Mortgage Expert, Andy May, Explains Why It's Better to Pay Off the Mortgage

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The age-old question of carrying debt into retirement is answered by Andy May with a few first hand examples.

andymay@adrmortgage.com

Mortgage Interest deductions are being eliminated for high income earners. Don't be surprised by the AMT.

As Andy May enters the AARP age, a more focused understanding of mortgage debt and whether to pay it off early comes into focus. This article is patterned off the early 1950s Modigliani-Brumberg Life Cycle theory whereby people spend more when younger and save more when older.

The top three reasons to pay the mortgage off in full:
Number 1 - Still the best reason. It feels great. With no mortgage payment, the consumer is limiting one side of the balance sheet. Liabilities, like assets, can change in value.

As the world watched the U.S. Housing market crumbled and tens of millions of U.S. Citizens found that debt/liability taken out in the early 2000s was actually worth more than the underlying assets. Foreclosure in the retirement is a little more unsettling then in the consumer's early 30s. Income is also pretty much fixed by retirement age. Consumers don't regularly get a great new job paying double in a great new city in their retirement years.

Number 2 - pay off the mortgage if the consumer is in the Alternative Minimum Tax bracket. Fidelity Investments has a great piece on 2013 AMT buckets.

According to Fidelity, "In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012." When a consumer lives in one of America's top cities they pay more to live there. Housing is more expensive. And naturally, incomes are higher. However, the AMT snares them and starts to gradually eliminate tax deductions. Coupled with ever higher state tax rates, while the mortgage interest deduction looks juicy - a thorough review of the consumer's income and deductions really needs to be done to understand if $30,000 in interest deductions really make it through in today's AMT environment. Speaking with a good CPA or book-keeper is critical. Linwood Johnson of Linwoodsbooks says, "all it really takes is a brief 5 minute review of the consumer's tax return to determine if mortgage interest is having the intended effect."

Number 3 - As the consumer ages the portfolio invested in risky - high return assets should be shifted to more stable assets. Similarly, paying the mortgage principal down is a great way to guarantee a stable rate of return. If the consumer is paying a 5% interest rate, where else can the consumer make 5%? In the case of AMT tax payers - many of whom do not get the maximum deduction for mortgage interest, the after-tax dollar effect may be the equivalent of a 7% rate of return.

When the tax structure provided clear and present benefits from mortgage interest deductions many consumers elected to go with liquidity and grow both sides of the balance sheet (assets and liabilities). Now however, it is important to understand the risks associated with high levels of mortgage debt as the consumer moves closer to retirement age. After all, the consumer can't take the house to heaven but can leave debt to heirs.

For more information on mortgage loans, call ADRMortgage.com at 919 771 3379 or visit ADRMortgage on the web. Get the most value out of a home sale or purchase by working with licensed professionals that have significant experience. You’ll be thankful you did. You can find additional information from Andy May, mortgage expert, at Andy May's blog. ADRMortgage.com was founded by Andy May in 2005. For additional information please go to http://www.adrmortgage.com or contact Andy May directly. License number 103418.

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Andrew May
ADR Mortgage
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