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A few months ago a friend called me to discuss paying off her mortgage. She had received an inheritance that was well more than her current mortgage balance. She asked me a straight forward and to the point question: Should she pay off her mortgage?
I have had this question asked of me a few times over the years and most of the time my answer is also straight forward and to the point, No! I then explain that not all debt is bad.
My first question to them is if they are retired or plan to retire in the foreseeable future. I ask this question to know if they will show earned income on their federal income taxes. If they say yes I want to know how much income. I want to determine if the interest paid out on the mortgage will make an impact on the amount of taxes they pay Uncle Sam.
In all but a few cases the homeowner is working and plans to stay working. So having a debt where they pay interest on that loan is a good thing. The interest paid will positively affect the amount of taxes they do pay Uncle Sam. In my opinion, having mortgage interest is one benefit of having debt, so not all debt is bad.
And, in today's real-estate market, if this homeowner had paid off her mortgage in full she would have lost money. Her home a year ago would have sold in the $400,000 range, in today's marketplace is would sell for less. I am not going to say that the home would sell for 5 or 10 percent less, but based on other sales in her neighborhood she would not get last year's price.
What I did recommend to her was to consider diversifying her investments. Her largest investment by far was her home. Her equity is, or at that time, was about 50 percent of the market value. By investing in a few Certificates of deposit, maybe a couple of quality mutual funds and even an annuity might be a good way to spread her risk.
I am happy to report that my client did take my advice. She kept her mortgage, we refinanced it to a lower interest rate with a shorter amortization period and she made a few very safe investments. She has reduced her tax obligation to Uncle Sam and has a cash buffer just incase she needs cash quickly. So as I said right up front, not all debt is bad and a mortgage is one of those places.
Bob Kieber can be reached at (970) 262-1199 or at rkieber@comcast.net. He is a local mortgage lender and principal of Resort Lending.
I have had this question asked of me a few times over the years and most of the time my answer is also straight forward and to the point, No! I then explain that not all debt is bad.
My first question to them is if they are retired or plan to retire in the foreseeable future. I ask this question to know if they will show earned income on their federal income taxes. If they say yes I want to know how much income. I want to determine if the interest paid out on the mortgage will make an impact on the amount of taxes they pay Uncle Sam.
In all but a few cases the homeowner is working and plans to stay working. So having a debt where they pay interest on that loan is a good thing. The interest paid will positively affect the amount of taxes they do pay Uncle Sam. In my opinion, having mortgage interest is one benefit of having debt, so not all debt is bad.
And, in today's real-estate market, if this homeowner had paid off her mortgage in full she would have lost money. Her home a year ago would have sold in the $400,000 range, in today's marketplace is would sell for less. I am not going to say that the home would sell for 5 or 10 percent less, but based on other sales in her neighborhood she would not get last year's price.
What I did recommend to her was to consider diversifying her investments. Her largest investment by far was her home. Her equity is, or at that time, was about 50 percent of the market value. By investing in a few Certificates of deposit, maybe a couple of quality mutual funds and even an annuity might be a good way to spread her risk.
I am happy to report that my client did take my advice. She kept her mortgage, we refinanced it to a lower interest rate with a shorter amortization period and she made a few very safe investments. She has reduced her tax obligation to Uncle Sam and has a cash buffer just incase she needs cash quickly. So as I said right up front, not all debt is bad and a mortgage is one of those places.
Bob Kieber can be reached at (970) 262-1199 or at rkieber@comcast.net. He is a local mortgage lender and principal of Resort Lending.
