Should Cousin Pay Off Her House?

[Guest]

I have a cousin (who is more like a sister over the years) who wants to know if she should pay off her house in CA. Here are the stats (round numbers):

Remaining on mortgage: $165,000
Remaining term: 21 years
Interest rate: 6.375%
P&I monthly to BofA: $1200
Property tax: $1800 yr
House insurance: $600yr.
Value of house: $420,000 (maybe!)
Age: 59.5 (can access her IRA)
Adjusted gross income $55,000
Liquid cash:
-- Equities: $100,000
-- IRA: $150,000
-- Cash (CDs): $550,000
Retirement: Will get a gov. pension (not sure how much.)
Social Security: Will get about $1100 month at age 67
Marital Status: Widow
Work: Plans to work until 67 or maybe 70 (full social security)
Debt: zero (except house.)
Obligations: none (kids grown)

Her advisor told her that taking $165K out of her cash /equities and paying off the house would be like getting an 8.7% return on an investment ($1200 x 12)/165000 by saving the $1200 she pays BoA each month... and she might get more if that $1200 was invested in something else (didn't say what.)

Her advisor said that the tax deduction for the interest paid is "negligible" at her tax bracket, compared to the "return" by paying off the property.

Do those of you who have experience in this area agree with her advisor? Her advisor is a (female) registered rep whom I think has excellent qualifications.

I'm hardly in a position to advise my cousin as this is way, way, way out of my area of expertise, license, (or interest.)

For the record, I think the advisor makes a good case... but as I said above, what do I know? I told Rachel (yes, "My Cousin Rachel" but she's not like the du Maurier's character!) I'd take it to this venue for some opinions.

Thanks.

 

[oicu812nbama]

the only real guaranteed interest in this world is not having to pay interest on a debt.

 

[Guest]

the only real guaranteed interest in this world is not having to pay interest on a debt.

Um... can you translate that? What are you trying to teach me?

 

[iiinycboi]

Hey Al, is refinancing an option? I'm not sure how it all works, but arent the rates in the low 3s?

 

[Norwayguy]

I have a cousin (who is more like a sister over the years) who wants to know if she should pay off her house in CA. Here are the stats (round numbers):

Remaining on mortgage: $165,000
Remaining term: 21 years
Interest rate: 6.375%
P&I monthly to BofA: $1200
Property tax: $1800 yr
House insurance: $600yr.
Value of house: $420,000 (maybe!)
Age: 59.5 (can access her IRA)
Adjusted gross income $55,000
Liquid cash:
-- Equities: $100,000
-- IRA: $150,000
-- Cash (CDs): $550,000
Retirement: Will get a gov. pension (not sure how much.)
Social Security: Will get about $1100 month at age 67
Marital Status: Widow
Work: Plans to work until 67 or maybe 70 (full social security)
Debt: zero (except house.)
Obligations: none (kids grown)

Her advisor told her that taking $165K out of her cash /equities and paying off the house would be like getting an 8.7% return on an investment ($1200 x 12)/165000 by saving the $1200 she pays BoA each month... and she might get more if that $1200 was invested in something else (didn't say what.)

Her advisor said that the tax deduction for the interest paid is "negligible" at her tax bracket, compared to the "return" by paying off the property.

Do those of you who have experience in this area agree with her advisor? Her advisor is a (female) registered rep whom I think has excellent qualifications.

I'm hardly in a position to advise my cousin as this is way, way, way out of my area of expertise, license, (or interest.)

For the record, I think the advisor makes a good case... but as I said above, what do I know? I told Rachel (yes, "My Cousin Rachel" but she's not like the du Maurier's character!) I'd take it to this venue for some opinions.

Thanks.

Perfect example of how difficult it is to deal with a family member.....Your checking out the recommendation made by your cousins advisor that even you say has a good handle on it, is known to you and take this to a message board for opions.

For the record paying off the mortgage inessence is its own guaranteed return on the money. Very few other options that would return the same % in this interest rate environment.

 

[Mr. Bill]

Yes, but dollars paid 30 years from now will be worth far less than dollars today.

See what happens when you tell her to have her "advisor" put his/her recommendations in writing.

PS Even with all the detail you provided, we don't have enough information to make an appropriate recommendation.

 

[oicu812nbama]

if it can be paid off; pay it off. no interest payments is just like gaining interest in another wise risky investment

 

[agentjhc]

I believe her full retirement is before age 70....I am 52 and mine is 66yrs 10 mos
- - - - - - - - - - - - - - - - - -
Her full retirement age would be 66 I believe.

 

[0b1kanobee]

My advice is to sell everything she has, move to somewhere like Ecuador and live like a queen.

 

[DHK]

I have a cousin (who is more like a sister over the years) who wants to know if she should pay off her house in CA. Here are the stats (round numbers):

Remaining on mortgage: $165,000
Remaining term: 21 years
Interest rate: 6.375%
P&I monthly to BofA: $1200
Property tax: $1800 yr
House insurance: $600yr.
Value of house: $420,000 (maybe!)
Age: 59.5 (can access her IRA)
Adjusted gross income $55,000
Liquid cash:
-- Equities: $100,000
-- IRA: $150,000
-- Cash (CDs): $550,000
Retirement: Will get a gov. pension (not sure how much.)
Social Security: Will get about $1100 month at age 67
Marital Status: Widow
Work: Plans to work until 67 or maybe 70 (full social security)
Debt: zero (except house.)
Obligations: none (kids grown)

First, we don't know the amount of interest being earned on the CDs or the return on the equities.

But let's assume it's 1% in today's interest rate economy.

1% on $650k = $6,500 per year in TAXABLE earnings. (Tax bracket is unknown. AGI based on $55k should be low - around 15%.)

The mortgage being $165,000 @ 6.375% TAX-DEDUCTIBLE interest, would probably make a lot of sense to be paid off with the cash in the CDs. I wouldn't touch the equities, unless she had other reasons for getting rid of them (market volatility, etc.).

Just keep in mind that once you put CASH in your home, you are NOT guaranteed to be able to get it back out again.

Well, except as a reverse mortgage once she is at age 62, and even then, it's only up to 70% LTV (loans to value of home).

So, for THIS question only, I would probably recommend paying off the home.

But again, like others have said, we don't have all the facts. Number and %'s only tell one side of the story.

Financial planning and decisions can definitely be different for people with a tax-bracket at 15% or lower, compared to 25% or more.