The Credit Fix

[Tony64]

Originally Posted by Etschell

a primary residence is hardly an investment.

here is an example. take 200k and invest it at 3%, in 30 years youll have 485k. pay off a 200k mortgage over 30 years youll be out 323k @ 3.5%. now invest that 200k in a tax sheltered annuity and you are really doing well.

I must be dense, because you lost me at your first sentence.

Perhaps my experience is unique, but I'd be in no particular hurry to retire a long term 3.5% loan, especially when it's tax deductible.

[BLACKHORSE 6]

Originally Posted by Tony64

I must be dense, because you lost me at your first sentence.

Perhaps my experience is unique, but I'd be in no particular hurry to retire a long term 3.5% loan, especially when it's tax deductible.

The only reason you're getting a deduction on your federal taxes is because you're allowed to deduct the interest paid to the bank. Better to pay taxes to the federal gov on the money than interest to the bank.

An example: let's say you paid your mortgage lender $5,000 in interest over the course of a year and you're income level places you in the 25% tax bracket. Uncle Sam will allow you to claim the $5,000 as a deduction, meaning that you'll get $1,250 (25% of $5,000) back as a refund. If you think in terms of a balance sheet, you've spent $5,000 in order to get back $1,250 meaning that the total cost was $3,750. If own the property outright, you'll simply not get the deduction meaning that instead you'll have paid only $1,250.

The next big goal for the wife and me is to pay off the mortgage. We already have a 15 year note with a really low interest rate, but I work in a volital industry and we'll sleep much better at night if we own the house outright.

[Dr. Prunesquallor]

Originally Posted by Tony64

Huh? That's interesting. For many US taxpayers, the federal tax deduction for paid mortgage interest is a significant benefit that effectively further reduces already low lending rates.



I guess there's always the exception though.

Only if itemizing beats the standard deduction. If you have low mortgage payments and/or low interest rate it often does not.

[Tony64]

Originally Posted by BLACKHORSE 6

The only reason you're getting a deduction on your federal taxes is because you're allowed to deduct the interest paid to the bank. Better to pay taxes to the federal gov on the money than interest to the bank.

An example: let's say you paid your mortgage lender $5,000 in interest over the course of a year and you're income level places you in the 25% tax bracket. Uncle Sam will allow you to claim the $5,000 as a deduction, meaning that you'll get $1,250 (25% of $5,000) back as a refund. If you think in terms of a balance sheet, you've spent $5,000 in order to get back $1,250 meaning that the total cost was $3,750. If own the property outright, you'll simply not get the deduction meaning that instead you'll have paid only $1,250.

The next big goal for the wife and me is to pay off the mortgage. We already have a 15 year note with a really low interest rate, but I work in a volital industry and we'll sleep much better at night if we own the house outright.

I get it, my point being though that the money you get back in tax deduction effectively reduces the already low cost of borrowing even further. Depending on your bracket, that 3.5% loan may be more like 2%!

Being able to borrow so much money at such a low rate is a once in a lifetime opportunity that many - myself included - have a hard time passing up. When interest rates climb, and they will, this will look like free money. Some of you must be old enough to remember CD's of 5%, 7%, or higher?
Does anyone seriously think interest rates will stay this low for the next 30 years??

Imagine a time in the not so distant future where you can get 5-7% return at virtually no risk. Wouldn't you love to have a 30yr fixed mortgage at 2% at that point, or is the emotional attachment of paying it off still too compelling?

[Etschell]

Originally Posted by Tony64

I get it, my point being though that the money you get back in tax deduction effectively reduces the already low cost of borrowing even further. Depending on your bracket, that 3.5% loan may be more like 2%!

Being able to borrow so much money at such a low rate is a once in a lifetime opportunity that many - myself included - have a hard time passing up. When interest rates climb, and they will, this will look like free money. Some of you must be old enough to remember CD's of 5%, 7%, or higher?
Does anyone seriously think interest rates will stay this low for the next 30 years??

Imagine a time in the not so distant future where you can get 5-7% return at virtually no risk. Wouldn't you love to have a 30yr fixed mortgage at 2% at that point, or is the emotional attachment of paying it off still too compelling?

5 to 7 percent on a cd is long gone. Monetary bubble is quite large along w debt.

[Abdullah71601]

I agree with others that a mortgage on your primary residence is not a great investment. But, it can facilitate good investments. My mortgage interest is lower than the average annual growth of my retirement accounts. For me, it was better to leave my cash invested and borrow cheap money for the house.

If your mortgage costs more than you earn on your cash, it's not a particularly good investment. The deduction makes the home purchase more friendly, but the math doesn't work out very well as an investment.

Originally Posted by Tony64

I get it, my point being though that the money you get back in tax deduction effectively reduces the already low cost of borrowing even further. Depending on your bracket, that 3.5% loan may be more like 2%!

Being able to borrow so much money at such a low rate is a once in a lifetime opportunity that many - myself included - have a hard time passing up. When interest rates climb, and they will, this will look like free money. Some of you must be old enough to remember CD's of 5%, 7%, or higher?
Does anyone seriously think interest rates will stay this low for the next 30 years??

Imagine a time in the not so distant future where you can get 5-7% return at virtually no risk. Wouldn't you love to have a 30yr fixed mortgage at 2% at that point, or is the emotional attachment of paying it off still too compelling?

[Chadridv]

I don't know much about this but I do know that credit utilization is a contributing factor to your score. From what I've seen a low percentage untilization will positively affect your credit score.

Meaning, let's say you have $80,000 in credit and you have overall balances of $8000. You're at 10% utilization, which is good. Now you open a new card with a $20k limit. Your overall limit has just jumped to $100k and if you still have an overall balance of $8k your utilization percentage just dropped to 8% which could theoretically increase your credit score.

Just one idea.

[subtona]

Credit has always been somewhat simple in my head...

borrow regularly but not erratically and pay things off on time, remember the little things count.

A magazine subscription is the only footprint I had when I got my first card.


Not sure if it was mentioned but discover card now delivers your monthly statement complete with your credit score

Originally Posted by Etschell

a primary residence is hardly an investment.

here is an example. take 200k and invest it at 3%, in 30 years youll have 485k. pay off a 200k mortgage over 30 years youll be out 323k @ 3.5%. now invest that 200k in a tax sheltered annuity and you are really doing well.

I don't see where you took into account the home tripling in value over 30 years, along with the monthly dividend of a roof over your head?


The mortgage also locks you into a monthly housing cost, if you have to rent at market rates you are at the mercy of inflation.

[Tony64]

I get it fellas. There is a strong emotional gratification of having your mortgage paid off. Just don't let it blind you to financial reality.

We live in troubled and volatile economic times, but the ability to borrow dirt cheap money for a long period of time is one of the greatest economic gifts our generation is likely to ever see.

Don't take my word for it, ask your financial advisor.

[uscmatt99]

Originally Posted by Etschell

a primary residence is hardly an investment.

here is an example. take 200k and invest it at 3%, in 30 years youll have 485k. pay off a 200k mortgage over 30 years youll be out 323k @ 3.5%. now invest that 200k in a tax sheltered annuity and you are really doing well.

I see what you're saying, but a primary residence is more than an investment, or place to park one's assets. It's also a place to reside. Out of curiosity, with some basic assumptions on your part, what would the numbers work out to if you factored in renting a like property to reside in for 30 years?

I am certainly no expert, but Google'd one of the craziest property markets in the country, full of volatility, Palo Alto CA. Median 2-bedroom home price is $1.74 million. Median 2-bedroom rental price is $3806. What happens if you put a total of $1.74 million into an account over 30 years in monthly installments, that has a 6% return annually, and pay rent for 30 years, with built-in assumptions for inflation? What happens if you take a mortgage at 30-year rates as they stand today and make that your investment? Let's assume tax law doesn't change too. I'm guessing there will be a pretty broad range depending on assumed parameters, but I'm curious where you'd come out at the end.

In my situation, purchasing made sense as a primary residence is an asset that is harder to come after in case of a lawsuit, and I'm not confident of my income beyond a 5-year horizon. We also bought in 2010 when nobody was building in our area, and builders were practically begging for business, so we got in near the nadir of the market. We did a 15-yr fixed and a second 10-year loan at favorable rates. But I've always wondered if, as you suggest, we could have been in an even better position had we rented and invested elsewhere.

[Dr. Prunesquallor]

Originally Posted by Tony64

I get it fellas. There is a strong emotional gratification of having your mortgage paid off. Just don't let it blind you to financial reality.



We live in troubled and volatile economic times, but the ability to borrow dirt cheap money for a long period of time is one of the greatest economic gifts our generation is likely to ever see.



Don't take my word for it, ask your financial advisor.

I researched the heck out of this when I was considering whether to pay off my mortgage or not. If you just look at the numbers, locking in a low rate for a long time makes sense if and only if 1) you are confident values won't dive and you find yourself underwater if/when it's time to sell and 2) you can find a place to park the money where you are confident it will make better returns (for a long time) than your mortgage rate.

The income tax deduction for the mortgage interest always seemed to be a bit of a red herring, as most people don't have enough deductions to make itemizing worthwhile.

The imponderable is the peace of mind in outright ownership of the roof over your head. Granted, you still have home-related payments like property taxes.




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[neophyte88]

Originally Posted by Dr. Prunesquallor

I have the highest credit score in my life right now (841), mainly because I have been shoving an obscene amount of money through my credit card and immediately paying it off in full.

i agree. (this is one, the right way).

[neophyte88]

Originally Posted by superdog

Are you saying the credit ratings are not a government construct? I'm genuinely asking as I am ignorant on the subject. I've always been under the impression it was.

And if not, how can they get away with their apparent impunity.

7 years ago I traded a Nissan Maxima for a Grand Cherokee. The Jeep dealer them went under. They did not pay off the car, or my payment for 2 months. My credit took another hit. I fought it to no avail. And it still comes up on my report. How is this even possible?

Your example also makes zero sense to me.

I just don't get how the ability to borrow is based on a system that is so clearly flawed.

hi, when you took the cherokee & traded your maxima (lease?) with 2 mos left on your payments, your salesperson didnt tell you to notify or call your bank right away (nissan motors?) that the 2 mos left are taken care of by the Jeep dealer, (unless specified/noted during the negotiation, did you?), the Jeep dealer paid late your pay-off amount to the bank. thats why, it showed late payment in your bureau & your credit score went down.

[rr-nyc]

After 3 pages, I'm sure someone else mentioned it but with new line of credit being reported without any balance (yet), your utilization percentage contributes to the increased FICO.

I just realized how old this thread is

[rr-nyc]

Originally Posted by Tony64

I get it fellas. There is a strong emotional gratification of having your mortgage paid off. Just don't let it blind you to financial reality.

We live in troubled and volatile economic times, but the ability to borrow dirt cheap money for a long period of time is one of the greatest economic gifts our generation is likely to ever see.

Don't take my word for it, ask your financial advisor.

I know we don't agree on a lot, but I completely agree with this. You couldn't be more correct.