What are the adv./disadvantages of paying off the mortgage

[hammer]

My grandparents have a $20000 mortgage left on their $400000 house. They are pensioners but have enough in the bank to pay this mortgage off. Are there any disadvantages to paying it off like paying taxes.

[me!]

Well, it depends.

How much is the monthly payments and how much of that is interest. If interest is meagre, then there is not much need to pay it off fast. I know someone who has a 6000 mortgage left on a 800k home and is not going to pay it off early because the interest is a less than 25 dollars a month. It is almost like an interest free loan. If i had a choice i'd pay it off in 50 years or more if I had an interest free loan.

If they need the 20K for other purposes and the interest is not that much, then I would say don't bother. It all depends on the interest payments. There are plenty of mortgage calculators out there that will tell you how much you will save by paying off early vs not paying off early.

[v00d00]

Also.. sad thing to say, but if they have insurances on the mortgage.. they may be better off just living a better lifestyle and paying the minimum possible on.

It would kind of suck for them to pay it off today.. and then one of them die tomorrow.. when the bank could have taken care of it all.

Crazy thought.. but it's one of the reasons my grandparents are still paying their mortgage.. that way they have extra money to spend monthly and in the event one dies.. it's in a sick way, kinda like the lottery!

[Jono]

Back to the original question, there are no tax consequences for paying off the mortgage.

[guest913]

Very simple, if their current investments earns less than the mortgage payments(interest portion), they should payoff.

[guest913]

Also.. sad thing to say, but if they have insurances on the mortgage.. they may be better off just living a better lifestyle and paying the minimum possible on.

It would kind of suck for them to pay it off today.. and then one of them die tomorrow.. when the bank could have taken care of it all.

Crazy thought.. but it's one of the reasons my grandparents are still paying their mortgage.. that way they have extra money to spend monthly and in the event one dies.. it's in a sick way, kinda like the lottery!

By making mortgage payments because they want extra money to spend is actually not the best approach.

Your grand parents can simply pay off the mortgage and apply for a secured line of credit. The benefits of a line of credit is that you don't have to pay interest on the entire amount, only the amount that is used. Secured line of credits offer lower interest rates, usually around prime or prime - 1.

This will save your grand parents alot more money since mortgages are Long term and for first five to ten years, majority of the payments go towards interest.

[cheap sk8]

What is the interest rate they are paying? What is the penalty for paying early (if it's still a closed mortgage, which it probably isn't)?

More importantly, why do they want to pay it off early? Don't assume its for peace-of-mind knowing there aren't any mortgage bills to pay. Do they eventually want to sell their home and move into something smaller? What happens if (god forbid) one of them dies; will the life-insurance be enough, or do they need a cushion? Is there a safe yet profitable vehicle they can invest the money in, and can they use the interest from it to pay of the mortgage?

Answer these, and they'll have their answer.

[Neil]

Well, it depends.

How much is the monthly payments and how much of that is interest. If interest is meagre, then there is not much need to pay it off fast. I know someone who has a 6000 mortgage left on a 800k home and is not going to pay it off early because the interest is a less than 25 dollars a month. It is almost like an interest free loan. If i had a choice i'd pay it off in 50 years or more if I had an interest free loan.

If they need the 20K for other purposes and the interest is not that much, then I would say don't bother. It all depends on the interest payments. There are plenty of mortgage calculators out there that will tell you how much you will save by paying off early vs not paying off early.

Let's wake this thread up!

Actually $25/month x 12 months/yr = $300/yr

$300 interest on $6000 balance is 5%

So their return on paying off the mortgage is 5% after taxes.

I would guess if they have savings those are paying about zero to 1%. After tax, a net return of half of one percent.

To get a 5% after-tax return, they'd need to find a savings account that pays close to 10% which is not possible.

There are some intangible advantages to keeping a mortage going like for example you know your own habit would be to just blow the monthly saved amount on discretionary stuff like Red Flag Deals for example. The regular mortgage payment is like your discipline then.

Or if you have tax considerations that allow you to write off some of your living expenses.

Or if you have other debts where you'd be better off plowing the money.

Or if your financial institution treats you different when you have multiple products with them.

Or if your financial institution takes care of your property tax payments and gets the advance/annual discount on your behalf.

It's probably not for this thread but some would suggest that some of the $794,000 equity in their home might be put to use leveraging if they are into such a thing.

[jkdiamond]

I would say pay off the mortgage and be free and clear. This is more for an estate planning strategy than anything.

Not to be morbid or insensitive, but when they do pass away you don't want to bank taking $20,000+interest from the estate.

[jrnight]

Let's wake this thread up!

Actually $25/month x 12 months/yr = $300/yr

$300 interest on $6000 balance is 5%

So their return on paying off the mortgage is 5% after taxes.

I would guess if they have savings those are paying about zero to 1%. After tax, a net return of half of one percent.

I agree. Pay off the mortgage. You are getting 5% return versus 0.1% which is what CIBC paid me before I switched.

I would get a Line of Credit on the House Even if you don't use it. This is for 2 reasons.

1) access to credit when you need it.
2) have a lien on the house so if somebody does a land transfer/mortgage fraud on your house. You'll know about it sooner than when you try to sell or are evicted in 2-3 years.