Paying off a mortgage completely

[LostInSpace]

I'm wondering whether to pay off a loan rather than continue paying the $850/month mortgage. My brothers and I bought a house about 5 years ago for our father. He passed away last year and our cousin is living in the house now. He is not paying rent- it's a long story- and we're not planning to start charging him rent.

We owe about $120,000 on the house. It's an adjustable rate which has gone from 5.9% to 4.1% currently. We're not getting any tax advantages since we're not living there and it's not a rental. Between the four of us, we could pay off the loan, thus saving the $400 or so a month we're paying in mortgage interest.

Since savings/cd rates are so low, it just doesn't seem to make sense to keep paying 4%+ on the house. Good idea? Thanks very much for any feedback on this.

[Slug]

It's hard to answer without the context of your existing personal financial situation. For example, any higher interest debt to consider? Is your Roth IRA funded for both 2009 and 2010? How's your emergency fund? These are the kinds of questions we'll need answers to in order to be helpful.

[LostInSpace]

Hi Slug,

Thanks for the reply. No higher interest debt, IRAs fully funded. We have stable jobs and emergency funds, though I know what you mean-- in case we need money in the future, this low-interest mortgage might be worth keeping.

But because there's 4 of us, we feel secure that we can handle things financially. We just all hate the idea of paying this much interest every month-- we're only getting about 1% on our savings/checking accounts, so we're forking over several hundred a month in interest to carry this loan.

Everyone keeps telling us about the benefits of using OPM etc, but in this climate I wonder.

[jIM_Ohio]

Paid off mortgage probably makes the most sense- eases everyone's liability both legally and cash flow wise.

[disneysteve]

Paid off mortgage probably makes the most sense- eases everyone's liability both legally and cash flow wise.

Jim, can you explain what you mean regarding easing legal liability? What difference does it make if they have a mortgage or own the home outright from a liability standpoint?

[LostInSpace]

jIM_Ohio,

I appreciate the feedback. We're leaning this way, just didn't want to make the move without looking into it first.

[jIM_Ohio]

Jim, can you explain what you mean regarding easing legal liability? What difference does it make if they have a mortgage or own the home outright from a liability standpoint?

if you pay off property you have more liability in some ways and less in other ways

less liability on what if one of your brothers or sisters backs out, misses a payment, or hurts the credit of the other 3 siblings. So less legal liability is more of who the bank comes after if a payment is 25% short.

You have more liability in some ways too...
I have heard this from land lords on other boards-

best to have less equity in property if possible.

Say I rent to you and have 20% equity in property. Paid 20k and have 80k in mortgage (for simplicity sake).
you trash the place, burn it down or otherwise decrease the value of the property I own.

If I have most of property financed, I could ask myself- did you do 20k worth of damage? It is possible I walk away, take a 20k loss instead of putting 30k of repairs into my rental.

If I have property paid off, in order for me to get my 100k equity, I need to sink 30k of repairs into property.

When "renting"- its best to keep property leveraged is what I am told from a legal standpoint. That is what I meant.

[Mike75]

You are right. I think you should pay off the debt as soon as possible. Being under debt not only lowers your credit ratings, but it can also put a lot of psychological pressure on you.

[tripods68]

Pay off the mortgage.

[Beppington]

My vote would be to pay it off in this case, since you're a group.

Per Jim: If only you owned it, I might not pay it off.

I myself am most comfortable with no debt, but I think the investors among us that are willing to carry some debt, such as a mortgage on a rental unit, may come out as good or better in the end.

[autoxer]

Everyone keeps telling us about the benefits of using OPM etc, but in this climate I wonder.

It's not the climate that is ruining the benefit of OPM. It's the fact that you aren't even charging rent. You should probably pay it off and then sell the house. An investment between four people with different goals and expectations is a dangerous thing.