[DARFAP]

Originally Posted by ElDiabloJoe

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000

There's good debt and bad debt. The three examples you provide I would place in the good (low interest) debt category. Bad debt example would be carrying a large credit card balance and only making minimum payments. In my case, I have a very low interest mortgage and car loan. I also have a second car loan at 0%. I've got the assets available to pay them all off, if need be. However, as long as I'm in the situation, I feel comfortable letting my investments sit and continue to grow (and they are).

[Stu from NYC]

Originally Posted by Topspinmo

agree, but don’t cry when get shaft by some financial shyter. Plenty of examples that for sure.

Have been to a number of financial dinners. Always ask for their credentials and amazed at the answers.

Such as
We have a computer program that tells us when to get in and out of the market.
Took some online courses
Was a math major so understand investments.

Amazing how if I do not raise this question nobody else will.

[Maker]

Also consider your tax return.
What is deductible, and what is not. Will you deduct slightly more than the standard deductible, thereby throwing away free money? Do you have huge medical deductions too?
What investment income will be taxable.

[Topspinmo]

Originally Posted by Maker

Also consider your tax return.
What is deductible, and what is not. Will you deduct slightly more than the standard deductible, thereby throwing away free money? Do you have huge medical deductions too?
What investment income will be taxable.

What investment income will be taxable. ?

Any dollar you made supposed to be counted as income of course if you’ve got lawyer to get you out of paying taxes. IMO most famous mis quote “ My secretary paid more taxes than me.” Or “ you didn’t. Build that” IMO want wrong with system too many loopholes, deductions, and exemptions. Flat tax with NO exceptions. I don’t care how many kids you choose to have, how many rental property’s have, or where can hide money.

[Topspinmo]

Originally Posted by jimbomaybe

This discussion like all such discussion here demonstrate the emotional/ psychological relationship people have with money, some are much more risk sensitive no matter what the numbers and statistics say. I have talked to people who would never think of investing in any form of stock equites , "you can lose money! "never considering the whole universe of risk and that not being so invested is in itself a risk , your money , your comfort level, your decision

“some are much more risk sensitive.”

Cause probably never had to earn it? If giving something and not earned it some have different attitudes. 100 grand lot money for most. And Some it just chicken feed cause somebody got deep pockets to alway bail them out. Few have ever been really hungry with no money, so they have different attitude.

[melpetezrinski]

Originally Posted by ElDiabloJoe

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000

House and boat loan keep.
Assumptions:
Invest in fixed income earning 5% risk free. If you invest in securities, that would be a much bigger discussion around other assets availalbe in case of a downturn in the markets. Would also need to know your expected tax rate on the capital gains of said investments.

Auto loan pay off.

[ElDiabloJoe]

Originally Posted by melpetezrinski

House and boat loan keep.
Assumptions:
Invest in fixed income earning 5% risk free. If you invest in securities, that would be a much bigger discussion around other assets availalbe in case of a downturn in the markets. Would also need to know your expected tax rate on the capital gains of said investments.

Auto loan pay off.

Thank you all for the thoughtful replies and responses.

I'm a buy and hold kinda guy who is moderately risk-averse, so my stock market investments and property investments are usually a minimum of a decade long. Even my cars I keep well over 10 years, my last was 17 years. I have exactly zero children so I plan to spend everything I have - just got to make it last at least as long as I do. Therein likes the trick.

As for the tax rate on capital gains, my state of primary residence has zero income tax, and zero taxes on investments and capital gains - so federal tax only.

[melpetezrinski]

Originally Posted by DARFAP

There's good debt and bad debt. The three examples you provide I would place in the good (low interest) debt category. Bad debt example would be carrying a large credit card balance and only making minimum payments. In my case, I have a very low interest mortgage and car loan. I also have a second car loan at 0%. I've got the assets available to pay them all off, if need be. However, as long as I'm in the situation, I feel comfortable letting my investments sit and continue to grow (and they are).

Typically, a car loan would be considered BAD debt unless it carries an extremely low interest rate. Autos fall under the category of considerable depreciating assets, so a loan to finance this purchase is not recommended. Even just purchasing a new vehicle is considered a poor financial move. Now, if this vehicle allows you to commute to work more efficiently or brings some other financial gains, then a loan can be advisable.

[retiredguy123]

Originally Posted by ElDiabloJoe

Thank you all for the thoughtful replies and responses.

I'm a buy and hold kinda guy who is moderately risk-averse, so my stock market investments and property investments are usually a minimum of a decade long. Even my cars I keep well over 10 years, my last was 17 years. I have exactly zero children so I plan to spend everything I have - just got to make it last at least as long as I do. Therein likes the trick.

As for the tax rate on capital gains, my state of primary residence has zero income tax, and zero taxes on investments and capital gains - so federal tax only.

You have exactly the correct number of children.

[jimbomaybe]

Originally Posted by Topspinmo

“some are much more risk sensitive.”

Cause probably never had to earn it? If giving something and not earned it some have different attitudes. 100 grand lot money for most. And Some it just chicken feed cause somebody got deep pockets to alway bail them out. Few have ever been really hungry with no money, so they have different attitude.

I don't understand what you are saying

[Maker]

Originally Posted by Topspinmo

What investment income will be taxable. ?

Very simple example. If the interest you pay on the mortgage is $15000, it is more than the standard deductible so it can be deducted.
But the entire mortgage can be paid off at any time, but you put the funds into something very safe (govt backed CD, or something like that) (not stock market) that earns $15000. Have to pay income taxes on that.

So the earned money = deduction for mortgage. Net zero. Sounds good, except for the standard deductible got lost.

Instead... Pay off mortgage. No interest deduction, but no investment income. Net zero? No. You get the standard deduction now. That saves money on taxes.

This concept all shifts as the type of investment changes. Risk it in the stock market, and you could go up or down. That's your decision.

[retiredguy123]

Originally Posted by Maker

Very simple example. If the interest you pay on the mortgage is $15000, it is more than the standard deductible so it can be deducted.
But the entire mortgage can be paid off at any time, but you put the funds into something very safe (govt backed CD, or something like that) (not stock market) that earns $15000. Have to pay income taxes on that.

So the earned money = deduction for mortgage. Net zero. Sounds good, except for the standard deductible got lost.

Instead... Pay off mortgage. No interest deduction, but no investment income. Net zero? No. You get the standard deduction now. That saves money on taxes.

This concept all shifts as the type of investment changes. Risk it in the stock market, and you could go up or down. That's your decision.

As I understand it, you can only benefit from the mortgage deduction for the amount that exceeds the standard deduction. So, if the standard deduction is $15K and your mortgage interest is $15K, your tax savings is zero, unless you have other deductible costs in excess of the standard deduction. Also, note that people over 65 get an additional $3,900 exemption that adds to the standard deduction.

[LeRoySmith]

Originally Posted by ElDiabloJoe

zero taxes on investments and capital gains - so federal tax only.

I assume you mean no state taxes on capital gains, I'd guess there's no way around federal tax on capital gains?

I just read the timeline in your signature. It seems we are moving together the past 5 or 6 years.

[ElDiabloJoe]

Originally Posted by LeRoySmith

I assume you mean no state taxes on capital gains, I'd guess there's no way around federal tax on capital gains?

Yes, exactly.

Originally Posted by LeRoySmith

just read the timeline in your signature. It seems we are moving together the past 5 or 6 years.

You clearly have excellent taste.

[Maker]

Originally Posted by retiredguy123

As I understand it, you can only benefit from the mortgage deduction for the amount that exceeds the standard deduction. So, if the standard deduction is $15K and your mortgage interest is $15K, your tax savings is zero, unless you have other deductible costs in excess of the standard deduction. Also, note that people over 65 get an additional $3,900 exemption that adds to the standard deduction.

Not exactly. If mortgage interest paid = deduction....
You have no net money gain or loss.
You have lost the standard deduction, meaning you will pay more tax.

If income is $100k, standard deduction is $15k, potential mortgage interest of $15k, and CD interest 15K...

If mortgage int, and interest earned, taxes are income + interest earned - Mort int = 100 +15 -15 = $100k taxed. You pay 22% of 15k more taxable income in taxes.

No mortgage or interest, taxes based upon income - std ded = $85k taxed.