The Definitive Way To Know If You Should Pay Off Your Mortgage Early

Want to be mortgage free? Looking forward to the day you complete your mortgage payoff? There may be a better way to allocate your money. It may be better to invest money instead. Learn how to figure out if you should invest or pay off your mortgage through our easy one step process.Paying off your mortgage early can seem like a great idea.

However, others argue that if you invest the money you would have used to pay your mortgage off early, you will likely end up with a higher net worth in the end.

Consider the following situation to figure out whether paying off your mortgage early is the right decision for you.

It should easily show you which option you prefer.

What Would You Do In This Situation?

Let’s pretend you owe $200,000 left on your 30 year 4.0% fixed rate mortgage. You have 25 years of payments left.

Somehow you come across a big stack of cash or, more realistically, get a check for exactly $200,000, just enough to pay off your mortgage.

What would you do with it? If you only had the following two options, would you pay off your mortgage or invest the money?

The answer to this question should tell you whether or not you should pay your mortgage off early.

Pay Off Your Mortgage Early

Paying off your mortgage early would be the safer option for most people. You would get a guaranteed 4.0% rate of return on your money and you wouldn’t have to worry about having a mortgage payment ever again. Granted, you’d still have to pay for insurance, taxes and other housing expenses, but you’d never make another interest and principal payment again.

Another point worth serious consideration is the fact that a home’s value will not remain static. Historically, housing prices have kept up with or exceeded the rate of inflation, which is good news if you pay off your mortgage.

However, recent memory reminds us that housing prices can crash, too. Due to the fact that a buyer and a seller must come to an agreement for a transaction price, when prices drop you could lose a lot more than you would think should you need to sell your home quickly.

Of course, using the cash to pay off your mortgage has downsides as well. By paying off your mortgage in full, you’ve locked up your cash in an illiquid asset.

If you need some of that money for an emergency or any other reason, you’ll have to sell or remortgage your house. Neither of these options can be done quickly and both require major expenses.

You’ll also lose out on the mortgage interest tax deduction. However, this tax deduction is really only for rich people anyway, so it may not affect you.

Invest The Money

Investing the lump sum is the other option. Investing has the potential to give you an overall higher return as stock market returns have generally outpaced 4% by a fair margin over long periods of time.

This option also allows your money to be more liquid should you need to access some of it for any reason. While selling when stocks have lost value would be a real possibility, you could at least only sell part of your investment rather than all of it like you would have to with a house.

Of course, human tendencies of buying high and selling low could easily demolish your return. If you aren’t a skilled investor, and by that I mean leaving your investments alone during market crashes, paying off the mortgage early may produce more reliable returns.

You would still be stuck with a monthly mortgage payment, but if you ever changed your mind later you could always sell your investments and pay your mortgage off at a later date. 

Considerations That Must Be Taken Into Account

Keep in mind, this whole analysis depends heavily on a couple factors that not every person would be able to consistently enact.

First, the person must invest every single penny they would have used to pay off their mortgage early. Many people don’t feel the same passion for investing that they feel for paying off debt.

People may put more toward paying off their mortgage than they would put into their investments. If that’s the case, it may make sense to pay your mortgage off early.

The second factor you must consider is your risk tolerance. If you don’t feel comfortable holding investments over a long time period through both bull markets and stock market crashes, paying off your mortgage debt is a safer, guaranteed return. If you sell when markets crash, you could end up with less money in the end than if you just paid your mortgage off early.

Finally, if your mortgage interest rate is anywhere above 6% or you have a variable rate mortgage or some other type of exotic mortgage, paying off your mortgage early may be your best move. Fixed rate mortgages reduce interest rate risk, allowing you to invest over long periods of time and grow wealth through arbitrage.

What Will We Do With Our Mortgages?

In the end, it really depends on your personality and risk tolerance to determine whether or not paying off the mortgage early is the right move for you.

Personally, I don’t believe we will be paying off our mortgages early. However, if we do, it will likely be after we’ve invested enough money to be able to pay the mortgage off with the hit of one sell button.

Of course, we’ll have to remember to factor in the taxes on our investment gains or else we would be hurting when we filed our tax return the next year.

Which camp do you fall in? Would you want to pay off your mortgage early or do you take the more logical approach of letting investments grow? Where do you think people would mess up the most in each situation? I’d love to hear your thoughts in the comments.

Mortgage Interest Tax Deductions Are Only For Rich People

Want to save money on your taxes? Think owning a house helps you get a large tax refund because of the interest you pay on your mortgage? Paying interest to save on taxes is a bad tax return tip. While some people save a small amount of money with the mortgage interest tax deduction, it mainly benefits the rich. Maybe paying off your mortgage isn't a bad idea? Find out my thoughts!Sadly many people think they’re saving a ton of money on their taxes when they buy a home.

Why? They think they’re going to get a huge tax break with the mortgage interest tax deduction.

Those people are in for a shock when they complete their first tax return after being a homeowner.

The mortgage interest tax deduction may have originally been for the average family, but it has always provided more benefit the rich more.

Why? The mortgage interest tax deduction allows you to deduct the interest paid on a mortgage on your primary and/or second home based on mortgage debt of up to $1,000,000. You can also deduct the interest on up to $100,000 of home equity debt.

The normal American cannot afford anywhere near these limits stated in the mortgage interest tax deduction rules. Even if an average married person can afford a $300,000 home, the tax deduction won’t even help you one bit unless you have other itemized deductions you can claim.

How can this be? The following example may shock you.

A $300,000 Home And No Mortgage Interest Deduction For Some

Let’s say you buy a $300,000 home. You put 20% down, so you’ll have to take out a mortgage for $240,000. Today you could easily get a 30 year fixed rate mortgage with a 4.5% interest rate if you have good credit. In the first full year of paying off your mortgage, you’ll only pay $10,720.29 in interest payments.

Unfortunately, that won’t help many people one bit. Why?

Itemizing Deductions Replaces Your Standard Deduction

When you itemize your deductions, you give up the standard deduction. In 2014, the standard deduction is $12,400 for married couples filing jointly and $6,200 for those filing single. 

If you’re married and have no other itemized deductions, which is admittedly unlikely, you won’t even itemize because the standard deduction would give you a bigger tax benefit. Your mortgage interest tax deduction is essentially useless in this case.

If you’re single and have no other itemized deductions, you’ll actually get to itemize your deductions. However, don’t think for a second you get $10,720.29 in deductions as your benefit. Instead, the only tax deduction benefit you’ll gain is the amount by which your itemized deductions exceed your standard deduction.

So, as a single person, you’d get $4,520.29 in additional deductions due to the mortgage interest deduction. If you’re in the 25% tax bracket, this would save you $1,130 in federal income tax. As a married person, you’d get no benefit at all. Not one penny saved in federal income tax. Sad! [Related: How Tax Rates Work In America]

Keep in mind, you pay the most interest in the first year of your mortgage. Every year after the first year, your mortgage interest tax deduction will shrink because you’re paying less interest each year.

On top of that, the standard deduction generally increases with inflation. That means your benefit will shrink even more as inflation increases the standard deduction.

How The Mortgage Interest Tax Deduction Favors The Rich

Let’s pretend I’m rich and am swimming in money. I’ve decided to take out the maximum mortgage amounts allowable under law to maximize my mortgage interest tax deduction. I have $1,000,000 in mortgage debt at 4.5% and a $100,000 home equity loan, also at 4.5% both on a 30 year amortization schedule for simplicity’s sake.

With this maximum level of mortgage debt, I’d pay $49,136.97 in interest that would qualify for the deduction. I’d assume because I can afford such a large mortgage, I’m probably in a higher tax bracket. I’d likely have a 28% or 33% marginal tax rate depending how much of my income is derived from wages vs investment income.

As a single person, I’d get an additional $42,936.97 in deductions. At the 28% tax bracket I’d save $12,022.35 in federal income tax and at the 33% tax bracket I’d save $14,169.20 in federal income tax.

As a married person, that would result in an additional $36,736.97 in deductions. At the 28% tax bracket I’d save $10,286.35 in federal income tax and at the 33% tax bracket I’d save $12,123.20 in federal income tax.

The rich person who can afford $1,100,000 in mortgages gets to save anywhere from $12,000 to $13,000 more in federal taxes paid than the normal person with a $240,000 mortgage! That’s messed up! Why are we subsidizing homes for the rich? Why not help the normal Americans looking to buy a home more?

Granted, they are paying more in interest to the bank, but why subsidize it?

Normal Americans Used To Benefit From The Deduction

Normal Americans used to be able to benefit more from the mortgage interest deduction. Unfortunately, that’s because they were paying a lot more in interest.

Mortgage rates are currently at one of the lowest points in history. If you had the same size mortgage now vs 20 years ago, you’d be paying less in interest today.

Paying less in interest is a much better deal than getting a bigger tax deduction. Tax deductions only reduce your taxable income, not the tax you pay, you only save a fraction of each dollar you pay in interest on your tax bill. However, let’s run the numbers real quick.

In 1994, mortgage rates were as high as 9% on a 30 year fixed rate mortgage, essentially double today’s rates. On a $240,000 mortgage, you’d pay $21,533.46 in interest in the first year.

For a single person in the 25% tax bracket that would result in a $3,833.37 reduction in their federal income tax due and for a married couple filing jointly, also in the 25% tax bracket, it would result in a $2,283.65 reduction in their federal income tax due.

But The Rich Have Always Had A Larger Benefit

While normal Americans used to benefit more from the mortgage interest tax deduction, the rich have always received a larger benefit. Using the same 9% interest rate, a rich person with $1,100,000 in qualified mortgage debt would see a larger reduction in their tax bill. They would pay $98,695.02 in interest in their first full year of their mortgage.

For a single person in the 28% tax bracket, their federal taxes would be reduced by $25,898.61 and for a single person in the 33% tax bracket, their federal taxes would be reduced by $30,523.36.

A married person in the 28% tax bracket would see their federal taxes reduced by $24,162.61 and in the 33% tax bracket they’d see their taxes reduced by $28,477.36. 

Keep in mind, there are many other calculations that go into tax calculations and the rich do have their itemized deductions phased out at a certain point. Normal Americans will likely have other deductions they can itemize, too. [Related: Be Wary Of Year End Charitable Contribution Phone Calls]

No matter what, the home mortgage interest tax deduction is no longer as useful as it once was for the ordinary American. It has always benefited the rich more.

That said, why is the limit on mortgage debt $1,000,000 or $1,100,000 with home equity debt? Wouldn’t something like a $500,000 still help the average American while not subsidizing housing for the rich? I’d love to hear your thoughts! Let me know what you think in the comments below.

Photo by: LipBomb Text added by: Lance Cothern

Panama City, Florida House Prices: How Much Can You Buy?

Panama City Home PricesI live in the Panama City area on the Gulf Coast of Florida and our home prices aren’t dirt cheap, but they aren’t outrageous, either.

After seeing Holly’s post over on Club Thrifty about how far her housing dollar could go in Indiana, I thought I’d do the same for where I live in Florida.

We’re not near any major cities where I live. Atlanta is 5 to 6 hours north and Pensacola is 2 hours to our west.

That said, we’re only a few minutes to the gorgeous beaches of Panama City Beach.

We really enjoy living here. If you’d like to join us, here are a few homes you could buy today!

Panama City Housing At $149,000

Panama City House 149000 dollarsThis home isn’t a gem, but it’ll get the job done. It is a 3 bedroom 2 bathroom brick home with 1,354 square feet.

It was built in 1981, has a one car garage and a screened in in-ground pool in the back. It appears there are laminate floors throughout the main living areas and carpet in the bedrooms.

The bathrooms and kitchen could use a bit of updating, but the house looks fully functional the way it is now. Heck, the appliances even look pretty new and they’re stainless steel to boot!

Panama City Beach Housing At $249,900

Panama City Beach House 250000 dollarsWant to live less than a mile from the beach while still living in a nice home? This house fits the bill!

It was built in 2002 and is just shy of 2,000 square feet. It’s in a great neighborhood with decent schools. It has 3 bedrooms, 2 bathrooms and a 2 car garage. There is a mixture of carpet and tile throughout the home.

Panama City Beach House 250000 dollars kitchenThe kitchen and bathrooms are nice, but they definitely don’t have the high end touches. There is a small quarterly HOA fee, but you get a community pool that you can use and you don’t have to take care of it yourself!

There are also sidewalks throughout the neighborhood if you like to take your dog for a walk or you want your kids to ride their bikes without getting hit by a car.


Panama City On The Water – $397,500

Panama City House 400000 dollarsIf you’d like to live on the water in Panama City, you can find a decent home for around $400,000.

This home was built in 1997 and comes in right at 2,200 square feet. The home is right off of a canal that leads to the Bay which makes for some amazing sunsets.

Panama City House 400000 dollars waterfrontThis home is in pretty decent shape but could use some cosmetic updates. Some of the rooms will need to be painted, but the bones are great.

The home has a two car garage, a pool and amazing waterfront views! Of course, you’re not anywhere near the beach. That’s still a good 20 to 30 minutes drive from here.


Panama City Beach On The Beach – $399,000

Panama City Beach Condo 400000 dollars 2Have $400,000 to spend and want to live right on the beaches on the Gulf of Mexico? You’re in luck because you can do that pretty easily.

This beach front condo comes in right at $400,000 but it comes with hefty HOA fees that are several hundred a month. So what do you get for $400,000 here?

This end unit condo on the 17th floor has 4 bedrooms, 3 bathrooms and a balcony with amazing views of the beach and the gulf.

Panama City Beach Condo 400000 dollarsThe condo comes furnished, so you’ll have to sell all of the furnishings or get rid of your current furnishings. The bedrooms are a bit small, but you’re living on the beach so you can’t complain too much.

This condo was built in 2008, so it’s relatively new, but it isn’t one of the higher end condo buildings on the beach. Don’t get me wrong, it’s nice, but it doesn’t have the resort feel.

The building does have a couple of pools, a gulf front fitness room, a sauna and an outdoor Jacuzzi tub.

Panama City Beach Landlocked For $725,000

panama city beach 750000 dollars 2I wasn’t planning on picking a $725,000 home from  the beach side of town, but there wasn’t anything worth showing in Panama City in this price range.

This home is is 3,081 square feet but only has 3 bedrooms and two and a half baths. However, the finishes are absolutely amazing.

The whole entire driveway is made of stone pavers and leads to a garage in the rear of the home. The entire outside living space is stunning and includes a pool in the back.

panama city beach 750000 dollarsThere are balconies on the outside of the home on the second floor and fancy looking columns support the roof and balcony.

The inside of the home has amazing detail throughout. The kitchen has high end finishes and the rest of the house matches it perfectly.

The huge downside to this home is it isn’t a water front property. If I was going to spend $725,000 in this area, I’d want to see a body of water other than a pool from my home.

Panama City Beach Gulf Front Condo – $749,000

panama city beach condo 750000 dollars 2If I was spending $749,000, I’d definitely want to be beachfront.

Unfortunately, the nicer living options in the price range are mostly condos. There are a few townhouses and single family homes on the beach in this price range, but they aren’t as nice as the condo I’m about to show you.

This $750,000 beach front condo is a penthouse on the 17th floor and was built in 2007. It is a little bit over 1,900 square feet and has 3 bedrooms and 3 bathrooms. The condo has high end furnishings and has a huge balcony to enjoy your beach front view.

PAnama City Beach Condo 750000It comes with two private parking spaces and you’ll have a secret code on the elevator to reach your penthouse condo unit.

The condo amenities include two pools, a spa and a fitness center. While I’d personally hope for a bit more than 1,900 square feet for $750,000 it does have a killer view!

There are plenty of other housing options both in town in Panama City and down at the beach in Panama City Beach. These were the highlights of what I could find in a quick search on our MLS, but I’m sure you could find plenty of other gems that would fit your needs better.

Overall, the housing prices down here aren’t bad. We personally got a two bedroom 1.5 bathroom townhouse a few blocks from the beach for less than $100,000 about 3 years ago that we now rent out.

We bought our house in town for less than $200,000 about two years ago and it’s a 3 bedroom 2 bathroom home in a nice neighborhood with a 2 car garage. It all depends on what you want and where you want to live, like anywhere.

That said, I think Panama City offers some great deals in housing if you don’t mind living in a smaller town!

How much does housing cost where you live? Is it cheaper or more expensive than here in Panama City? I’d love to hear about your local market!

New Homes Or Homes With Character? Which Would You Prefer?

When it comes to buying a home, most people fit into one of two camps. People either want the features and amenities of a newer home or they want the style and character only an older home can provide. There are huge difference in how you should go about buying each type of home. So, what should you expect?

Homes With Character Could Be A Steal Of A Deal

Homes with character can come one of two ways. They can be perfectly restored and updated while keeping their charm or they can be diamonds in the rough that need some work. Unless you have a big budget and don’t want to earn some sweat equity, then you might want to consider looking for the diamonds in the rough that you can customize to your liking. You can save money on the purchase price and customize your home exactly how you want to while keeping the character that attracted you to the older home.

Character Could Cost Big Money In Repairs And Maintenance

These diamonds in the rough could end up costing you more than you bargained for. If you’re doing any major renovations you could easily run into unexpected problems that would demolish your budget. When you buy a home, you can’t see through the walls to find potential problems with plumbing, electrical and dangerous insulation. That said, if you budget a contingency fund for these problems you could overcome them.

The extra cost isn’t all in the renovation phase of owning the home though. Older homes have older equipment and building materials that could require maintenance at any time. Granted, a new home will have these problems after a few years, but generally you don’t have to worry about a big dollar repair within the first few years of new home ownership.

New Homes Can Provide The Perfect Fit

For the other camp, new homes are the perfect solution to their house hunting adventure. You can customize anything you want in a new home, provided you pick the right developer and neighborhood. You can pick the perfect floor plan for your family, the perfect paint colors on the walls and the perfect flooring for every room. You can even pick out the perfect appliances. Unfortunately, all that awesomeness usually comes with a higher price tag in the current real estate environment. On the positive side, you shouldn’t have to change a thing after your new home is built!

New Construction Isn’t What It Used To Be

Like everything else these days, most homes aren’t built to the same standards as they used to be. In today’s tight economic conditions it’s easy to see how builders would cut corners and use cheaper materials to squeeze a little bit more profit out of each house they build. Not all builders will do this, so make sure you find a good quality builder that has a great reputation. You’ll pay more for your home, but hopefully it will be built better and there will be more time between big repairs.

Whether you like the character homes or shiny new construction homes, be prepared for what challenges might lie ahead. Realize that everything comes with some good and some bad and be prepared to make the best out of the situations that could provide potential challenges. House shopping should be fun! Just go into it with your eyes wide open.

Which do you prefer? The charming home that could use some work, the more expensive, fully renovated house with charm, or the new build made just for you?

Flood Insurance Rental Property Surprise – What New Landlords Need To Know

I know many people don’t have rental properties, but the lesson in today’s post can be applied to everyone that has insurance of any type, even basic insurances like car, renter’s or homeowner’s insurance.

We knew we were going to become landlords and turn our old home into a rental property when we signed our death pledge for our new homeWe did a lot of research before we made the decision and thought we understood most of the changes that would be involved when we converted our townhouse that we bought on a whim to our first rental property.

However, just recently we learned about something we hadn’t found in our research and it had to do with our flood insurance. When we were doing research we asked our insurance company if we had to make any changes to our flood policy now that our townhome would now be a rental property and they said we didn’t. They were right, but they didn’t advise me of the changes that would occur once the property was no longer our primary residence.

Your Flood Policy Changes When The Home Isn’t Your Primary Residence

If you have a flood insurance policy, there is a 99% chance this applies to you. From what I’ve been told, the National Flood Insurance Program (NFIP) is the only flood insurer in the United States and is actually backed by FEMA and the federal government.

When I called to renew my flood policy I asked my agent a few questions about policy limits now that we were insuring a rental property rather than our primary residence. I was trying to drop contents coverage, since I no longer had any personal property stored there. They informed me that I couldn’t drop the coverage and then I asked if I could at least change the personal property from replacement cost to actual cash value to save some money.

That’s when the insurance agent did some digging and informed me that my whole entire policy was now based on actual cash value rather than replacement cost because it was no longer my primary residence. This made a huge difference to me and I asked why no one told me this before. My agent explained that the type of policy doesn’t change, but some of the wording in the policy says this would happen.

Darn it! I Didn’t Read My Flood Policy Recently!

I firmly believe in reading everything you sign, especially important documents like insurance, loans and contracts. If I did read my flood policy when I initially bought it two years ago (which I’m pretty sure I did), I certainly didn’t remember this particular clause. Sure enough, though, it was there.

So what’s the big deal? Now that we have an actual cash value policy, the flood insurance won’t pay me the cost it would take to rebuild my townhouse if it were completely destroyed in a flood. Instead, they’ll look at the value of the components of my house based on how old they are and how worn out they are. Basically, if I had a 20 year shingle roof and it was 10 years old, they’d likely only pay for 50% of the cost of the roof.

I had bought my policy based on replacement cost and made sure I had limits that would cover rebuilding my home. Instead, now I’ll only get actual cash value so I had to adjust my insurance limits down accordingly so I wouldn’t be over insured and throw money away for no reason.

Lesson Learned – Read and Review Your Insurance Policies

I was listening to the Stacking Benjamins podcast and in this episode, they briefly talk about doing a yearly insurance policy review to ensure that you’re covered for what you think you are. If I had done this, I would have known about the change when the house went from our primary residence to a rental property. If I had known that I could have saved a bit of money by proactively changing my policy in advance.

Instead, I lost a bit of money by being over insured. Read your insurance policies to make sure you know what you’re paying for and it is what you think it is. When I read my car insurance policy, I learned I wouldn’t be covered if my car was destroyed in an act of war or if it was incapacitated by a nuclear weapon. You learn something new every day!

Do you read your insurance policies? What is the weirdest thing you’ve ever seen in one? Were you surprised by the amount of exclusions that you weren’t aware of?