Author Topic: Which Mortgage to Work On  (Read 1912 times)

Catbert

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Which Mortgage to Work On
« on: October 16, 2013, 04:59:49 PM »
I've never been one to work hard at paying off mortgages because there always seemed to be a better use of my money.  Now we are fully retired and frankly have a large enough stash that investing/saving more money isn't necessary.  So working on paying off mortgages is the new focus for extra money.  Oddly, our 4 mortgages have the same interest rate 4.75% ( well one is 4.78% but that's pretty negligible.)  All are currently tax deductible.   I'd curious whether anyone has thoughts on which mortgage to work on 1st.  Below are the mortgages and pros/cons for each as I see them:

Principal Residence.  This has the lowest balance (under 50K) and will pay-off in less than 5 years with no extra payments.   
PRO: will be paid off sooner than others.  It would be nice to own home free and clear. 
MAYBE a CON:  will accelerate the day when we will take a standard deduction rather than itemizing.

2nd Home.  28 years left.  Balance about 150K. 
PRO:  this deduction is more likely than others IMO to be lost during some future tax reform. 
MAYBE a CON:  Will accelerate the day when we will take a standard tax deduction rather than itemizing. 
It will be a long time before it make a difference in cash flow. 

2 different rental houses:  27 years left.  Balances of 160K and 290K. 
PRO:  During an unusually bad rental year I could lose all/some this deduction since my MAGI is over 100K and ability to take losses decreases. (Would have to be a really bad year but I had one of those 2 years ago. ) 
CON:  Changes to tax laws are unlikely IMO to affect this tax deduction.
 It will be a long time before it would be paid off and affect cash flow.

My inclination is work on my principle residence.  But am I forgetting anything? 

seattlecyclone

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Re: Which Mortgage to Work On
« Reply #1 on: October 16, 2013, 05:07:59 PM »
How much higher are your itemized deductions than your standard deduction? If they're pretty close, then you might want to focus on the rental houses since getting yourself under the standard deduction in your personal houses will effectively make those mortgages non-deductible.

Have you considered refinancing any of these mortgages? You could probably knock 1-1.5% off any of these by converting to a 15-year loan. If you're planning to make higher payments on one or more of these loans anyway, you might as well take advantage of an opportunity to reduce the interest at the same time.

Hamster

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Re: Which Mortgage to Work On
« Reply #2 on: October 17, 2013, 09:53:09 AM »
How much higher are your itemized deductions than your standard deduction? If they're pretty close, then you might want to focus on the rental houses since getting yourself under the standard deduction in your personal houses will effectively make those mortgages non-deductible.

Have you considered refinancing any of these mortgages? You could probably knock 1-1.5% off any of these by converting to a 15-year loan. If you're planning to make higher payments on one or more of these loans anyway, you might as well take advantage of an opportunity to reduce the interest at the same time.

I agree with the second part, about refinancing. But, I think your logic is backward on the deductions.

The rental mortgage interest is a business expense so 100% is deductible - or counted against income.

The residential mortgage is only partially deductible (only to the extent that it is above your standard deduction).

Let's pretend you have a primary residence and a rental property. Same interest rate, and each one costs you $15k in interest per year. No other deductions. Assume standard deduction is $12k, and income tax is 25% marginal rate to keep the math easy.

Scenario 1 you pay down your primary residence resulting in $5k less interest on the primary. You pay a total of $25k in interest for the year. You get your 12k standard deduction, nothing extra for your primary mortgage, and $15k 'deduction' for the interest on your rental= $27k in 'deductions', or about $6750 in tax savings.

Scenario 2 you pay down your rental to the same extent. You get 15k in itemized deductions and only $10k in deductions against your rental. This is a total of $25k in deductions or $6250 tax savings.

There may be other arguments for paying down the rental, but tax wise it is almost surely less beneficial unless the interest rate is higher.