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I would appreciate and invite anyone's review of the following analysis:

Situation:
1. Will turn 59.5 years of age May 1, 2000.
2. Have mortgage at 8% interest
3. Have enough $$ in tax deferred account to pay off mortgage
(currently in MM at 5% interest)
4. There are no withdrawal penalities on the account
5. Currently at 36% marginal tax bracket
6. Will be at 31% marginal tax bracket upon retirement in 3 years.
7. Amount to withdraw will not push me into a higher bracket either prior to or after retirement.

Question:
Shall I withdraw these funds and pay off my mortgage or wait until I retire to do so.

My analysis says the Foolish thing to do is wait. What say ye?

Persevere!
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Personally if you can payoff the mortgage without paying penalties, I would be inclined to do so just to clear the books and not have it hanging over your head.

However, the best answer to your question depends on what return you expect to make with the funds invested in the account (IRA? 401K?) compared to that 8% interest paid on the mortgage. You can also factor into your calculation the discount that results from being able to take a tax deduction on the interest from the mortgage.

If your account is conservatively invested in bonds, they may be paying 6% or so, so paying off the mortgage makes sense. However, if they are Foolishly invested in S&P Index funds, last year you made 21% return, so why give that up to pay off an 8%er. (Of course the real question is whether the S&P can do anything like 21% in 2000.)

Best of luck to you.
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pauleckler,
Thanks for your quick response:

Personally if you can payoff the mortgage without paying penalties, I would be inclined to do so just
to clear the books and not have it hanging over your head.


This is not a consideration. I don't mind the "books" and the "hanging over" head part.

However, the best answer to your question depends on what return you expect to make with the
funds invested in the account (IRA? 401K?) compared to that 8% interest paid on the mortgage.


As I stated in my post, I have these funds over in the MM at about 5%. Have bunches of other $$ in S&P Index and individual stocks.


You can also factor into your calculation the discount that results from being able to take a tax
deduction on the interest from the mortgage.


Yes! This is an important part of my analysis that leads to my conclusion to wait until retirement -- even with the MM return of only 5% on the tax deferred funds. You will also note that my marginal tax rate is expected to move from 36% to 31% upon retirement.

If your account is conservatively invested in bonds, they may be paying 6% or so, so paying off the
mortgage makes sense. However, if they are Foolishly invested in S&P Index funds, last year you
made 21% return, so why give that up to pay off an 8%er. (Of course the real question is whether
the S&P can do anything like 21% in 2000.)


Is it unFoolish to have these funds in a fixed-rate investment if they are earmarked for mortgage retirement at some time within the next 5 years?

Best of luck to you.

Thanks much. And you too.

Persevere!
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I'd let the mortgage run its course.
The 8% is tax deductable. You can get very good tax free bonds at 5 1/2%, with no tax ever. These bonds would be liquid.
Further, the money in MMs is available for your needs and wants without any hassle. If you get sick and need big $$$, it would be harder to refinance after you are retired.
You've already qualified for the mortgage, paid your closing costs, etc etc. I'd opt for the liquidity and leave the mortgage where it is.
Best wishes, Chris
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Crosenfield,

Thanks for your input and comments.

The 8% is tax deductable. You can get very good tax free bonds at 5 1/2%, with no tax ever.
These bonds would be liquid.
Further, the money in MMs is available for your needs and wants without any hassle. If you get sick
and need big $$$, it would be harder to refinance after you are retired.
You've already qualified for the mortgage, paid your closing costs, etc etc. I'd opt for the liquidity
and leave the mortgage where it is.


I see these same advantages to waiting.

Here's the gist of my quantitative evaluation:

1.
8% mortgage before tax -> 8*(1-.36)= 5.12% after tax; with a 36% marginal rate. This is the after-tax cost in waiting.

2.
5% return on MM -> 5*(1-.31) = 4.05% after tax; with the 31% marginal rate after retirement. This is one part of the after-tax gain by waiting

3.
36% marginal before retirement minus 31% marginal after retirement = 5% gain by waiting just due to the differences in marginal tax rates. This is also a after-tax gain

Comparison:
Costing 5.12% to wait
Gaining 9.05% to wait

Decision: wait

Does this seem sound and logical?

Of course, one item I am leaving out is the State taxes. These are a flat 6% and will not make much of a difference either way.

Persevere!

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All that you say sounds logical. The 5.12% cost after taxes of your mortgage is less than 5.5% you can get on AAA tax free bonds. The only reason I can see to pay off the mortgage would be if you have a cash flow problem. Apart from that, if you can take in 5.5% with one hand and pay out 5.12% with the other, it is to your advantage to keep the mortgage.
State tax is a minor reason to keep the mortgage.
Keep foolin! Chris
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Dear not-so-foolish-prof! You have got some great advice and the decision-delay,with escalating interest rates is the wise one. I would add however, one pearl
of wisdom; add a supplemental, monthly payment to
your mortgage each month! $50, $100, $200, - whatever
you can manage, you will significantly shorten the life of the mortgage and you will be astounded at the amount
of compounded interest you will save over the remaining life of the mortgage! Enjoy the fruits while you can
- - Matthew
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My situation was a little different. I started a new job and wasn't eligable for retirement plan for a year. Therefore took the "extra" money and used it to pay off the mortgage, way early.

Here's my take. Eventhough you get to write off the interest of the mortgage, interest money spent is money lost. $1000 in interest, in 36% bracket, you only get to write off $360, you've lost $640.

Some of it depends on which end of the mortgage you're in. At the beginning, it's almost all interest, for me a big incentive to get rid of it. At the end, there's hardly any, so not much "lost" or "written off".

JLC
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Here's my take. Eventhough you get to write off the interest of the mortgage, interest money spent is money lost. $1000 in interest, in 36% bracket, you only get to write off $360, you've lost $640.

In addition to figuring the deduction, you must also look at the opportunity cost of the money that could have been invested. Many people believe that they can earn a total return that is greater than the interest rate they pay.

volchris
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<<Shall I withdraw these funds and pay off my mortgage or wait until I retire to do so.>

Neither.
From a financial standpoint, you are best off by keeping a mortgage on your house. Cash is king. Liquidity is king.

I'd recommend that you read Ric Edelman's book(s) and listen closely to his reasoning. Might also visit his web site www.ricedelman.com

Ray
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<<You've already qualified for the mortgage, paid your closing costs, etc etc. I'd opt for the liquidity and leave the mortgage where it is.>>

I'm preparing for early retirement myself. We are planning to buy a new house this year or next, and plan to mortgage it to the hilt. The money that we cleverly don't sink into the house (average annual growth 1%-2%) will go into the stock market (average annual growth 11%).

FWIW, my (75-year old) mother recently closed on her new house at Sun City. The lady who handled the closing said that more than half of the people buying houses there are taking out a mortgage (usually with only 20% down) on the advice of their financial advisers. Believe me, *no* person moving into Sun City doesn't have the ability to pay cash if they want to.

Ray
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<<, if you can take in 5.5% with one hand and pay out 5.12% with the other, it is to your advantage to keep the mortgage. >>

The best reason to not pay it off is options.

With cash in the bank you have more options available to you than if you have no cash and a paid-off house.

Assuming that you can make the payments, you have much more freedom of action with the assets in liquid form. My mom and all her siblings learned this the hard way a couple of years ago, when my Uncle had emergency unexpected quintuple heart bypass surgery, a very expensive free-and-clear house and very little liquid assets. Try getting a home equity loan to pay for post-operative care when you are in a hospital bed with tubes coming out of you.

Ray
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Rayvt,

Thanks for your insights and ideas. More to think about. Ideally one would like to have a paid-off mortgage, the house of their dreams, excellent health AND loads of money in the bank.

Life is full of compromises.

Persevere!
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Professor,

We'd all like to be in your tax bracket now and when you retire. Given the 31% tax bracket, your real interest rate is 6.32%. It should not be hard to find an investment that does better than this, in which case, keep the mortgage.

Good luck.

LMB
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