[Supertacks]

I am interested in getting some opinions from some of the folks on the boards. I think there is a good mix of folks in my situaion all the way up to retirement age.

I know conventional thinkers and money managers will tell me this is a bad idea. But so far I am not sure.

I am 44, wife and two children ages 4 and 3. The idea is to cash out enough money from my retirement investments to pay off my mortgage. I realize I would be paying a penalty plus income tax on the money as incomed earned for 2008.

I have a reasonable mortgage rate at 5.35. Over the life of the note I will be paying 98K in interest. My early estimates put me at about 45K in penalties and income tax on the early disbursement.

The easy math suggests that over the life of the note, the difference of 98K minus the 45K in penalties and taxs in 08 still provides me a net gain of 53k.

The real value to me is the financial independance of owning my home free and clear.

This would free up a significant amount of cash to re-invest on a monthly basis as I see fit. (I am discplined enough to do this)

I know a lot of folks that are retired and do NOT own their homes. The biggest single obligation they have is their mortgage.

If the economy goes south as bad as some predict, and I own my home. I could make ends meet on a 10 dollar an hour job.


It seems to easy to me. What am I missing?

[Judge not]

If your investments are earning more than 5.35 than there is no way I would pay it off early. Most investment programs I hear on the radio advise against it. Don't forget the mort. int. write off also.

[Supertacks]

Sure my investments are making more than 5.35. But I can't touch them and put the money on the mortgage note on a monthly basis. Therefore my mortgage is a very real cash out of pocket liability that I deal with monthly.

The other thing to consider is that if the funds I am using tank, the value of my retirement account could drop significantly. If I choose less aggresive funds the spread between my interest rate and what I could expect on an investment return is pretty small.

Owning my home free and clear seems really attractive to me right now.

How much is financial independence worth in quality of life and lack of stress? Is it worth a few percentage points?

Without that mortgage I would actually be able to put more into my investment accounts than I do now.

Correct me if I am wrong but those post mortgage payoff investments would also be post tax, so if I chose the right funds I could disburse without penalties in the future couldn't I?

I am not running out tomorrow to do this. Just trying to understand the pros and cons.

[Stuckinda60s]

If you're sure you want to pay off the mortgage, why not borrow against your IRA? No penalties-no taxes. If, as you stated, you're disciplined enough to put the mortgage payments in to the IRA, it could work out for you. Especially with the market down. However, when the market's down, your investment at that time means more when the market rises.

You should be able to get some good, free, advice from your financial advisor. Consider that he will lean toward not borrowing the money if his fee is based on the size of your account.

Rich

[Judge not]

Here is a link. http://www.usatoday.com/money/perfi/...mortgage_x.htm

Google your question, a bunch of pro and con articles come up. It looks like it works either way. I know I wouldn't take the hit twice on my 401k though. Penalties and lost earning potential. What if the real estate market tanks and your house is worthless? Or a toxic spill or a landfill opens.....? Know what i mean?Here is another link... http://money.cnn.com/2002/04/23/pf/yourhome/q_payearly/

[Supertacks]

Originally Posted by Judge not

Here is a link. http://www.usatoday.com/money/perfi/...mortgage_x.htm

Google your question, a bunch of pro and con articles come up. It looks like it works either way. I know I wouldn't take the hit twice on my 401k though. Penalties and lost earning potential. What if the real estate market tanks and your house is worthless? Or a toxic spill or a landfill opens.....? Know what i mean?Here is another link... http://money.cnn.com/2002/04/23/pf/yourhome/q_payearly/

Right now the market is pretty volatile. You can't really say lost earning potential without mentioning the possibility of market crash. My portfolio could be worthless and I would still have the reponsibility of my mortgage. Even if housing crashes, my house still serves a purpose as my family has a nice roof over their head. Doesn't really matter if it isnlt worth much. And on the flip side when the kids move away, the house becomes a pretty nice asset should wifey and I decide to downsize.

As for talking to my fincial advisor, that's why I titled it unconventional thinking. Of course he is going to advise against this. Aside from his commision check I totally understand why he would say not to do this.

[GTOGreg]

The only time I've ever borrowed to pay against my mortgage was to buy down the rate from jumbo to conventional - the cost of the loan more than offset the point differential. Enjoy your tax write off and diversify your portfolio, keeping in mind long term trends. The best returns are made buying off the bottom and not the top...the only way to do this in a particular type of investment vehicle is to dollar cost average over time, slooowly rolls your funds into the investment (i.e. a 401k plan).

As for taking money out of the 401K, not a good idea. The penalties will be substantial as you will now owe taxes on all of it. The primary benefit of it is for growth against non-taxed dollars. If you weren't in the plan you would be paying 30-50% tax on that money AND not getting a return on it. Yeah, times seem bad right now, but you gotta stay in the game for it to work out in the long term. You're only 44, so you got that going for you.

BTW, I am not a financial advisor, but I play one when the stakes aren't high . Besides, what do I know, I invest in GTO's

[PonchoV8]

I understand where you're coming from and maybe something is telling you to be thinking this way? There's something intangible to consider if that's what's being pressed in upon you. Personally, I've been feeling for about a yr that I need to work on getting my primary house out of hock. I haven't done much about it though. I don't think I would draw my retirement out, but I've considered selling a house to pay another down quite a bit.

I looked at refinancing since we bought almost two yrs ago when rates had ticked back up, but we decided that sending along an extra $250 per month will knock us from 28 yrs down to 16 yrs. We still have the comfort of a low payment if something happens, and we get the benefit of a nearly 15 yr mortgage without having to refi to a higher payment at a lower rate--with closing costs.

I'd look into borrowing against the 401K like was mentioned earlier. Maybe it's still the same thing as a mortgage payment?

But in the event of a market crash (and your holdings are worthless), you can bankrupt and keep a paid for home, but you can't keep a home that you can't make the court agreed payments on now can you?

[jcruz]

I'd keep a very small affordable mortgage. Assuming the value of your house increases over the next 20 years, which it will, you're basically borrowing someone else's money to invest otherwise. In short, what GTOGreg says -- a two-pronged approach.

John

[Supertacks]

Originally Posted by PonchoV8

I understand where you're coming from and maybe something is telling you to be thinking this way? There's something intangible to consider if that's what's being pressed in upon you. Personally, I've been feeling for about a yr that I need to work on getting my primary house out of hock. I haven't done much about it though. I don't think I would draw my retirement out, but I've considered selling a house to pay another down quite a bit.

I looked at refinancing since we bought almost two yrs ago when rates had ticked back up, but we decided that sending along an extra $250 per month will knock us from 28 yrs down to 16 yrs. We still have the comfort of a low payment if something happens, and we get the benefit of a nearly 15 yr mortgage without having to refi to a higher payment at a lower rate--with closing costs.

I'd look into borrowing against the 401K like was mentioned earlier. Maybe it's still the same thing as a mortgage payment?

But in the event of a market crash (and your holdings are worthless), you can bankrupt and keep a paid for home, but you can't keep a home that you can't make the court agreed payments on now can you?

Bingo . . . its an emotional thing. The idea of owning it free and clear and eliminating
the stress and burden of the mortgage is totally appealing to me. Isn't part of the American Dream to own own our homes. How many of us really achieve it.

Any one here own there homes free and clear. What did it feel like the day you made that last payment.

How much financial freedom do you now have to chase other opportunities that you had to pass on previously because you didn't have the cash.

Right now I do not have the extra money to invest the way I want to. My employer does not offer a match, so I am feeling like my investment strategy is even less effective. If my house was paid off . . . you can bet that 80 percent or more of the money I currently pay on my mortgage would go right back into investments.

I would also like to start my own business. I cant get past the risk of a potential income hit during start up, so its not even a realistic consideration for me. No mortage eliminates that.

If I wanted to make a career change I could do that knowing my income would suffer a bit. Not possible with my mortgage.

Also

If something happened to me. My wife would not have to worry about the house.

I know on paper it won't calc out. But I am least going to go through the analysis. If its close, it really could get some consideration.

[GTOGreg]

Only one way to sum it up...your emotinal contentment now will MORE THAN LIKELY cost you in the long term (unless it's eating at your health or something that much now, then no on e can put a price on that my friend)

[cuz68]

Originally Posted by Supertacks

Bingo . . . its an emotional thing. The idea of owning it free and clear and eliminating
the stress and burden of the mortgage is totally appealing to me. Isn't part of the American Dream to own own our homes. How many of us really achieve it.

Any one here own there homes free and clear. What did it feel like the day you made that last payment.

How much financial freedom do you now have to chase other opportunities that you had to pass on previously because you didn't have the cash.

Right now I do not have the extra money to invest the way I want to. My employer does not offer a match, so I am feeling like my investment strategy is even less effective. If my house was paid off . . . you can bet that 80 percent or more of the money I currently pay on my mortgage would go right back into investments.

I would also like to start my own business. I cant get past the risk of a potential income hit during start up, so its not even a realistic consideration for me. No mortage eliminates that.

If I wanted to make a career change I could do that knowing my income would suffer a bit. Not possible with my mortgage.

Also

If something happened to me. My wife would not have to worry about the house.

I know on paper it won't calc out. But I am least going to go through the analysis. If its close, it really could get some consideration.

Did you read my post where i paid my home off? I am very happy and feel very good about it, NO more payments means a lot too me, Good luck on what ever way you go. Click on my gto and you can find my thread.

[kenneth77]

why do you have to pay a interst rate of 5,35%,when the federal reserve have lowered the rate to 3%(?) ..i thought the normal was +1% from the banks

[Supertacks]

Originally Posted by kenneth77

why do you have to pay a interst rate of 5,35%,when the federal reserve have lowered the rate to 3%(?) ..i thought the normal was +1% from the banks

Fixed rate mortage at 5.35.

I am going to talk to my money guy today. My guess is I won't end up doing this. But it certainly sounds good on the surface.

[OhMyGoat]

Although 98k minus 45k sounds good, the equation is missing the growth potential that the retirement investments will bring over time.

A 5.35% mortgage is a bargain. I spent a lot of years paying off my mortgage that was 9.75% and we made it through. Be patient. For a regular family (not independently wealthy) a home usually takes years to pay off. I would never draw down an IRA or 401k to pay down a mortgage. Nor would I borrow against them.

[PonchoV8]

I paid my first house off and it felt great. I'm watching a friend try to keep up with the Jones' and is buried so deeply in debt, it scares me. You get used to it seems--and then again you don't.
We ended up taking an equity loan to buy a second house to remodel. When it got down to a certain level, I surfed it to a credit card with a lower interest.

Our current house is the one that's 16 yrs out in a conservatively aggressive pay off schedule. We could liquidate some stuff if needed and get back to zero (assuming those things still have value). It's a risk I'm taking, and feel very much like you feel right now about.

[PonchoV8]

Originally Posted by kenneth77

why do you have to pay a interst rate of 5,35%,when the federal reserve have lowered the rate to 3%(?) ..i thought the normal was +1% from the banks

That's the rate that they loan banks to banks. I can't answer why mortgage rates aren't tied directly to that rate though. I just know they aren't.

[UPC-WU2]

I just did it. I had two IRAs, one through work that I can't touch and another independent one. Lately they had been bleeding 2 grand per week. I cashed one out and paid down my mortgage. Sure I took a 10% penalty. And I'll have to pay taxes on it but I would have been taxed on that at some time anyway. Now I'm in much better shape in my opinion. Owning your house is huge.

Why, when someone asks for advice for ways to get more financially sound, do people tell them to 'borrow more'?

[UPC-WU2]

Now if you wanted to cash out an IRA and take a trip, or buy a boat or home theater, then I'd suggest not doing it. But paying off a house? yes. Maybe it's just me, but I don't like debt.

[1967Clone]

Originally Posted by OhMyGoat

Although 98k minus 45k sounds good, the equation is missing the growth potential that the retirement investments will bring over time.

Yes BUT his mortgage payment could then be used to replace the "lost" investments. That's what I've done and it's worked out GREAT.