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chyna's avatar

If you had just enough money in your savings account to pay off your house, would you?

Asked by chyna (33900 points ) August 18th, 2012

Or would you continue making payments and keep your savings account intact? Please explain either way.
This does not pertain to me.

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22 Answers

bkcunningham's avatar

It would depend on the interest rate, @chyna, and other things like they type of loan, how much equity I had in the house, amount of mortgage payment, value of the home…

chyna's avatar

Let’s say your loan rate was low, 4.5%, amount owed would be below 100,000 and house would be worth close to 200,000. Years left in loan would be 15 years.

janbb's avatar

No – I would keep the mortgage for the tax benefit and also keep the money in the bank for security.

bkcunningham's avatar

How much does the mortgage deduction help you with your taxes? LOL @janbb.

filmfann's avatar

I did pay off my house once. A lot of bank people told me the value of keeping a loan going on it, but i wanted to own it free and clear. My taxes did go up, but I loved knowing I was done with house payments.
Then we found a retirement home. I mortgaged my house for a down payment on the new place. I now have two house payments.

bkcunningham's avatar

I hate debt and would want to pay it off. My husband said invest in annuities.

wundayatta's avatar

I would keep the money in my savings account. I’d make my monthly payments, but I want to have some cash ready for emergencies. No way I would ever empty out savings to become debt free. That would feel very unsafe to me.

Having said that, I have no problem with paying off early if you do it steadily. We started with a 30 year mortgage and then kept refinancing. In the end, we had a 15 year mortgage. Overall, we paid off in 20 years instead of 30. But we kept plenty of money in savings during that time.

Ironically, we are now depleting savings because when our children go to college, we will be in the best position if we have no savings (outside of retirement savings). In this way, we will be entitled to the highest amount of need-based benefits. It’s kind of nuts, if you ask me, but the rules are the rules.

gailcalled's avatar

The only debt that my father, a true fiscal conservative, believed in, was a home mortgage. The yearly interest can be used as a tax deduction, which, in my case, was a good thing.

JLeslie's avatar

No. I would keep saving until I had a cushion that would cover at least 6 months worth of living if I lost my job. If you are less than a year away from being able to do this I would not refinance nor pay down my mortgage by adding extra money to the payments. I would keep doing what I am doing, and then pay off the mortgage in full.

I am a big supporter of no debt and paying off a mortgage. But, savings for a rainy day is very very important. Even with your house paid off you can lose it. You still need to pay property tax, you still need to insure it, you still need to pay utilities and other upkeep. I canculated my tax savings with my mortgage, and paying it off saves me about $3500 figuring the interest I paid on the mortgage, tax savings, and what I earn in a CD or savings account. I don’t do a lot of big investing.

One great thing about paying off your house is very quickly you build back up your savings, now that the old mortgage payment can go right into savings.

JLeslie's avatar

@chyna I don’t think the value of the house, $200k, is part of the equation at all. The only thing that matters is what is cheaper keeping the loan with the tax benefit, or not. Most people believe the tax benefit is always better, but it isn’t true, it depends. The old spiel about a mortgage is cheaper than rent and a better deal because of the tax benefit, and at the end you own the property free in clear is true. But, that is not comparing paying off a mortgage to having a mortgage, that is comparing renting to having a mortgage. That is where people screw up. They misapply the information/sales spiel to the wrong situation.

A $100k mortgage probably does not bring the owner to the level of being able to itemize on his taxes, so probably the property tax alone is enough to get the same deduction they get with the mortgage interest added in or not. But, my tax knowledge is sketchy.

Mariah's avatar

No, I’d always leave some padding in case of emergencies. You never know what might happen.

Bellatrix's avatar

There are no tax breaks in Australia for mortgages so a home loan is purely a debt. I would pay off a substantial amount and put some of the money into a managed trust/or other investment that I could access if my financial situation changed. Paying off our mortgage equates to earning almost 6.5–7% interest.

It would also depend on the type of mortgage you have. If you have a fixed interest mortgage, the exit fees can be horrendous here and any savings by paying your loan off early would be wiped out. In the end, the decision depends on your own circumstance, the tax position you are in, the size and type of mortgage you have and interest you are paying.

JLeslie's avatar

@Bellatrix I think fees for early payoff are awful! But, that is a good point to bring up. Some loans in America have them, some don’t. It is another thing to consider when calculatng whether it is a good idea or not. Some early payoff penalities dissappear after a year, some 3 years, some there is a penaltiy for as long as the loan. It can vary a lot.

Symbeline's avatar

If I owned a house to begin with, maybe. Not sure what owning a house all amounts to, but it’s probably a lot of work and money. Knowing me, I may just very well go for broke, if it was a house I planned to live in for a very long time.

augustlan's avatar

No, but I’d be making extra principle-only payments every month, in order to pay it down quicker.

RareDenver's avatar

Yes I would. The extra money in my pocket that would normally go on mortgage payments every month would come in very handy.

Adirondackwannabe's avatar

No, Two reasons. It’s tough to save that much, knowing where you are in life. The payments don’t hurt that much, saving that much cash would. Plus the mortgage gives you a little protection against anyone that sues you for whatever reason.If it’s free and clear, someone sues you, and they get a judgement against you they have as much claim to your house as you do. With a mortgage in place they have to go through that first.

flutherother's avatar

No I wouldn’t. I don’t like debt and I try to avoid it but a mortgage is different. Interest rates are very low just now so your mortgage is cheap. You won’t get much interest on your savings either but you never know when that cash might come in handy. While you have your savings you know you can pay your mortgage off any time you want which is a nice feeling.

susanc's avatar

The tax break on the interest is 25 per cent of the amount paid in interest. That isn’t much unless you’re paying on a very expensive house in the first place or if you’ve owned the house for only a little while and are paying mostly interest. For example, say you owe $300K on a fairly young mortgage. Your interest in a year hovers about $4000. The IRS allows you to claim a quarter of this – $1000 – as a deduction. I’d say that instead of calling this good, you could cautiously, without impoverishing your savings, pay down principal on a monthly schedule, using some of the accumulated $ in your bank account, to quickly reduce the amount of debt. Paying down principal by $100/month will still allow you to claim the 25 per cent interest deduction, which (in this scenario) will almost pay you back for the contribution to principal.
If your interest rate isn’t abusive, paying down the principal without refinancing really reduces your debt and involves no fees.

Paradox25's avatar

As someone who prefers not to play the credit rating game I would pay most of the house off, but leave enough in my account to pay other bills/expenses. I almost always (unless I absolutely can’t for a very good reason) keep enough money in my account where I can get by most emergencies, and purchase something without using credit or interest.

JLeslie's avatar

@Paradox25 Credit score is not something to worry about when paying off a mortage in my opinion. Paying off the mortgage might cause the score to dip a little, but if the goal is living more and more debt free, I say so what. Having some credit cards is sufficient for great credit, along with bills not going to collections and other obvious things. We have great credit, no mortgage, cars owned outright (we did recently lease a new car, but had great credit before that) we use our credit cards for almost everything, and always pay them off in full.

Paying off most of the house dimishes the OP’s savings, and keeps his monthly mortgage payment requirement the same. So if he hits a difficult time, he still has the same monthly obligations. Paying it off (which I advise against right now, but hopefully in the near future) will mean no mortgage payments and being able to start saving a lot of money every monoth going forward.

@susanc Ok, that is what I was sort of skirting around, but my knowledge of taxes is not expert level that’s for sure. Anything below $10k more or less (whatever the cut off is for itemizing) in mortgage interest and property taxes combined only gives the $1,000 deduction, isn’t that right? I didn’t think it was 25%, I thought it was a flat amount? But, now I am questioning myself after what you wrote, but not sure if you were just using numbers that worked out to that percentage as an example.

Taciturnu's avatar

I’m with @augustlan. If I had the ability to throw down a large check for principle only and keep some money aside for living expenses, that’s what I’d do. If you can’t pay it off completely, there’s nothing wrong with speeding up the process. :)

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