good feeling to know that if hard financial times
come (as, in fact, has happened to us recently), at least you've got
the house: and it is YOUR house, not the bank's house.

You have a lump sum coming in

If you invest it, somewhere down the line, you'll be paying someone
else to manage your money

You'll also, most likely, be paying tax on the income, which is really
partly the capital (inflation etc).

If you already knew of a safe way of lending money at more than the
cost of borrowing it, then you would be leveraged up to your eyeballs.

I would pay off the mortgage like a shot, especially if you are into
refinancing, but I would also make a conscious effort to build up a
reserve, mainly for peace of mind.

Consider paying off the mortgage as switching lenders, from someone
else to yourself.

My pleasure momofthree-ga, and much thanks for the 5 star rating.

Much thanks for the comments as well.  The three to this point all have
excellent points; jack_of_few_trades-ga on the IRA/401(k) investments,
Pink on the emotional plus of home ownership free and clear, and frde-ga
on the point of becoming your own lender.  Nice!

Looking Forward, denco-ga - Google Answers Researcher