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What's Better Money In The Bank or Paying Down The House?

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tanglovers

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Discussion starter · #1 ·
Hi All,

Well doing some thinking and planning with budgets etc. And a simple (maybe obvious) question comes up.

What is better? Money in the bank or a lower loan value against the house?

I am not talking about having no savings in the bank, still keeping a decent nest egg.

We are planning on staying in our house for years and years to come, we bought our house with intentions of staying here until we retire (20-30 years yet). Our neighborhood/area is seeing a slight decline in housing value but not tons of foreclosures and the houses that do go up for sale have been selling for the most part.

Just hate looking at our mortgage and seeing how much we pay a month in just interest. We do currently pay some extra each month but not as much as we could be without hurting ourselves.

Any suggestions / thoughts on this?

The interest that we pay on our mortgage is tax deductible right on our income tax?

Thanks!
 
#2 ·
i've been contemplating this also.

or investing... "russianroulette"

i've pretty much ruled out paying down on the mortgage. i'm comfortable where i'm at now and with this market who knows.

i might just get pissed enough to buy and walk... seems like the in thing to do.
 
#3 ·
Mortgage interest is deductable, but you are still paying it.
As long as you have a good nest egg I would pay extra on the mortgage. Theres no better security than having your home paid off.
I think I figured out that we saved around 11,000 in interest by paying off early.
 
#5 · (Edited)
A lot of the best answers depend on your individual situation. I am an insurance agent that works with seniors so I get to see the end results of good and bad planning. Paying off revolving debtis the first step I would take.

Once the credit cards are paid off put 6 months or so expenses into savings. If you need to touch the money in an emergency a CD can be a bad choice because of penalties for withdrawal.

Paying off the house is a wonderful thing. Just one extra payment a year will take 10 years off a 30 year mortgage. But the drawback can be not having a tax deduction.

As far as the stock market goes, I have seen some people lose more than half their life savings in the last year. At a time in their live when they dont have time to make it back. The stock market is cyclical and this happens every 5-10 years just not on the scale it did this time. If you have a very long time horizon, the stock market can be a good choice but you have to also realize that the returns you hear about are not guaranteed and you can lose most of it in a short period of time.

My money is in indexed annuities. There are not in the market but adjust according to the movement of the S&P. If the market goes down, my annuity still gets a small interest, if the market goes up I go up with it. I got a bonus the first year so my return will be 7.8 percent plus the huge upward swing since I got into it last fall. All without any exposure to risk. Annuities do have a penalty for withdrawal but allow 10-20 percent withdrawal a year without penalty so I still have access to my money. To me, that is much better than the 40-60 percent penalty people took in the stock market this last year. Disclaimer- I do make comission on annuties, I dont say sell because they do not have a load or cost like stocks do ( my company pays me rather than my client).

Either choice of savings or paying off your mortgage is a great one, the important thing is to do something and plan.

(Just remembered kind of a fun fact- Annuities are considered an insurance product and not an asset so they can also be given special protection from lawsuits, creditors, bankruptcies. This is exactly how OJ was able to protect his money from Fred Goldman's lawsuit. Sad but true.)
 
Discussion starter · #6 ·
Thanks for the info. The only debt we have is our house other then my wife's student loans. From what we have been told though, paying off student loans early is really not recommended since they have such a low interest rate.

I appreciate all the info and advice.

Thanks!
 
#7 ·
I was thinking about this as well. I figured my interest rate on the house (4.5%) is good for a tax deduction. I used a 25% tax rate, so basically I'm paying 3.375% interest on the house. If I can find a low risk investment that returns better than 3.5%, I'd be better off investing it.
 
#8 ·
Keep in mind that if you don't have any interest to write off you still get a standard deduction (plus property tax bump). So the tax shield of your interest is the amount of your schedule A deductions less the standard deduction. So if your Schedule A amount is $12,400 and MFJ for 2009 Std deduction is $11,400, your only benefiting from $1,000 of interest.
 
#9 ·
tanglovers said:
Thanks for the info. The only debt we have is our house other then my wife's student loans. From what we have been told though, paying off student loans early is really not recommended since they have such a low interest rate.
Click to expand...
Definitely. That's the situation we're in. The student loan rates are so low (and also deductible) that those will be the last to pay off for us.

We've leaned towards paying off the mortgage; the interest rate on that, while not high, is higher than what we can get with it in the bank (even in most CDs).
 
#10 ·
Great point.

tszetela said:
Keep in mind that if you don't have any interest to write off you still get a standard deduction (plus property tax bump). So the tax shield of your interest is the amount of your schedule A deductions less the standard deduction. So if your Schedule A amount is $12,400 and MFJ for 2009 Std deduction is $11,400, your only benefiting from $1,000 of interest.
Click to expand...
 
#12 ·
Something else to consider which has been fairly popular but sometimes unknown (althought your mortgage broker should have informed you, I wouldn't put it past some).... pentalties for early payoff on mortgages. If your thinking about an early payoff there you might want to check into it before doing so ;)
 
Discussion starter · #13 ·
I do know that our mortgage does not have any early pay off penalties. This is something we made sure of when we bought it originally as we typically pay things off ahead of schedule. I will have to check interest rates etc and see. Won't be a quick decision reguardless but appreicate all the info already.
 
#14 ·
If you actually sit down and do the math, I don't think the tax deductions are worth the money.

Depending on your car loan, it might be smarter to pay those off last.

Credit cards usually are top of the list as far as interest rates go.

Having your stuff paid off makes working/spending/saving so much less stress free.

The way michigan is, I think the worst part of home ownership is the property taxes myself.
 
Discussion starter · #16 ·
Anyone who has seen our setup knows it does not get neglected for money or new additions and not looking to adopt another person's tank currently :)

Cars are paid off and no credit card or other debts so that is why the question was posted as pay extra towards house or leave in the bank.

I think we have settled on it will be a combination, will leave a nice emergency / savings fund and then put towards the house.
 
#17 ·
Definitly a good idea.

I hope you didn't take that the wrong way, I definitly was not even slightly trying to imply your tank "needed work" or was neglected for any reason. I just know how alot of us like to spend any extra money we have on our tanks... I know I do anyways :D lol
 
#20 ·
I would vote to put it in the market, granted you would be around 4 months late but given the relative instability you can make a decent return just on volatility. Assuming you watch it frequently and are OK with the risk. If you are leaving it in the bank to earn a money market return or CD, then go for the mortgage payment.

2 things to remember about the student loans:
1) If memory serves, you can only write them off for a set amount of time irregardless of balance
2) Once you reach a certain income level you can't deduct anything.
 
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