Need Some DU Advice On My Mortgage!

[Bobbieo]

I owe less than $9,000 on my mortgage and will have it paid off by ‘09 -probably before. I have a friend who insists I refinance to save on interest for future income taxes.

Somehow this does not make sense to me when I am able to make the monthly payments with money left over and have no balance on my one credit card. I can surely save up enough to pay the taxes and insurance.

What is the best thing for me to do?

[bigscott]

1. ignore your friend

she is off base on this one - to save more money on your taxes later you have to SPEND more money NOW - if you are OK with the way things are now then don't rock the boat

[ileus]

8. around 3k to do the refi....you do the math.

[DoYouEverWonder]

2. Talk to a good accountant

I've never heard any such advise.

I don't like the idea of carrying debt, just for the sake of carrying debt or that somehow that will save me money.

[lectrobyte]

3. I think you are better off paying it off early, if possible,

from my calculations, I could never see where the income tax deduction ever came close to offsetting what I was paying in interest. Your situation may vary, though, but I'd not consider refinancing unless I needed to get some equity out for something like college tuition etc.

[berni_mccoy]

4. What is the current interest rate on your mortgage?

The tax benefits on paying mortgage interest are also going to depend on your income level and other deductions.

[izzybeans]

5. I would find out exactly how much your taxes would increase

if at all. Is the increas really more than your mortgage payments for an entire year? If not consider who you would rather give your money to; a bank or a government.

The only two people I have had conversations with this about are my sis and bro-in-law and they both have an irrational fear of taxes. I haven't followed up on what the actual increase would be. I sometimes wonder of that is a myth. I hope someone has some answers on this thread because I am interested as well.

[Demobrat]

6. First of all figure out your breakeven.

Refinancing isn't free, or even cheap. The first thing you need to figure out is how many years of savings you will need to pay for the points and fees. I'm willing to bet it's longer than 2-3 years. There are plenty of online calculators you can use for this.

[Tess49]

7. I know I would feel better if my house were paid for in full. Naturally,

my advice is to pay it off and don't even think about a refinance.

[Lerkfish]

9. better to have no debt than to incure more debt to get short term money

you have to have TWICE as much additional money or more to offset debt in the long run. its not an even transfer.
There are other costs to having debt, not only in interest, but in viability for new loans as seen by lenders, etc.

[lapfog_1]

10. That's silly... unless you LIKE being in debt OR you need

to pull a large chunk of money from your house equity for some other purpose.

[matcom]

11. I'm in the business

pay it off (unless you NEED the $$$)

pay it off. have a burning party. never look back

[Gormy Cuss]

17. Absolutely.

No sensible reason to add debt with so little remaining on the mortgage for the OP.

[kath]

12. Your friend is nuts.

All the tax deduction for the interest does is soften the blow from the *interest* that you pay out (and ONLY if you have enough deductions so that you are able to itemize).
For example, last year we paid approx 10 or 11K in mortgage payments (not counting insurance and taxes). Of this, $5000 was interest (we are 12 -13 years into a 30 year mortgage). We're In the 15% marginal rate Federal bracket, and 7% marginal state income tax rate. So $5000 in interest X .22 marginal tax rate = $1100 less taxes due than what we would pay if we had no mortgage interest (or if we couldn't itemize).
So, bottom line is we paid $10,000 - 11,000 for the mortgage and our taxes were $1100 less than they would otherwise be. ****BUT, we're still out a net 8,900-9,900 bucks **** This is not saving money!!

Another way to look at it is that the tax deduction effectively lowers your annual interest rate by a percentage equal to your marginal tax rate (it's a bit more complicated than that, since because of the way the mortgage is amortized, the amount of the payment that is principal vs. interest changes each month). So, ROUGHLY, for us if the interest rate is 7%, it effectively becomes 7 X (1-.22) or 7& X .78 = 5.46% considering the tax savings.

You should always pay off the highest interest debt first. So for us, we wouldn't accelerate the payments on our mortgage unless we had eliminated all other debt with an interest rate higher than around 5.5%.

The only way it would make sense to take out a mortgage that you don't NEED would perhaps be if you were going to INVEST the money in something where you were sure (or pretty sure) that you would make back more than the effective interest rate (ie more than the 5.46% in my example BUT, on edit, you ALSO need to consider the costs of refinancing, which are considerable) AFTER the taxes on the earnings (capital gains, etc) are subtracted out. Maxing out your 401K contribution might be a good choice - in our situation we save (or essentially *make*) 22% (possibly + 7.65% FICA, but I'm not sure on this) right off the bat for every dollar that we contribute to hubby's 401K plan.

I'm not an accountant - anyone who is, please correct me where I've gone wrong in my analysis.

[freethought]

13. It's pretty pointless to refinance when you have only

about 9k left on it. You'll likely get hit with 2k-3k in closing fees or other costs to do the refinance. Refinancing only makes sense when you can get at least 1% off of your current rate, otherwise I wouldn't bother.
With so many people who have bought homes that are larger than their means, if they can get 1% or 1.5% off their current rate on their mortgage these people will think they are in paradise.

Usually the people who get 1%-2% off with new refinancing have HUGE mortgages.

I think MATCOM had the right idea. Pay it off and have a mortgage burning party.

[Nye Bevan]

14. Don't refinance unless you need to borrow money

which it sounds like you don't, as you have no credit card balance.

Since you have plenty of equity in your home and your financial situation sounds excellent, I would suggest that you take out a no-fee home equity line of credit now, even though you have no intention of drawing on it. Given your current situation you should get a very good interest rate, and it will be there for you to draw on in case of a future financial emergency; much cheaper than borrowing with a credit card.

This would only be a bad idea if the existence of the credit line might tempt you to waste money on unnecessary purchases, but I have a feeling that this would not apply in your case.

[Wcross]

15. NO WAY!!!!!

I am in the same boat, 8500.00 balance on my mortgage. Why would I refinance if I don't need the money? If anything I would roll it over onto a 0% credit card offer and pay it off quicker!

[denverbill]

16. You are always better off paying off a mortgage.

It's a very straightforward equation. It doesn't matter if your tax bracket is 30% or 15%.

Assume you pay $1000 in mortgage interest in a year. If you deduct it from your income taxes, it lowers your taxable income by $1000. The amount in taxes that you would save would be your tax rate X 1000 ($300 assuming you are in the 30% bracket).

So, you have a choice between paying $1000 or saving $300.

[kath]

20. Well, in your scenario it's not a choice between paying $1000 or saving $300 -

it's a choice between paying $ZERO (after the mortgage is paid off) or paying $700. ($1000 paid out to the mortgage co. minus the 300 saved in taxes)

Borrowing money to be able to claim the mortgage interest deduction doesn't SAVE anyone money - all it does is lower the effective interest rate on your mortgage (see my post above).

[China_cat]

18. If you don't have enough in qualifying deductions

to itemize, you can't use your mortgage interest any way. And mortgage interest alone will seldom bring you up to a level where you can itemize.

Committing yourself to 15 or 30 more years of payments now would just be DUMB.

[Writer]

19. I typically would suggest that you avoid paying off your mortgage...

because not having the interest to write off your taxes will make April of that year a bit tricker for you

HOWEVER

$9,000 is such a small amount of money owed on a mortgage that I would keep paying until you pay it off. The cost of refinance simply isn't worth it. In the meantime, however, take as much money (the money you will save) as you can and tuck it into a flexible money market account so it can collect interest. Not only will you have emergency cash on hand, but you also will have available cash in case your income taxes from that year will be against your favor.

And... if you begin saving TOO MUCH cash (you'll know if/when it's too much)... look for a good mutual fund and stash A PART of it away for the long term. :P

Good luck! :hi:

[kath]

22. Actually, it would make April simpler - one less receipt (the one from the bank

or mortgage co. that states interest paid, taxes paid, etc.) to have to find. ;-)

[billyskank]

21. Even better - save up from your money left over and pay it off early

:thumbsup:

[dysfunctional press]

23. your friend is an idiot...

to get the mortgage interest deduction- you have to be paying interest on a home loan-

if you don't have to pay it, why do it just to save it on taxes later...? the money is still gone to no good but interest payments.

i've never understood that (lack of)logic.

[cemaphonic]

24. On top of what everyone else has to say

The remaining interest on 9k would be so minimal that you would not even be able to itemize at all, unless you have a bunch of medical bills or something. Pay it off if you want, or just keep making the payments until it is gone. No benefit at all from a refi.