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    Should I pay off my mortgage?

    Hi, looking for some advice. I was thinking about cashing in some stock to pay off my mortgage. I have maxed out my 401k contributions, have a good amount of savings and have no credit card debt or car payments. Mortgage payment is about 2200 per month and I owe about 120,000 on a house valued @ 350K with about five years left on the loan. I am 46 years old. Should i pay it off and the taxes when i cash in the stock or should I make some extra payments so I can keep the mortgage interest deductions for a bit longer?

    #2
    Originally posted by JoseGaspar View Post
    Hi, looking for some advice. I was thinking about cashing in some stock to pay off my mortgage. I have maxed out my 401k contributions, have a good amount of savings and have no credit card debt or car payments. Mortgage payment is about 2200 per month and I owe about 120,000 on a house valued @ 350K with about five years left on the loan. I am 46 years old. Should i pay it off and the taxes when i cash in the stock or should I make some extra payments so I can keep the mortgage interest deductions for a bit longer?
    For the 2013 tax year, the standard deduction for most US taxpayers is:
    $6,050 single
    $12,200 married

    So, the interest you pay on your mortgage would help you reduce your taxes only by the amount that your total deductions exceed this amount. Unless you have a lot of other deductions, you probably aren't saving anything on your taxes by keeping the mortgage.

    As far as whether you should sell stock to pay off the mortgage, that's another question entirely. Did you purchase the stock or was it inherited? If you purchased, why did you purchase them originally?

    Comment


      #3
      I have a few questions first.... What is the interest rate on your mortgage? Exactly how much cash do you have in savings? You definitely don't want to deplete all of your savings in this. In addition, you need to consider the tax ramifications of selling that much stock all at once. Lastly, and perhaps most importantly, why do you want to pay it off right now?

      I would be hesitant to give a recommendation without a better understanding of your situation. However, one thing is certain.... If paying off the house is the right decision for you, the tax deduction on your mortgage interest isn't a factor. After all, for every tax dollar you save from the deduction, you will have paid 3 times as much in interest charges.
      "Praestantia per minutus" ... "Acta non verba"

      Comment


        #4
        Originally posted by scfr View Post
        For the 2013 tax year, the standard deduction for most US taxpayers is:
        $6,050 single
        $12,200 married

        So, the interest you pay on your mortgage would help you reduce your taxes only by the amount that your total deductions exceed this amount. Unless you have a lot of other deductions, you probably aren't saving anything on your taxes by keeping the mortgage.
        Agreed. Especially as you are in the last 5 years of your mortgage, the % of each payment that represents interest is smaller, and you're likely not incurring too much.

        $120k balance even at 5% interest would be a max $6k/year of interest. Less than that because you're paying it down quickly.


        Another option to consider would be a refinancing of the remaining debt. If you've got a interest rate from 15 years ago still, you may be able to really reduce your interest cost and remain invested, by refinancing.

        Originally posted by kork13 View Post
        I have a few questions first.... What is the interest rate on your mortgage? Exactly how much cash do you have in savings? You definitely don't want to deplete all of your savings in this. In addition, you need to consider the tax ramifications of selling that much stock all at once. Lastly, and perhaps most importantly, why do you want to pay it off right now?
        Other questions that would help:
        - What basis do you have in the shares?
        - Is it actually stock? All one company's stock? Or a stock mutual fund?
        - What percent of your investment assets does $120k represent?
        - What tax bracket are you in? What state?

        After all, for every tax dollar you save from the deduction, you will have paid 3 times as much in interest charges.
        I think that's the wrong way to look at it. Of course you pay more in interest than you get on the deduction, but that's not why the deduction is important. If it applies, it helps reduce the effective cost of borrowing. When your effective after tax rate on your mortgage is super low, it is more beneficial to remain invested IMO.

        If your mortgage is at 4% and it's all deductible in your 25% bracket, your after tax rate is 3%. Even less if you have state taxes, or are in a higher bracket.

        I would much rather keep $120k invested if OPs after tax cost of borrowing is under 3-4%. Maybe not all in a single stock, but invested nonetheless.

        Comment


          #5
          Originally posted by JoseGaspar View Post
          Hi, looking for some advice. I was thinking about cashing in some stock to pay off my mortgage. I have maxed out my 401k contributions, have a good amount of savings and have no credit card debt or car payments. Mortgage payment is about 2200 per month and I owe about 120,000 on a house valued @ 350K with about five years left on the loan. I am 46 years old. Should i pay it off and the taxes when i cash in the stock or should I make some extra payments so I can keep the mortgage interest deductions for a bit longer?

          as a general rule you want to look at your expected after tax returns on an investment and compare it to the after tax cost of the loan. you also want to consider the risk of the asset vs the loan. so if you expect to earn 4% after tax on the stock and pay 3% after tax on the loan, holding the stock seems like a good deal at first. however, if you are not comfortable with the risk of underperforming in the stock, then maybe you want to sell the stock to pay off the loan. if the loan is not tax deductible, then it is not a tax efficent way to borrow, so it argues for paying it off sooner. without more details, i can't say much more...

          Comment


            #6
            Stock was a gift as a company employee, so no investment on my part. 401k is @ 400k and liquid savings is 75k. As mentioned, no other debt. Interest rate is 4.25% on a 10 yr fixed with about 60 months remaining.

            Comment


              #7
              Originally posted by JoseGaspar View Post
              Stock was a gift as a company employee, so no investment on my part. 401k is @ 400k and liquid savings is 75k. As mentioned, no other debt. Interest rate is 4.25% on a 10 yr fixed with about 60 months remaining.
              if the stock is in your company, if your company goes bankrupt you lose your job AND the stock. diversification is typically a good idea.

              i do not know if you will receive the interest deduction based upon how you file. either way you can look at this in the context of your overall asset allocation. for example, if you have a need to buy bonds in your portfolio and a mortgage (a short position in callable bonds), what are the rates of your bond portfolio after tax in comparison to the mortgage. if you have a 4.25% mortgage after taxes with say a 3 year average life, you will have a hard time beating that in the bond markets. so it makes sense to "not buy bonds" with the proceeds of the stock because you will have a negative funding. it may be the case if you have the deduction that you would also be in the same situation but to less of an extreme. even if you refinance, the markets are normally structured so banks can invest in mortgages at higher rates than they can buy bonds for, so it would probably still be a negative funding. in all caes you would lose money. if you do not have bonds, but TIPs or stocks, the situation becomes fuzzy. it has to do with your expectations for after tax returns on these asset classes and the risk of outperformance over the life of the loan. most people agree stocks can be very risky in the short run. holding TIPs would be a natural hedge for your liabilities, but the short term movements in inflation also tend to be unpredictable. this incremental decision would have to do with your risk tolerance.

              i typically use a tax program like turbotax and run my return with and without the mortgage in it. i find the change in the taxes relative to the change in income recorded as the marginal tax rate and use it to draw comparisons.

              you seem to be asking a targeted question on this decision only and i do not know enough about your situation say much more, so i will stop here.

              Comment


                #8
                Originally posted by JoseGaspar View Post
                Stock was a gift as a company employee, so no investment on my part. 401k is @ 400k and liquid savings is 75k. As mentioned, no other debt. Interest rate is 4.25% on a 10 yr fixed with about 60 months remaining.
                Is the stock you are thinking of selling in your 401k? If so the answer s absolutely not. You'll pay 35% in interest and penalties to repay a 4.25% loan which would be insane.
                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


                  #9
                  Originally posted by JoseGaspar View Post
                  Hi, looking for some advice. I was thinking about cashing in some stock to pay off my mortgage.?
                  Don't forget to consider the tax consequences of cashing in your stock. There will be tax to be paid that varies depending on what type of options you have. You may want to cash them out over a few years if they are going end up putting you in a higher tax bracket.

                  Comment


                    #10
                    JoseGaspar - It sounds like the company stock is outside of your 401K. Is that correct? Is it in something like an ESPP (Employee Stock Purchase Plan)?

                    You sound like a pretty sharp person, so I'm going to assume that you've already read the Plan Summary? If it's in an ESPP, there are probably restrictions on who can sell shares and when. For example, if you have inside information about your company, there may be an approval process you have to go through. You may have to hold the stock for a certain period of time before you sell. Etc, etc. There are always rules.

                    But if you are completely free & clear to sell the stock, if I were in your shoes I would go ahead and sell the stock. As others have said, owning a lot of stock in the company you work for makes you less diversified and exposed to a lot of risk if your employer goes out of business.

                    You mentioned that you are maxing out your 401K. Are you also maxing out IRAs (Traditional & Roth)? If not, I would probably opt to use the proceeds from the stock sale to fund my IRAs**, and then throw the rest at the mortgage (to either get it paid off completely or get it paid down early).

                    If all tax-advantaged savings are being maxed out, then it very likely makes sense to go ahead and pay off the mortgage.

                    **QUESTION FOR THE FORUM: Does anyone know if it's possible to transfer shares of company stock to an IRA and then sell the stock inside the IRA, to avoid or delay paying tax on gains?

                    Let us know what you decide.
                    Last edited by scfr; 01-13-2013, 06:42 AM.

                    Comment


                      #11
                      Originally posted by scfr View Post
                      **QUESTION FOR THE FORUM: Does anyone know if it's possible to transfer shares of company stock to an IRA and then sell the stock inside the IRA, to avoid or delay paying tax on gains?
                      Nope. IRAs can only be funded with cash, not transferred securities.

                      (That's not the case for rollover IRAs but that isn't what you were asking.)
                      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


                        #12
                        Originally posted by scfr View Post
                        **QUESTION FOR THE FORUM: Does anyone know if it's possible to transfer shares of company stock to an IRA and then sell the stock inside the IRA, to avoid or delay paying tax on gains?

                        Let us know what you decide.
                        scfr,
                        Here is a link to an article "Know your NUA. If your 401(k) includes your company's stock, a rollover may be a bad move." ("Net Unrealized Appreciation" or NUA.)

                        Comment


                          #13
                          Originally posted by scfr View Post

                          **QUESTION FOR THE FORUM: Does anyone know if it's possible to transfer shares of company stock to an IRA and then sell the stock inside the IRA, to avoid or delay paying tax on gains?
                          No - IRA contributions must be made with cash.

                          To OP - agreed with the others. Tax deductions are generally never a good reason to "keep" a mortgage. May be a huge deciding factor when comparing rent to home ownership. But once you have the mortgage, there is really no benefit to paying tons more than you will ever get out of a deduction. I've owned a home for about 14 years, and though we still get the full deduction (we itemize a lot of other things), the interest no longer really amounts to a hill of beans. Especially at these interest rates.

                          So, if your interest is about $5,000 per year ($120,000 x 4.25%), and ever decreasing as you pay down the loan, and your tax rate was some ridiculous 50%... Then you'd be paying $2200/month mortgage to save $2500 per year in taxes. I don't think your tax rate is that high, but just using a high-tax/simple math example. & that is assuming you even itemize the interest, which you probably do not. Of course, this is just one piece of the decision to pay off a mortgage, BUT, it seems to be the only reason you feel motivated to keep the mortgage. So, I am just addressing the math of that.

                          Anyway, if I were you, I'd pay off the house. You could refi into some ridiculously low interest rate, but I personally wouldn't bother in your situation.

                          Comment


                            #14
                            Originally posted by scfr View Post
                            **QUESTION FOR THE FORUM: Does anyone know if it's possible to transfer shares of company stock to an IRA and then sell the stock inside the IRA, to avoid or delay paying tax on gains?
                            If the shares were issued in a non-qualified (taxable) account, they cannot be transferred into an IRA. If they were issued in a qualified (tax advantaged) account, they should be able to.

                            On the basis of your question, it assumes there is a cost basis and a gain in the shares that would be taxable on liquidation. Based on that scenario, you could not move the shares into an IRA to avoid taxes on the gain. You still may sell the shares and contribute cash, but the IRS wouldn't let you get around paying tax on the gain like that.


                            The assumption I'm working on is that it's employer stock held in a taxable account, gifted over a year ago. There's still a lot of unknowns here that OP didn't answer.

                            I have no idea what if any cost basis he has in the shares, so don't know how much would be taxed or not. Assuming $0 basis, it'd be $120k long term cap gain (hopefully) so 20% there in 2013, and taxable in his state too at various rates, so say another 5-10%. So that'd be $30-36k of taxes due on the sale.

                            In this 1st year, at $2,200/month payment at 4.25%, OP will pay ($4,625.08) in interest. Possibly partially deductible. In the following years that falls to ($3,681.41), ($2,696.84), ($1,669.60), and ($597.84). Those likely aren't deductible, so I'd go with 4.25% after tax cost of borrowing.


                            Assuming all my statements above to be accurate:

                            If OP is aggressive and risk seeking (like me), I'd still pay the 4.25% to remain invested, although I would still sell the stock and diversify away from my company.

                            If OP is more moderate - conservative, I'd sell the stock, keep 35k aside for taxes, and pay down debt.

                            Comment


                              #15
                              Some great feedback and some very smart people here. Thank you for all of your insights...a lot to consider and sounds like I have some number crunching to do. The stock in question is NOT part of my 401k portfolio...completely seperate. I do not have any other 401k or savings. I am eligible for a pension (rare I know) which is why I haven't considered any other savings aside for my current 401k and my ongoing liquid savings

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