itemize or standard deduction?

[miatagirl]

Which is better? Pay off mortgage (100,000) with inheritance and take the standard deduction then take monthly amount we would have paid and invest it or keep paying on mortgage and itemize and put the inheritance money into index funds?If we itemize ,last year was 15,042 vs 10,300 for standard. This is a debate with my husband and myself so please don't beat me up for asking. I appreciate everyone taking the time to answer.

[MonkeyMama]

I think we would need more info.

For one most people around here are going to say pay it off.

If you are young and can put the money into IRAs or a 401k instead (which you wouldn't be able to all at once, but possible over a few years you could) I would invest the money, personally. Less because of the whole itemized vs. standard thing, but more because you can invest the money long-term with better returns overall, tax-deferred, and you should be able to come out ahead. I am also assuming you could invest the money well (an index fund would do) AND that you have a low interest rate on your mortgage.

Deciding to pay off a mortgage, or not, based on a tax deduction alone is silly. You will pay $5k/year interest to save $1k in taxes. From that standpoint it is silly to pay all that interest for a bigger tax deduction. Your deduction may be another $5k but it would only lower you actual taxes paid by about 25% of that (depending on your tax bracket).

[disneysteve]

most people around here are going to say pay it off.

Not me. I'd say do whichever earns you the most money. Odds are it is investing. We have a mortgage of about 100K (will be UNDER 100K in 3 months - yeah!) and we have an investment portfolio of nearly 400K, so we could pay off our mortgage tomorrow if we wanted to. Our mortgage interest rate, after taxes, is quite low compared to what our investments are earning, so I see no benefit to paying off the mortgage.

[safari]

What rate are you paying on your mortgage? The rate is the main factor that you have to consider. For example, if you're paying 6% APR and you're in the 25% tax bracket, your real rate is 4.5% if we account for the tax deduction. In this case it makes a lot more sense to invest that money instead of paying off the mortgage because you can earn a better return on your investment.

[MonkeyMama]

DisneySteve is not most people - LOL.

I was thinking about this after the fact and wanted to round out my post on the tax deduction thing. Paying $5k interest to save $1k in taxes is silly, yes, but if you can invest the money and earn a good 8% return, you see why investing is worth it. You should be able to keep the tax deduction then (keeping the cost of your loan lower) and invest the money, and you should be able to come out ahead. Especially since if you invest it all in ROTHS, your returns will be tax-free. If you invest in 401ks you defer the taxes until much later. Either way you can probably avoid paying tax on most of the investment returns in the immediate future. Though it may take a while to be able to transfer all of the money into ROTHs and 401ks and all that (or you may not be able to). In that case you have to factor the tax on investment returns and it is not quite as lucrative, but still, investing the money should give you an edge.

As safari says, rate on your mortgage is key. I think your age is key too. A long investment horizon makes investing more worthwhile. If you were nearing retirement you might just want to pay off the mortgage.

[disneysteve]

DisneySteve is not most people - LOL.

Thank you very much.

My daughter thought that was very funny.

[MonkeyMama]

& I certainly mean it as a compliment.

[scfr]

Without knowing more about your situation I can't offer an opinion. As others have already stated, it would depend on your mortgage rate, age, marginal tax bracket, what the rest of your investments look like, etc. It would also depend on psychological factors such as how much risk you can tolerate, how much confidence you might gain from knowing your house is paid off, etc.

2 comments tho':

1. You are looking at two really good alternatives --- good for you! Either investing or pre-paying the mortgage could be really smart moves. [So glad you aren't asking "Should we take a cruise around the world or buy a Mercedes?]

2. If, after looking at your complete financial picture, there are still legitimate arguments on both sides and you and your husband still cannot agree, why not compromise? For example, invest the money, but take the earnings on the investments and make extra principal payments?

[scfr]

For one most people around here are going to say pay it off.

Funny - I would have said "most people around here would tell you to invest it!"

[Aleta]

I agree with scfr that you can't really get adequate advice without first giving more details. You didn't say if your inheritance was more than your mortgage. Do you have an emergency funds and are all of your debts paid off? Are there 1 or 2 paychecks in the family? Do you currently contribute to an IRA , Roth, or 401K? What are your ages?

After paying your house off, you could always take the payment that you were paying before and invest monthly in a fund or whatever you need at that time. There are too many variables in this. We need more information.

[MonkeyMama]

Maybe it's over on the blogs, I can only think of a handful around here who actually consider investing rather than prepaying a mortgage.

Great post though. If you can't decide or its not clear, do both... Indeed.

[Aleta]

I would think that most people would want to pay their house off too just because of the pschological aspect of it and it's like paying off another debt that you just cross off. for some people itemizing doesn't work because they don't have enough deductions and like you said MonkeyMama - you have to pay out too much in interest and payments to save $1,000.

[disneysteve]

Maybe it's over on the blogs, I can only think of a handful around here who actually consider investing rather than prepaying a mortgage.

Anyone who has a mortgage but contributes to a 401K or 403B or Roth or 529 or any other savings plan is investing instead of prepaying their mortgage. They may not think of it that way but that's exactly what they're doing. So I don't think that opinion is as prevalent as you might think.

[Aleta]

Good point Steve.

[lgslgs]

This should help you do a comparison: Invest vs. Payoff


Every time folks here start singing the praises of prepaying mortgages I calculate how much money I'd lose each month doing so. I'm glad I got have the extra money growing than pay good money for nothing more than a warm fuzzy feeling.

I'd much rather be home, retired early and enjoying my house with an easy to afford mortgage on it than having to leave every day to go work so I could buy a warm fuzzy feeling for a house that sits vacant all day waiting for me to come home.

Lynda