WOW! We're debt free!

[Willowy]

Originally Posted by mrblanche

Paying off your house is putting all your own cash at risk. Yes, it frees up some monthly income, but, should you have to sell it for some reason, you will have to "realize" your gain or loss completely for yourself.

In other words, if your house has gone up in value, you get to keep all the profit. But if it's gone down in value, you get to take all the loss, and it's real money. If you have a mortgage, it's only theoretical money.

I don't see how a mortgage is "theoretical money". If you sell your house for less than you paid, you still have to pay off the mortgage, even if the mortgage balance is more than you got for the house. The banks aren't going to let you walk away from your debt. And I don't see why a paid-off house would be harder to sell than one with a mortgage. I'm confused as to what you mean exactly.

The only "drawback" I can see to paying off your mortgage is that you don't get to deduct the interest from your taxes. But since you aren't paying the interest in the first place that's not really a drawback

. And another possible drawback would be if someone tied up ALL their money on paying off the house. Then they'd be house-rich but cash-poor, which is never a good idea.

Congrats! Now you can call Dave Ramsey and yell "We're debt free!" on his show

.

 

[mrblanche]

No, the money "above" the mortgage is "theoretical."

If you're planning on living in your house for a long time, paying it off is not a bad idea, although it has its drawbacks. But if you're going to move in the foreseeable future, paying one off is probably not a good idea.

 

[Willowy]

Originally Posted by mrblanche

No, the money "above" the mortgage is "theoretical."

If you're planning on living in your house for a long time, paying it off is not a bad idea, although it has its drawbacks.

Your profit is theoretical whether you pay off the mortgage or not. I guess I don't see your point.

What drawbacks are there to paying off your mortgae? I'd like to know since I plan on paying mine off when I can.

 

[mrblanche]

Originally Posted by Willowy

Your profit is theoretical whether you pay off the mortgage or not. I guess I don't see your point.

What drawbacks are there to paying off your mortgae? I'd like to know since I plan on paying mine off when I can.

1. The interest is no longer deductible.

2. Your cash is tied up in a non-liquid asset.

3. You no longer have a large financial institution interested in the well-being of your property.

4. Any appreciation will be at a lower rate.

5. If you have an assumable loan, it's easier to sell.

I could keep going. I'm not saying it's wrong for everyone. I'm just saying you need to weigh the financial consequences.

 

[stephanietx]

WOOHOO!! Is this the Dave Ramsey "I'm debt free yell?"

DH and I are debt-free except for our mortgage and it's a great feeling!

 

[blueyedgirl5946]

I don't think it is ever the wrong thing to pay yourself out of debt. Congratulations to you on owning your home. If anyone has to sell their house in this economy right now, they are going to lose money whether their mortgage is paid off or not. Congratulations.

 

[Willowy]

Originally Posted by mrblanche

1. The interest is no longer deductible.

True. But in order to deduct the interest, that means you have to pay it in the first place. Keeping a mortgage to get the deduction seems like a poor financial choice.

2. Your cash is tied up in a non-liquid asset.

True, no argument here. Like I said, being property-rich, cash-poor is a bad thing. But if it can be done without tying up all your savings I don't see a downside.

3. You no longer have a large financial institution interested in the well-being of your property.

How is the bank interested in the well-being of my property? They require that I have homeowner's insurance and that's it. Not like they come around now and then to check on their property or anything. I don't understand that one.

4. Any appreciation will be at a lower rate.

I don't get this one. Why would a mortgaged property appreciate at a higher rate? Doesn't make sense to me....maybe I need to read up on these things.

5. If you have an assumable loan, it's easier to sell.

Oh. That makes sense. My loan isn't assumable so I never thought of that.

Thanks for the explanations, I like to understand things.

Yeah, I'm debt-free except for the mortgage and it's great! I hate being in debt.

 

[mrblanche]

An explanation of #4.

It's called "OPM." "Other People's Money."

Say you buy a house for $100,000. You put down $10,000, keep it for ten years, and sell it for $120,000. On your initial investment, plus your payments of $15,000 to the principal, you make a $20,000 profit. That's $20,000 on an investment of $35,000. Not a fantastic return, but pretty good.

But say you pay cash for the house. Everything else stays the same. You make a $20,000 profit on an investment of $100,000. Very poor return for ten years.

And it could be worse. Right now, there are people who are losing big money on their investment. Fortunately, not in our area.

As to the financial institution, the bank makes sure your house stays insured and the taxes are paid. Any lien has to be filed with them, and will be inferior to their claim. They will make sure it stays that way. This used to be much truer than it is now, by the way.

 

[Willowy]

Originally Posted by mrblanche

Say you buy a house for $100,000. You put down $10,000, keep it for ten years, and sell it for $120,000. On your initial investment, plus your payments of $15,000 to the principal, you make a $20,000 profit. That's $20,000 on an investment of $35,000. Not a fantastic return, but pretty good.

Yes, but in that same time you'll also pay about $20,000 in interest. And even though you can deduct it (not everyone can BTW; my parents can never itemize, it just doesn't work out for them), you're still paying more than you get deducted. But I guess I get the point. Maybe.

 

[catmom2wires]

I'm not worried about being debt free.

My home's value has increased at least double since we built in 1995. We're fortunate that we built in a newish subdivision which has now become the 'hood of choice in our county. I see it as a great freedom, because although we are not planning to move, if we DO have to, we will be free to go without actually "worrying" about selling the house immediately. We could rent a place if need be in the new town and wait it out. However, I don't see it as a problem because we have real estate agents who regularly ask if we're ready to sell because they have a large amount of clients who would be interested in a property like ours.

Thanks for all the comments. In summary, this hasn't been easy, but it's not been horrible either. We tried hard to balance things because along the way I lost my brother and learned quickly that you need to do fun things in life, too, because you never know....

 

[momofmany]

It is a tremendously good feeling to have your mortgage paid off and I am so very happy for you to have met this goal!!!!!

Originally Posted by Willowy

Yes, but in that same time you'll also pay about $20,000 in interest. And even though you can deduct it (not everyone can BTW; my parents can never itemize, it just doesn't work out for them), you're still paying more than you get deducted. But I guess I get the point. Maybe.

We paid our last house off and just paid off this house about 3 weeks ago. I did the math on the itemized deductions. We were paying far more interest than we were saving on deductions. My friend, who is a financial consultant, agrees with me that this is the hokiest sales pitch that a mortgage company has handed out to the public. They've got the majority of people believing that it is true. It's not to your benefit to keep a mortgage for tax deductions.

My last house was paid in full and we made tens of thousands of dollars more on its sale than we had ever expected. The buyers, even at closing, didn't have a clue that they bought a home that wasn't under a mortgage. Buyers don't need to even know this fact.

It is the best feeling in the world to know that even if the bottom falls out tomorrow, that you don't have to worry about being foreclosed by a bank.

 

[mrblanche]

Actually, the "standard deduction" has gone up so much for most married couples that the interest deduction is not that significant any more. And, personally, I don't think the interest should be deductible, anyway. No other country that I know of does it, and I think the mortgage companies raise the rates because of it, anyway.

I DO believe you should make every effort to have your house paid off if you intend to retire in it.