When To Payoff Mortgage: Housing Myths Part 13

Previous: Payoff Mortgage v. Invest Stocks: Housing Myths Part 12

Do not simply compare nominal interest rates, even tax-adjusted rates (which many people miscalculate). Where you are in the mortgage repayment amortization schedule is only one of the additional factors that determine your cost-benefit analysis.

Tony asked, "I have a current home loan of 50,000 and I have 70,000 in a money market. My current interest per month is 260.00. My gian on my money market is only 53.00 in interested per month [less than %1 APR]. Should I pay off my mortgage or keep paying it and saving in my money market? I also have 100k in a cd that yields 4% at this time."

Where are you in the mortgage repayment amortization schedule?

Mortgages front-load the repayment of interest so paying down extra early in the mortgage saves much more money than does paying down extra late in the mortgage.

Compare two people who owe $50k @ %5 interest:

• Person #1 started a $50k mortgage today and owes almost another $50k in interest, $46,627.89 to be exact, which we will round to $47k. Paying off the $50k mortgage today saves $47k.
• Person #2 has about $50k left on a $500k mortgage, in the last 2 years of a 30-year mortgage. He/she already has paid $466k in interest and the last 20 months contain only about $2k in interest (and only $855 of interest in the last year) so paying off the remaining $50k mortgage today saves $2k.

Two people each owe $50k @ %5 nominal interest rate but one person saves $47k by paying it off today and the other person saves only $2k by paying it off today.

The effective annualized interest rate is lower for Person #2 (in the last year or two of a mortgage) than for Person #1 (in the first year of a mortgage).

What is your tax-filing marital status, top federal/state/local top marginal tax rate, and total itemizable deductions?

Calculate both taxes and tax deductions correctly.

A $100k %4 APY CD yields $4k gross but a 10% top marginal tax rate cuts your effective net interest income to $3.6k after federal income tax while a 35% top marginal tax rate slashes your effective net interest income to only $2.6k after federal income tax--and maybe even less after state/local income taxes.

Parting with $50k savings to payoff a $50k mortgage depends partly on your top marginal tax rate that reduces your income from savings:

4 Percent APY Savings Rate:

• $2.0k gross interest income ($50k at %4 APY)
• $1.8k after 10% tax rate
• $1.3k after 35% tax rate

1 Percent APY Savings Rate:

• $500 gross interest income ($50k at %1 APY)
• $450 after 10% tax rate
• $325 after 35% tax rate

A new $50k %5 30yr mortgage costs $2.5k of interest in the first year so a single person with about another $3.5k of other itemizable deductions (property tax, etc., considering the new IRS property-tax deduction) sees ZERO tax advantage or tax reduction from the mortgage interest costs, when compared to being debt-free with a standard deduction.

New IRS Tax Deductions Worsen Mortgage Debt Deal

The new IRS property tax deductions make mortgage debt an even worse deal than it already was.

2008 and 2009 tax years allow you to take the standard deduction but also deduct $1,000 in property taxes (if married filing jointly, or $500 if single) simply by checking box 39c on Form 1040.

IRS Standard Tax Deductions for 2008 Tax Return
(ie, no "itemized" Schedule A needed)

$ 5,450 (single)
$ 5,950 (single, property tax deduction)
$10,900 (couple, married filing jointly)
$11,900 (couple, married filing jointly, property tax deduction)
$14,000 (senior couple, age 65 or older, married filing jointly, property tax deduction)

Non-senior singles can deduct almost $6k without itemizing and without paying a penny in mortgage interest.

Non-senior couples can deduct almost $12k without itemizing and without paying a penny in mortgage interest.

Senior-citizen couples can deduct $14k without itemizing and without paying a penny in mortgage interest.

These deductions are in addition to the $3.5k per person deductions ("personal exemption") for yourself and dependents.

The IRS tax changes are another reason on top of recent market declines as to why debt does not pay.

I warned about such issues before the market crash:

Prepay Mortgage V. Invest in Stock Market
Myth of Mortgage-Interest Income-Tax Deduction
Myth of the Stock Market (Leveraged Borrow-To-Invest Dangers)

Save Money on Your Winter Home-Heating Costs

Some people muse idly about the coming winter's fuel costs as if it were a storm over which they have no control. However, you do control your heat costs. Moreover, if everyone did these smart actions, lower demand would put downward pressure on fuel prices.

• Insulate: What would you think if someone left his/her front door wide open all winter and then complained about his/her heating costs? Lax insulation is like leaving your front door open in winter. First, inspect your current insulation. You can upgrade from minimum to average or from average to super-insulated. The roof is the most important because heat rises. Control air infiltration/leaks with caulk, etc. When it comes to heat retention, windows are only the next best thing to a hole in the wall, so use the best combination of storm windows, shutters, plastic films, thermal drapes, etc.
• Use Free Heat: Manage your windows to use free solar heat gain (insolation) through the glazed surfaces (eg, glass). Make a solar space to trap solar-heated air against your building (eg, cover the interior of a screen porch in black, fill it with thermal masses (water jugs, lawn mowers), and cover the exterior screens with clear plastic). Manage your yard to landscape for best solar gain on the whole house in winter. Basically, do the opposite of summer home-cooling techniques. Basements are free passive geothermal heat sources, when even their typical geothermal-heat 40-50F degrees are better than zero-degree (0F) outside air temperature (check radon gas if necessary). Earth-sheltered homes maximize free, passive, geothermal heat.
• Reduce Usage/Lower Demand: Conservation (not burning fuel) is the cheapest and easiest method to keep heating costs low. Insulation helps after you already have heated a space, but consider all the heating and fuel-burning that you do not need to do in the first place. Size/service/clean your furnace to peak efficiency, which is like raising the MPG on your car (otherwise, you are burning gallons without any heat benefit, simply burning money). Get a programmable thermostat that lowers heat while you are at work or sleeping under blankets. Lower your "standard" temperature a few degrees and wear a sweater (yes, the cliche actually works extremely well). Make "winter rooms," the old-fashioned method to keep the key part of the house at standard temperature (keep water-pipes above freezing or shut-off/drain the pipes from, say, an upstairs bathroom) and close-off unnecessary square footage (adjust heat registers/vents, close/add doors between rooms, etc.), such as the "exercise room" that is more of a junk room anyway. Winter rooms simulate the efficiency of studios, tiny homes, or other low-cost, efficient, simple-living lifestyles.

Let me know if I forgot anything.

Good luck.

Crossposted from Inexpensive Home Building

Girl Pregnancy Pact Gloucester MA High School: School Subsidizes Teen Pregnancy (Savers Are from Mars. Debtors Are from Venus. Episode 6)

School Subsidizes Teen Pregnancy

Media Reports Miss the Main Point on Spike in Teen Pregnancies

A large number of high-school girls intentionally got pregnant or were happy to get pregnant at Gloucester High School in Gloucester, Massachusetts.

Earlier reports of a formal group "pact" to get pregnant are now disputed to be a post-pregnancy pledge for the teen mothers to somehow support each other, although the point about the girls' enthusiasm to get pregnant appears undisputed:

"But at a press conference today, Gloucester Mayor Carolyn Kirk emerged from a closed-door meeting with city, school and health officials to say that there had been no independent confirmation of any teen pregnancy pact. She also said that the principal, who was not present at the meeting, is now "foggy in his memory" of how he heard about the pact.

[Gloucester High School, principal Dr. Joseph ] Sullivan has not spoken publicly about the teen pregnancies since he told TIME earlier this month that several girls repeatedly requested pregnancy tests at the school clinic and that some had reacted to positive test results with high fives and plans for baby showers. Pathways for Children CEO Sue Todd, whose organization runs the school's on-site daycare center, told TIME on June 13 that its social worker had heard of the girls' plan to get pregnant as early as last fall. She noted that some of the girls involved had been identified as being at risk of becoming teen mothers as early as sixth grade, when they began to request pregnancy tests in middle school." (TIME)

Various reports blame the depressed, working-class, blue-collar, fishing economy or a poor, anti-social home-life:

""What we've seen is the girls fit a certain profile," Todd said. "They're socially isolated, and they don't have the support of their families."

The Real Point

People with no job prospects and no family support should be trying to INCREASE income and DECREASE outgo. Teen, single, diploma-less mothers are DECREASING their income potential and INCREASING their outgo expenses.

The schools apparently utterly failed to teach math, logic, or home economics.

The schools apparently do manage to teach and subsidize teen pregnancy (according to public radio and other reports):

• The school(s) teaches sex to children: School-district health coordinator Ann-Marie Jordan blamed budget "cutbacks" for stopping sex education after the 9th grade, leaving 'only' the years of sex taught in middle school and freshman year: Exactly how many YEARS does it take to figure out? One pair of unfixed neighborhood dogs or cats should do it.
• The school(s) conducts "health surveys" that ask children to describe their sex lives: Behavioral experts know that people are more likely to do something when you make them discuss, imagine, and visualize doing it.
• The school(s) provides/conducts pregnancy tests on children: Children can see grown-ups' tacit acceptance and expectation of teen sex (and usually failing tests in school is bad).
• The school(s) provides a FREE in-school daycare center for teen mothers: "The high school has done perhaps too good a job of embracing young mothers. Sex-ed classes end freshman year at Gloucester, where teen parents are encouraged to take their children to a free on-site day-care center. Strollers mingle seamlessly in school hallways among cheerleaders and junior ROTC. "We're proud to help the mothers stay in school," says Sue Todd, CEO of Pathways for Children, which runs the day-care center." (TIME)

Gee, can anyone think of where the girls got the idea to get pregnant?

The school is one step away from providing wine coolers and a Jacuzzi.

"Experts" continue to miss the point:

"Dr. Joanne Cox, director of the Young Parents program at Children's Hospital in Boston, said that in-school programs for birth control are shown to be effective, as is education. Upon hearing of the situation in Gloucester, she said that considering birth control distribution in school would be wise. "When 10 are pregnant — that's the time to have the political courage to do it," she said. She added that the lack of easily available birth control — which, she said, pediatricians are often hesitant to prescribe — is "probably the No. 1 reason" for an increase in pregnancies." (Gloucester Daily Times)

1. Basic economics: Subsidize something and you get more of it.

2. Birth control is useless when the girls WANT to get pregnant, which is the reported case with the Gloucester girls.

Maybe there would be fewer teen pregnancies if the schools spent less time and money teaching and subsidizing sex -- and instead spent more time and money teaching math, logic, and economics.

Personal Finance Carnival 128 Features Home Finance Freedom's "Savers Are from Mars. Debtors Are from Venus. Episode 5"

Home Finance Freedom's "Savers Are from Mars. Debtors Are from Venus. Episode 5" was featured by the 128th Carnival of Personal Finance at Stock Trading To Go in an "Investment Truth" edition, along with a number of good articles from fellow PF bloggers. Thank you.

Personal Finance Carnival 127 Features Home Finance Freedom's "Payoff Mortgage v. Invest Stocks: Housing Myths Part 12"

Home Finance Freedom's "Payoff Mortgage v. Invest Stocks: Housing Myths Part 12" was featured by the 127th Carnival of Personal Finance at Moolanomy with a "Wonders of the World" theme, along with a number of good articles from fellow PF bloggers. Thank you.

Savers Are from Mars. Debtors Are from Venus. Episode 5

Turning Gold into Lead:
How To Lose $100k, and Your House, and Your Family

"Wendy's home had appreciated in value by about $100,000, only months after she and her husband bought it. So, they took out a second mortgage for almost $80,000 to enhance their new home. It was at 8% interest. When the housing bubble burst, that $100,000 in equity evaporated. But, the interest on that second adjustable rate mortgage by now had climbed from 8% to almost 16%, creating a monster of a monthly payment they couldn't handle. 'Then, it just gets pulled from right out underneath you.' Wendy says her marriage even broke-up over this. Now the couple faces possible foreclosure on the house" (KVOA).

Debtors often display this unfortunate tendency to turn even a $100k windfall into more debt, to eliminate increases in net worth, to eradicate any trace of even accidental equity.

Remember that the $100k was only a paper profit, not real wealth, because they did not sell the home at the high price (they ignored the basic, old "sell high" truism).

They ignored the chance to increase their income and instead increased their outgo (spending)--the opposite of basic financial advice to increase income and decrease outgo.

Avoid Holiday Travel Costs with Virtual Visits

Look Who's Coming to 21st-Century Dinner

National Public Radio (NPR) yesterday interviewed a woman who could not afford airfare to visit family. High fuel prices raise the cost of air and road travel.

Better than a card or phone call:

Use a webcam to virtually visit for almost free.

You might already own the computer, internet connection, and webcam needed to virtually visit distant family (and webcams are cheap now).

You can park the monitor like another seat at the dinner table (fun gimmick).

A large TV display beside the table might feel like another table.

Virtual visiting also can help when little Billy might be bored at Grandma's house but can play with his cousin across the country.

Personal Finance Carnival 126 Features Home Finance Freedom's "Home Decorating Costs: Housing Myths Part 11"

Home Finance Freedom's "Home Decorating Costs: Housing Myths Part 11" was featured by the 126th Carnival of Personal Finance at Million Dollar Journey, along with a number of good articles from fellow PF bloggers. Thank you.

End of Privacy Sought by Government

"Privacy no longer can mean anonymity, says Donald Kerr, the principal deputy director of national intelligence. Instead, it should mean that government and businesses properly safeguard people's private communications and financial information" (Associated Press (AP), Yahoo! News).

Privacy (noun) = the government knows everything about you--but keeps it a secret from you.
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You Owe 9 Trillion Dollars

Congratulations, the United States gross national debt now exceeds $9 trillion.

You owe $30k. Your baby owes $30k. Your family of 4 owes $120k.

Your government put you in all this debt to make you richer, in case you were wondering why your life has felt so easy and virtually cost-free all these years.

Remember that when choosing a presidential candidate.

Why stop at $9 trillion?

Should the federal government make us all even richer by borrowing $18 trillion (so a family of 4 owes $240k) and leverage-investing it in the stock market for a higher return?

After all, Ben Stein recommended that you stay in debt to get rich: Payoff Mortgage v. Invest Stocks: Housing Myths Part 12