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    Mom wants to pay off home

    Hi,
    I’m trying to help my mom decide if/how it makes most sense to pay off her Mortgage. Here are the specifics:
    Age:65 (turning 66 this fall)
    Income: 35K/yr (No state Income tax) SS = 1,500/Mo (starting this fall)
    Mortgage: borrowed 89K on 30 yr. @ 7.5% with 18 years remaining (current bal app 67K)
    Debt: 2K in consumer debt ( bought a bed w/0% finance deal for 3 yrs).
    Savings: IRA – 140K (66 in a Money Market) & 73K in fixed insurance fund)
    Emer. Fund: 7K cash

    She will begin receiving her SS payments on her 66th birthday (Oct 2012) but she plans to work an additional 6-7 years. She likes her job & is in good health so she wants to keep working...
    She can access her money market fund without penalty but wants to know what would be the best way to pay off her mortgage. She would continue making the same house payments (just only to herself) until she retires.
    So we want to evaluate what would be her tax liability and under what scenario would maximize saving the home interest against increased income tax exposure.
    We are looking at a few scenarios:
    1. Pay the entire 67K Mortgage balance & save all the remaining interest but be taxed @ 107K for 2012
    2. Pay in 2 installments, 33K in fall 2012 & 34k in Jan 2013. This would put her taxes exposure at app 74k for 2012 & 81K in 2013 (she will get taxed on her SS in of 2013).
    3. Spread out the payoff for 3 or more years.

    A rough calculation shows if she paid off in 2012 she could avoid paying app $45K in interest to the bank.
    If taking this amount we assume she would take a 1 time income tax hit of 15-20% on that additional 67K or app 17K.

    Are we missing something in our estimations??

    Suggestions are appreciated!

    #2
    wow, 7.5% mortgage.... Guess that was the prevailing rate around 2000? Compared to present rates, that seems exorbitant. (I'm young enough to have not paid attention to it back then, so it's news to me) If I'm guessing at her payment correctly, nearly 25-30% of her payments are still going to interest? That's nuts!

    I'd recommend paying it off in a way that best minimizes the tax hit.... which would mean taking it out over at least 3-5 years. My thoughts: why pay a big tax "penalty" (by way of realizing investment gains and having them push her into higher tax brackets) in order to save probably less money on interest payments (comparing 4 yrs of interest v. 1 yr of interest).

    2 proposals...
    A) Pay it off over 3-5 years, taking out saved cash only to the point that it would kick her into a higher tax bracket... I assume she's in the 15% bracket? This should minimize the tax hit for her while still saving a significant amount of the interest.
    B) Refinance to a 15yr mortgage... she could probably get a rate of 3.5% (or better). It would cut her interest charges by more than half, give her a slight reduction in payoff timeline, and give her much more flexibility. She would break even within only 9-10 months (due to the extreme rate difference), and be saving money from then on out.

    Actually, plan C -- Refinance to a low-rate 15yr mortgage, then still follow a 3-5 yr payoff plan. It'll give her the advantages of both -- quick, tax-minimized payoff, while still saving significant interest costs. You'd need someone smarter than me to look at the exact numbers, but I think that could be a good plan for her.
    "Praestantia per minutus" ... "Acta non verba"

    Comment


      #3
      Agree with Kork - refi! 7.5% is way too high. You potentially could literally cut her rate in half. How much interest would that save? What could she do with the interest she saves?

      Effect on cashflow: Refi to 15 year 4% would lower expenses $125/month. Refi to new 30 year 4% would lower expenses $300/month.

      Other notes - I really don't like the investment allocation. She has too much in cash. Given her balance, there is no sense for her to have $66k in a money market at her age. Plus the $73k in a fixed insurance contract?? That's too conservative overall.

      What is she doing about inflation? Over the next 20 years, inflation will eat away about half the earning power of her money. And she's not doing much about it.

      There are other options you have to at least earn something back.

      https://www.fidelity.com/retirement/planning
      https://personal.vanguard.com/us/ins...etirement-tool
      Individual - Treasury Inflation-Protected Securities (TIPS)

      Comment


        #4
        You've left out a vital piece of information needed to begin to answer your question. What are her current monthly living expenses, including the mortgage payment?

        You also need to consider the possibility that a 65-year-old woman may not be able to work for another 6-7 years. Great if she can but stuff happens and she needs to be financially prepared so that she has enough cash flow to manage if she is forced to stop working for some reason.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          Originally posted by disneysteve View Post
          You've left out a vital piece of information needed to begin to answer your question. What are her current monthly living expenses, including the mortgage payment?

          You also need to consider the possibility that a 65-year-old woman may not be able to work for another 6-7 years. Great if she can but stuff happens and she needs to be financially prepared so that she has enough cash flow to manage if she is forced to stop working for some reason.
          Thanks everyone for the comments. To add some more detail; She pays roughly $888 on her monthly mortgage and has app $800 in monthly expenses. She lives a fairly simple life with very little debt.

          Part of the reason she is thinking to do a payoff v/s a refi is 2 years ago she lost her job and when we looked at her budget, if she would have started drawing SS (then it was 1300/mo) things would have been very tight for her (almost impossible). I remember her saying "if I didn't have that big house payment, I could do okay lust living off my Social Security". If she starts drawing SS this fall, she will receive $1500/mo. That alone would be enough to live on for her.

          Part of her likes the idea that she can be in her own home, where nobody could ever kick her out. She has a long term care insurance policy that covers in case she gets incapacitated, so only risk is if she lost her job and had that house payment.

          I guess the other thinking would be to use the cash if unemployed to make her mortgage payments, but again she loses 4K-5K per year alone in interest, so why not keep that as her own investment return??

          I'm trying to run some scenarios to see how her taxes would be impacted between a 1,2,or 3 year payoff plan. I read somewhere that Congress was considering to allow retirees an income exemption for home payoffs. Not sure if it fell by the wayside though, anyone else hear anything?

          SB

          Comment


            #6
            So her expenses are about $1,700 and she earns somewhere around $2,000 I'm guessing. I don't see a problem. She seems to be in good shape. She has low expenses, income that more than covers them, a nice amount in savings and is eligible to collect SS whenever she chooses to do so.

            I agree with refinancing to the low rates available today if the numbers make sense and costs aren't too high to sink the deal. Then, she could much more easily accelerate her payments, shorten her repayment period and slash the total interest paid. But she could still maintain her savings in case of emergency or job loss.

            Check on that long term care policy. It is very unlikely that it would cover anything close to her full expenses if she needs care. The daily benefit is typically a fixed amount like $100/day or something like that while expenses may be double or triple that amount.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              Refinance! She will save about $150/month and shave a couple of years off the loan (assuming she has the credit and equity for a 3.25%, 15-year loan).

              If she applied 100% of her social security for 3 years, to the mortgage, she'd pay off the home. DONE!

              Social security income is taxed if you have other income. As is, I'd estimate about 70% of her benefits will be taxed while she is still working. If you start withdrawing retirement funds, you will be paying taxes on those funds plus more taxes on social security. From a tax standpoint, she should just focus on paying down the mortgage with her income. Also, as far as preserving her savings.

              Frankly, running the numbers, if she is committed to paying off in 3 years, it doesn't make much difference to refi. (She can still pay off in 3 years with same plan). But it might still be worthwhile from a "worse case" scenario - to knock her costs down a bit and shorten the re-payment.

              Comment


                #8
                Originally posted by artwest
                If she is going to continue to work, why draw social security? If she waits until 70, she will get larger social security checks.

                I still don't get why she doesn't refinance. A 10 year mortgage for $67,000 at 4% would be a payment of about $679, Principal + Interest only. I think she should refinance and then pay off the mortgage in the next 3-5 years. I also think she should pay off the $2k in consumer debt today.
                She has decided to start her withdrawal at 66, but it might make sense to wait. It all depends on when you die. If she dies @ 73, she obviously loses by waiting. No guarantees for our length of life :s

                The 2K consumer debt (mentioned in OP) is a 0% promo so I would disagree to pay that off ahead of time.

                Even if she refi's she couldn't pay off the mortgage that quickly without using most of her MM funds so she would still be taxed as income... not sure exactly how that works to her advantage, but I haven't studied all the numbers yet.

                Comment


                  #9
                  I would re-finance to lower rate. It should not be more than 4%. I would keep paying minimum on because
                  1. Her mortgage amount would be fixed and her social security income would only go up because of inflation adjustment.
                  2. She will also avoid tax hit as she won’t need to withdraw to pay off here house.

                  If she is making more than here expense and is healthy, what’s the point of start withdrawing social security retirement benefits? I would wait till I turn 70 in this scenario. I would delay it as it is clear that she is not going to need that money as far as she has job. And if she loses job she could withdraw money from her retirement account, or start withdrawing social security or do both.

                  Comment


                    #10
                    Originally posted by sb95tx View Post
                    She has decided to start her withdrawal at 66, but it might make sense to wait. It all depends on when you die. If she dies @ 73, she obviously loses by waiting. No guarantees for our length of life :s

                    The 2K consumer debt (mentioned in OP) is a 0% promo so I would disagree to pay that off ahead of time.

                    Even if she refi's she couldn't pay off the mortgage that quickly without using most of her MM funds so she would still be taxed as income... not sure exactly how that works to her advantage, but I haven't studied all the numbers yet.
                    If she dies at 73, nothing to worry about as far as numbers are concerned. But if she lives longer, she will have higher money coming in every month as long as she will live.

                    Comment


                      #11
                      Originally posted by disneysteve View Post
                      So her expenses are about $1,700 and she earns somewhere around $2,000 I'm guessing. I don't see a problem. She seems to be in good shape. She has low expenses, income that more than covers them, a nice amount in savings and is eligible to collect SS whenever she chooses to do so.

                      I agree with refinancing to the low rates available today if the numbers make sense and costs aren't too high to sink the deal. Then, she could much more easily accelerate her payments, shorten her repayment period and slash the total interest paid. But she could still maintain her savings in case of emergency or job loss.

                      Check on that long term care policy. It is very unlikely that it would cover anything close to her full expenses if she needs care. The daily benefit is typically a fixed amount like $100/day or something like that while expenses may be double or triple that amount.
                      Thanks for the feedback disneysteve,

                      I think the idea of accelerating payments using her SS money might be the right way to go. She can earn as much as she wants, but her SS will be taxed on anything above 15K, so keeping her IRA money setting aside and applying an extra $1500/mo would get her to the 3 yr payoff mark with limited exposure to income taxes.

                      Comment


                        #12
                        Free advice and incomplete information

                        Please stop and get some advice from someone who knows all the facts about your mother's situation: financially, health wise and family.


                        • [1]The number one regret of most retirees is taking Social Security too early.

                          So she should delayed taking Social Security as long as possible. Every year she waits increases her lifetime benefit by 8% a year. There's no other place in the world to make 8% on your money especially one that comes with a lifetime stream of income that is protected against inflation.

                          Her $1,500/mth Social Security income at age 66 turns into $1,966/mth at age 70. Plus it would be increased by any inflation adjustments during the next four years. (Est. $2,202)

                          One might argue with the calculation of inflation as it is currently calculated by the government. Not to mention most likely the government will be changing this calculation in the future, further reducing/minimizing the true inflation rate.
                        • Retirees shouldn’t have a mortgage payment. So paying off the mortgage is a good idea. A better idea might be to refinance, keep in mind to keep the refi fees as low as possible. But your mother is not retire she's just thinking about making the number one mistake most retirees make Taking Social Security Early.
                        • The number one way to save money on your taxes it is to reduce your taxable income. The worst way to reduce your taxable income is through the use of tax deductions. The best thing to do is to make sure that your Social Security income is not taxable.
                        • Tax free income it is better than tax deductible expenses and taxable income.


                        No one here knows the complete picture. And no one is in a position to offer advice without knowing all the facts.

                        Refinancing seems like a simple and safe idea.
                        Working as long as possible is also a sound idea if she is in good health as you state.
                        If she must stop working due to her health, it might be best to withdraw the money from her IRA, so she can delayed taking Social Security as long as possible, thereby maximizing her life-time inflation protected cash flow.

                        JDC CPA

                        Comment


                          #13
                          Originally posted by sb95tx View Post
                          Thanks for the feedback disneysteve,

                          I think the idea of accelerating payments using her SS money might be the right way to go. She can earn as much as she wants, but her SS will be taxed on anything above 15K, so keeping her IRA money setting aside and applying an extra $1500/mo would get her to the 3 yr payoff mark with limited exposure to income taxes.
                          You need to find answers to questions below or someone who knows the answers.
                          1. Is this true?
                          2. What type of income makes her SS taxable?
                          3. If so what part is taxable?
                          4. Is it possible for her SS not to be taxable?

                          Comment


                            #14
                            Take all the social security comments with a grain of salt. I think people are forgetting that if you don't take SS# now that you are giving up money. It mostly evens out either way. You get less now and more later, if you wait, but it is all going to be about the same in the end.

                            There may be reasons to wait, but it's not as simple as "waiting is always better."

                            In this case, I think paying off the mortgage and eliminating that bill while still being able bodied and working sounds like a good idea. That might be more beneficial to her finances than getting a slightly higher SS benefit down the road.
                            Last edited by MonkeyMama; 02-17-2012, 05:34 PM.

                            Comment


                              #15
                              I would actually say the #1 regret of most retirees is that they didn't start saving for their retirement sooner.

                              Taking SSI early can cost a few 100/month (but you get payments early). Not starting saving while you're young can literally cost millions.

                              4 years of $1500 = 4 * 12 * 1500 = $72,000
                              BE point if payments go up $500 by waiting 4 years = 144 months = 12 years

                              She'd break even on SSI at age 82. Not as bad as it may seem.


                              IRS: Are Your Social Security Benefits Taxable?

                              Social Security Administration: Benefits Planner: Taxes and your Social Security benefits

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