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Subject:  Re: Payoff house ??? Date:  3/23/2000  11:43 PM
Author:  jpkiljan Number:  6842 of 875607

There are a lot of good posts on this subject and maybe it doesn't need another. One thing should be plain: there are lots of intangibles (like peace of mind) and whether or not to pay off your house loan early is a highly personal decision. Still, that doesn't mean that you should not try to crunch the numbers first.

One thing I did for years on the numbers side was a pretty simple exercise that made my decision (not to pre-pay the loan, in my case) much easier. Other readers might want to try it as well.

Each year after doing my income taxes, and while all the paperwork was still sitting in front of me, I would quickly re-calculate how my taxes, and my net worth, would be different if I had pre-paid my loan at the beginning of the previous year. Of course, I would loose most of my itemized deduction and my taxes would rise because of that. Then, I would figure how much interest (or capital gains, dividends or whatever) I would have lost from the money I would have had to take from my savings/investments to cover the loan payoff. If the payoff amount would have come from selling stock or mutual funds, I'd also deduct the estimated capital gains tax due as a deduction.

Don't worry about the actual payoff amount--it is still your asset either way. It is just as valuable sitting in your house as in your brokerage account.

Then, I'd add back the plusses like the money I would no longer be sending off to the loan company monthly and rough out what the investment return for that year would have been. Try to remember that, for some investments (after-tax like bonds), I'd be paying taxes on the dividends. For other investments (like a Roth IRA), there would be no reductions in my return. You want to estimate your after-tax return, if you can.

Anyway, each year, I had a figure which was what it would have cost me (or saved me) if had paid off the loan in preceding January. All this took about 20 to 25 minutes to do.

In my case, for most years, my net worth would have fallen by thousands each time I did this 'what if?' calculation; however, when I had my loan nearly paid off and I started taking the standard deduction under this scenario, the numbers reversed and it 'paid' slightly to pay off the loan. Then, that changed again to a slight loss when interest rates rose in the most recent upswing--I have an old low-intest house loan.

For years, when I really wanted to have that peace of mind by paying off that house loan, I was able to tell myself I was saving $ X,XXX's each year and doing the right thing by waiting awhile longer. I felt better for it. You might too.

-- JPKiljan
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