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Mortgage Math: When to Keep Paying and When to Pay It Off

Question: I have 26 years left on a 30-year mortgage with a balance of $115,000. I can pay it off from savings without affecting my standard of living. I have about $400,000 in other investments, including savings and mutual funds. Is the tax deduction from the mortgage interest worth keeping the debt?

Answer: Given how little you owe and recent tax cuts, you may not be getting much of a tax benefit from that mortgage.

You don't get any special break from a mortgage unless you itemize your deductions in other words, if the mortgage interest, property taxes and other deductible expenses you pay exceed the standard deduction.

For 2003, the standard deduction for singles is $4,750. For married couples filing jointly, it's $9,500. (That's a big boost from previous years, when marrieds' standard deduction was 167% of singles'; now it's twice that of singles, an effort to eliminate the so-called marriage penalty.)

Given the size of your mortgage and when you got it, you probably paid less than $8,000 in mortgage interest last year. If your property taxes were $1,500 or less, you had no tax break at all from homeownership if you are married and filed jointly.

If you're single, you saw some benefit but not as much as you may think. You have to subtract the standard deduction from your itemized deductions to determine the marginal tax benefit of homeownership. If your interest and property taxes were $9,500, for example, you would subtract the single's standard deduction of $4,750 from that. Then you'd multiply the result by your tax rate. If you're in the 15% bracket, your homeownership saved you just $712 in taxes about $60 a month, or less than 10% of your payment.

The main reason to continue paying a mortgage is that, in the long run, you probably can get better returns on your money elsewhere. Paying off a mortgage also can leave you dangerously concentrated in one asset, with too much tied up in real estate and not enough invested in stocks, bonds and other assets.

But if the paid-off home would constitute less than half your total assets, and you want the security of your home being free and clear, then retiring your mortgage can be a reasonable plan. Just make sure you arrange for a home equity line of credit so you can tap your equity in an emergency.


Being Landlord Includes Duties, Vacancy Risk

Q: A few months ago you warned a reader about the disadvantages of being a landlord. I think you painted a very unrealistic picture. We have found our rental properties to be an excellent source of income in retirement, and we have never faced anything like the 25% vacancy rate you said the reader should factor into his plans.

A: As the column noted, many people manage a comfortable retirement income from rental property. Some even do so by renting out their longtime home when they move to a smaller apartment, as the reader and his wife were considering.

These particular would-be landlords, however, were moving because they were worried about being physically able to handle snow shoveling and other arduous home maintenance chores as they aged. Given that, they probably wouldn't want to be awakened by tenants at 2 a.m. when the water heater bursts.

Hiring a management company to handle such issues is an option, of course, but that would cut into profit.

The 25% vacancy figure was probably high but reflects the greater risk of renting a single-family home versus multiple units. If your tenant moves out of your house, you have to continue carrying all the costs (mortgage, insurance and so forth) without any income until the tenant is replaced. By contrast, you rarely would have all your tenants abandon you in a multiunit building, which means you would still have rent income to cover most of your costs.

If you have multiple units, a 5% vacancy rate might be more realistic. For a five-unit place, that would mean counting on an empty apartment three months a year.


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