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Sell Stocks And Pay Off Your Mortgage

It’s hard to borrow yourself rich—especially when you can’t deduct the interest.

A friend from Connecticut tells me she and her husband were recently inspired to sell some securities and pay off their mortgage. She figures the market is due for a correction.

A clever move, I say, and not just because stocks are richly priced. Mortgages, even though rates are at near-record lows, are expensive. And there’s a tax problem.

The tax angle relates to what went into effect last year—something Trump called a tax cut, although it raised federal taxes for a lot of people in high-tax states like Connecticut. For our purposes what matters is that the law made mortgages undesirable.

Used to be that people would say, “I took out a mortgage because I need the deduction.” That doesn’t work so well now. The new law has a standard deduction of $24,400 for a couple, and you have to clear this hurdle before the first dollar of benefit comes from a deduction for mortgage interest.

Today In: Money

Most middle-class homeowners aren’t itemizing at all. For them, the aftertax cost of a 4% mortgage is 4%.

If you are still itemizing, your interest deduction may not be worth much. You are probably claiming the maximum $10,000 in state and local taxes. (If you aren’t, you are living in an igloo in a state without an income tax.) That means the first $14,400 of other deductions don’t do anything for you.

A couple with $2,400 of charitable donations and $15,000 of interest is in effect able to deduct only a fifth of the interest. The aftertax cost of the mortgage depends on these borrowers’ tax bracket, but will probably be in the neighborhood of 3.7%.

Before 2018, your finances were very different. You no doubt topped the standard deduction (which was lower then) with just the write-off for state and local taxes (which didn’t have that $10,000 cap). So all of your mortgage interest went to work in reducing federal taxes. You could do a little arbitrage.

If your aftertax cost of a 4% mortgage was 2.7%, an investment yielding 3% aftertax yielded a positive spread. You’d hold onto that investment instead of paying off the mortgage. It was quite rational to sit on a pile of 3% tax-exempt bonds while taking out a 4% mortgage to buy a house.

Now that sort of scheme doesn’t make sense. The aftertax yield on muni bonds is way less than than the aftertax cost of a mortgage. This is true of corporate bonds, too: Their aftertax return, net of defaults, is less than the cost of a mortgage today.

So, if you have excess loot outside your retirement accounts, and it’s invested in bonds, you’d come out ahead paying off a mortgage.

What about stocks? Should you, like my friend, sell stocks held in a taxable account in order to pay off your mortgage? This is a trickier question. If your stocks are highly appreciated, perhaps not. You could hang onto them and avoid the capital gains.

If they are not appreciated, or if you have a windfall and you’re deciding whether the stock market or your mortgage is the place to use it, the trade-off changes.

Stock prices are, by historical measures, quite high in relation to their earnings. The market’s long-term future return is correspondingly less.

Financiers

In the short term, stocks are entirely unpredictable. Neither my friend, nor I, nor Warren Buffett can tell you whether there will be a crash next year to vindicate her decision or another upward lurch that will make her regretful.

For the long term, though, you can use earnings yields to arrive at an expected return. I explain the arithmetic here. A realistic expectation for real annual returns is between 3% and 4%. Add in inflation and you’ve got a nominal return not much more than 5%.

From that, subtract taxes. You’ve got a base federal tax of 15% or 20% on dividends and long-term gains. There’s also the Obamacare 3.8% if your income is above $250,000. You have state income taxes, no longer mitigated by a federal deduction for them (because you’ll probably be well above the $10,000 limit no matter what).

Add it all up, and you can look forward to an aftertax return from stocks of maybe 4%. That is, your expected return could be only a smidgen above the aftertax cost of your mortgage. Worth the risk? Not for my friend. Not for me.

What if I’m wrong about the market, and it’s destined to deliver 10%? Or what if you are a risk lover, willing to dive in with only a meager expected gain? Mortgages are still a bad way to finance your gamble.

You don’t have to borrow money at a non-tax-deductible 4%. I can tell you where to get a loan at slightly more than 2%, with the interest fully deductible.

The place to go is the Chicago Mercantile Exchange. Instead of buying stocks, buy stock index futures.

When you go long an E-mini S&P 500 future you are, in effect, buying $150,000 of stock with borrowed money. You don’t see the debt; it’s built into the price of the future. The reason the loan is cheap is that futures prices are determined by arbitrageurs (like giant banks) that can borrow cheaply. The reason the interest is in effect deductible is that it comes out of the taxable gains you report on the futures.

Futures contracts are taxed somewhat more heavily than stocks. Their rate is a blend of ordinary rates and the favorable rates on dividends and long-term gains. Also, futures players don’t have the option of deferring capital gains. Even so, owning futures is way cheaper than owing money to a bank while putting money into stocks.

One caveat for people planning to burn a mortgage: Stay liquid. Don’t use up cash you may need during a stretch of unemployment.

But if you have a lot of assets in a taxable account, it’s time to rethink your mortgage. Debt is no longer a bargain.

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 44 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.

Source: Sell Stocks And Pay Off Your Mortgage

In many situations, paying off your mortgage early could potentially be costing you hundreds of thousands of dollars…and I’ll run the numbers to show this based off real world examples. Enjoy! Add me on Snapchat/Instagram: GPStephan Join the private Real Estate Facebook Group: https://www.facebook.com/groups/there… The Real Estate Agent Academy: Learn how to start and grow your career as a Real Estate Agent to a Six-Figure Income, how to best build your network of clients, expand into luxury markets, and the exact steps I’ve used to grow my business from $0 to over $120 million in sales: https://goo.gl/UFpi4c This is one of those subjects that’s not intuitive for most people – you would think that paying off your mortgage early would be a really good idea. But this isn’t always the case. The reason people think this way is because they haven’t really looked at the true cost of ownership, what their money is really worth, and they only focus on the end number. On our $400,000 loan example, your payment is $1956 per month and you wind up paying $304,000 in interest over 30 years. But there are three very important considerations here: 1. The first is the mortgage interest tax write off – this is what makes real estate extremely appealing, and why keeping a mortgage helps long term.For the average person in a 23% tax bracket, with a 4.2% interest rate, after you factor in your write offs, your ACTUAL cost of interest is only 3.23%. 2. The second factor is Inflation. Because the bank is holding the entire loan over 30 years and you get to pay bits and pieces of it over time, it should be safe to assume a 2% AVERAGE inflation rate over 30 years. This means that even though you’re paying a NET interest rate now of 3.23%, if we subtract 2% annually for inflation, this means that you’re really only effectively paying 1.23% in interest after tax write offs and inflation. 3. Finally, the third factor is opportunity cost. Can you make MORE than a 1.23% return ANYWHERE ELSE adjusted for inflation? The answer is pretty much always yes. This means that if you INVEST your money instead of paying down the mortgage, mathematically over the term of the loan you’d come out ahead than if you just paid off the loan early. So with these points above, we’ll take two scenarios. In scenario one, you have a 30-year, $400,000 loan at a 4.2% interest rate that you pay off in half the time – you increase your payments from $1956 to $3000 per month in order to make this happen. Then once the loan is paid off, you invest the full amount in the stock market for another 15 years. After an additional 15 years, that works out to be just over $1,000,000. So you now have a paid of house plus a million dollars. But what happens if you kept the 30-year mortgage and instead of you paying it off in half the time by increasing your payments to $3000/mo, you just invested the extra $1050 per month instead? Because you didn’t pay down your mortgage early and you invested that extra money instead, at a 7.5% return in an SP500 index fund…at the end of 30 years, you’ll have a paid off home PLUS $1,433,000.. This means that over 30 years, that’s a difference of $433,000…by NOT paying down your mortgage early, and instead investing the difference. Although keep in mind, if you have a really high interest rate on your loan, above about 6%, it’s probably better to pay it off. This is because the upside to investing gets smaller and smaller the higher your mortgage interest rate is. But the biggest advantage of paying it off early is that with the above example, we assume the person will actually invest the money rather than pay off their loan early. In order for this calculation to work, the person needs to be disciplined enough to actually invest the different and not spend it. But for anyone with the discipline to actually stick with an investing plan instead of paying down the mortgage, statistically and mathematically, you can often make more money paying it off slowly than paying it off early. For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness@gmail.com Suggested reading: The Millionaire Real Estate Agent: http://goo.gl/TPTSVC Your money or your life: https://goo.gl/fmlaJR The Millionaire Real Estate Investor: https://goo.gl/sV9xtl How to Win Friends and Influence People: https://goo.gl/1f3Meq Think and grow rich: https://goo.gl/SSKlyu Awaken the giant within: https://goo.gl/niIAEI The Book on Rental Property Investing: https://goo.gl/qtJqFq Favorite Credit Cards: Chase Sapphire Reserve – https://goo.gl/sT68EC American Express Platinum – https://goo.gl/C9n4e3

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As Mortgage-Interest Deduction Vanishes, Housing Market Offers a Shrug

The mortgage-interest deduction, a beloved tax break bound tightly to the American dream of homeownership, once seemed politically invincible. Then it nearly vanished in middle-class neighborhoods across the country, and it appears that hardly anyone noticed.

In places like Plainfield, a southwestern outpost in the area known locally as Chicagoland, the housing market is humming. The people selling and buying homes do not seem to care much that President Trump’s signature tax overhaul effectively, although indirectly, vaporized a longtime source of government support for homeowners and housing prices.

The 2017 law nearly doubled the standard deduction — to $24,000 for a couple filing jointly — on federal income taxes, giving millions of households an incentive to stop claiming itemized deductions.

As a result, far fewer families — and, in particular, far fewer middle-class families — are claiming the itemized deduction for mortgage interest. In 2018, about one in five taxpayers claimed the deduction, Internal Revenue Service statistics show. This year, that number fell to less than one in 10. For families earning less than $100,000, the decline was even more stark.

                                    

The benefit, as it remains, is largely for high earners, and more limited than it once was: The 2017 law capped the maximum value of new mortgage debt eligible for the deduction at $750,000, down from $1 million. There has been no audible public outcry, prompting some people in Washington to propose scrapping the tax break entirely.

If the deduction’s decline should be causing a stir anywhere, it is in towns like Plainfield, where the typical family earns about $100,000 a year and the typical home sells for around $300,000. But housing professionals, home buyers and sellers — and detailed statistics about the housing market — show no signs that the drop in the use of the tax break is weighing on prices or activity.

“From the perspective of selling and trying to buy, I don’t see any evidence of that,” said Paul Forsythe, who teaches physical education and coaches football at a high school.

Mr. Forsythe and his wife, Kylie, are selling their four-bedroom, two-bath home on a quarter-acre lot in one of Plainfield’s older developments, which dates to 1997. They are moving with their two daughters to a nearby suburb, closer to the schools where they work. They have owned homes through the ups and downs of the local housing market, which boomed in the early 2000s and crashed in the midst of the financial crisis.

“Right now,” said Ms. Forsythe, a fourth-grade teacher, “people are excited that the market is finally good again.”

Such reactions challenge a longstanding American political consensus. For decades, the mortgage-interest deduction has been alternately hailed as a linchpin of support for homeownership (by the real estate industry) and reviled as a symbol of tax policy gone awry (by economists). What pretty much everyone agreed on, though, was that it was politically untouchable.

Nearly 30 million tax filers wrote off a collective $273 billion in mortgage interest in 2018. Repealing the deduction, the conventional wisdom presumed, would effectively mean raising taxes on millions of middle-class families spread across every congressional district. And if anyone were tempted to try, an army of real estate brokers, home builders and developers — and their lobbyists — were ready to rush to the deduction’s defense.

Now, critics of the deduction feel emboldened.

“The rejoinder was always, ‘Oh, but you’d never be able to get rid of the mortgage-interest deduction,’ but I certainly wouldn’t say never now,” said William G. Gale, an economist at the Brookings Institution and a former adviser to President George H.W. Bush. “It used to be that this was a middle-class birthright or something like that, but it’s kind of hard to argue that when only 8 percent of households are taking the deduction.”

Kylie and Paul Forsythe outside the Plainfield home they are selling. “People are excited that the market is finally good again,” Ms. Forsythe said.
CreditAlyssa Schukar for The New York Times

Mr. Gale, like most economists on the left and the right, has long argued that the mortgage-interest deduction violated every rule of good policymaking. It was regressive, benefiting wealthy families — who are more likely to own homes, and to have bigger mortgages — more than poorer ones. It distorted the housing market, encouraging Americans to buy the biggest home possible to take maximum advantage of the deduction. Studies repeatedly found that the deduction actually reduced ownership rates by helping to inflate home prices, making homes less affordable to first-time buyers.

But the real estate industry said that scrapping the deduction could undermine the value of what is, for most American families, their most important asset. In the debate over the tax law in 2017, the industry warned that the legislation could cause house prices to fall 10 percent or more in some parts of the country.

Price growth has cooled in many markets, including New York and Seattle, but not nearly as much as the most alarming estimates suggested, and not in a pattern that suggests the loss of the deduction was a primary factor. Places where a large share of middle-class taxpayers took the mortgage-interest deduction, for example, have not seen any meaningful difference in price increases from less-affected areas, according to a New York Times analysis of data from the real estate site Zillow.

Skylar Olsen, an economist at Zillow, said that the slowdown in the housing market probably had little to do with the tax law. Home prices have risen much faster than wages in recent years, creating an affordability crisis in many cities that probably made slower growth in prices inevitable.

“Housing markets were burning so hot at an unsustainable pace and they had to come down,” Ms. Olsen said.

The tax law may have had another impact: It capped deductions for state and local taxes at $10,000, which had a particularly large effect in coastal cities and other places where property taxes and real estate values are both high. Those places did see a slowdown in the growth of home prices after the law took effect, although it is not clear whether the two were linked.

The national real estate industry argues that the two tax changes have together played a role in weakening the housing market.

“Clearly the housing market is underperforming in relation to economic fundamentals of job growth, wage growth and mortgage rates,” said Lawrence Yun, chief economist for the National Association of Realtors.

Economists like Mr. Yun and Ms. Olsen will probably debate the law’s impact for years. It is possible, and even likely, that sophisticated analyses will eventually conclude that limiting the mortgage-interest deduction did lead to somewhat slower price growth.

But for most home buyers and sellers, those subtle effects will be washed away by forces that have a much bigger impact: changes to mortgage rates, construction costs and supply and demand trends that vary from city to city and from neighborhood to neighborhood.

The tax law also rolled back the mortgage-interest deduction in a way that minimized the chance that taxpayers would notice its absence. Congress did not take away the tax break; it just changed the law in a way that meant fewer people would benefit from it — and buried the change in a much broader overhaul to the tax code.

But while Washington think tanks plot the deduction’s demise, the real estate industry is still hoping to restore it in some form. Mr. Yun of the National Association for Realtors said that as the housing market weakened, pressure would mount for Congress to restore some of the tax advantages that homeownership has historically enjoyed, although not necessarily in the same form.

For now, though, real estate agents and developers do not see the erosion of the mortgage deduction playing much of a role.

Plainfield’s housing market has been shaped by abrupt changes over the past 30 years. In 1990, a tornado leveled parts of town, killing more than two dozen people and forcing a huge rebuilding effort. At the turn of the millennium, the town had fewer than 10,000 residents. It has since quadrupled, with more growth on the way.

During the housing craze of the mid-2000s, developers leveled corn fields and sod farms to make way for cul-de-sacs. When the crisis hit, activity in many of the new subdivisions froze, said Ellen Williams, a real estate agent with Coldwell Banker in Plainfield who has sold homes in the area for nearly two decades. Only in the past few years has construction restarted in earnest.

CreditAlyssa Schukar for The New York Times

Ms. Williams helped the Forsythes buy their home several years ago, when the housing crash still weighed on the market and the couple was underwater on a townhouse that had become too small for their growing family. They rent the townhouse out now, which means that they still itemize their deductions, including for mortgage interest. They said the deduction was not a factor in the sale of their home this summer or in their purchase of a new one.

Ms. Williams said that has been the case across the market. “I don’t know that it’s been a huge enough change yet,” she said. “People worry about Illinois taxes more.”

In the Forsythes’ ZIP code, housing prices are up 2 percent from the last year, according to data from the online real estate brokerage Redfin. Homes are selling quickly, Ms. Williams said, as she gave a quick tour of a recently listed four-bedroom house backing up to a pond in a nearby community. The hardwood floors were well kept, the kitchen hardware dated to the mid-1990s and the home was listed for $267,000.

“There’s not a lot available in this subdivision,” Ms. Williams said, “so I anticipate it selling quickly.”

Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley

Ben Casselman writes about economics, with a particular focus on stories involving data. He previously reported for FiveThirtyEight and The Wall Street Journal.

 

Source: As Mortgage-Interest Deduction Vanishes, Housing Market Offers a Shrug – The New York Times

Should You Pay Off Your Mortgage Early – J.D. Roth

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My friend Amy recently wrote with an interesting dilemma. “Should I pay off my mortgage early?” she wonders. Amy has a high-paying job and has managed to save enough that she could be completely debt-free if she wanted to. And she kind of wants to! But is this the best choice? She’s aware that this is a nice problem to have — but it’s still a bit of a muddle. She’d like some guidance. Just so everyone is on the same page, here’s a quick look at the pros and cons to paying off your mortgage. There are advantages and disadvantages to both choices. Are certain advantages more important than others? You make the call……….

Read more: https://www.getrichslowly.org/pay-off-mortgage/

 

 

 

 

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Why Giving Your Child A Mortgage May Be Better Than Giving Them A House – Timothy K. McCarthy

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As housing prices continue to climb across the nation’s hottest real estate markets, many young families struggle to buy their first home, particularly in their parents’ more expensive neighborhoods. Wanting to keep their children close, parents, with the financial resources to help, often consider gifting a home to their children. While this tactic can help keep kids nearby, providing a home can have significant tax and other associated implications. But there is another option: giving your child a low-interest home loan……

Read more: https://www.forbes.com/sites/whittiertrust/2018/10/05/a-smarter-gift–why-giving-your-child-a-mortgage-may-be-better-than-giving-them-a-house/#2cbc41e37596

 

 

 

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