College Savings Plan OR Additional Mortgage Payments?
by Mortgage Rates on Saturday, October 23rd, 2010 | 9 Comments
-
Mortgage Info
-
Updates
-
Useful Links
-
-
Tags
2010 About article Auctions bank banks best Business buyers change Credit Debt Equity Financial First fixed Foreclosure From good Government Help Home house Housing interest Loan Loans Market more Mortgage Mortgages Need News options qualify Rate Rates refi refinance Refinancing should this Time variable would-
Meta
This is a secret for life…
If you want to have options in life, and stay relatively happy financially, and able to handle anything life throws at you..
GET OUT OF DEBT…
and
STAY OUT OF DEBT
Pay off your mortgages. You can start saving for college a little later. Plus, if you can’t pay for college then it will motivate your daughter to work hard to try and get a scholarship. If not, she can take out a student loan. These have low interest rates. She’ll be a grown up by then, she’ll have to learn how to deal with her own debt.
Smartest move – 529 – they are really tightening up on home equity loans. Keep your credit in good standing. You will need about $150,000 (or more) by the time your daughters goes. If you an save in the 529 that is really the best way….wish I would have done that…I have mortgaged my house way too much….good luck
Suze Orman has had this question posed several times on her show. She said that you should be responsible for YOUR bills first. She would recommend getting yourself in a better financial situation and then helping your daughter. She said that too many women always want to do for others, but never do as much for themselves. Your house (and having a place to live) is just as important as your daughters college, which is 18 YEARS away.
When we maintain debt and also invest in a savings plan to pay for college for a child, we expose ourself to a risk that our source of income may fail, our investment within the savings plan may not give us satisfactory return.
If the mortgages after 15 years will still have a balloon payment, interest may be much higher.
Interest on the rental property of course is a cost applied against rental income for tax purposes.
If you have or get rent control, interest may be part of the rent control rules. I can not see a good reason to pay that mortgage off early.
We know that if we pay off our home mortgage first, and fast, then set aside money in the college fund we remove those risks from the equation. Tax effects as you mention are minimal.
When you have your home mortgage paid off, that is a good time to get going on a college fund and a retirement portfolio. Leave the rental mortgage alone. If you consider selling that unit, it may be an advantage to have an assumable and large mortgage, but that may not be an option.
Don’t pay down your mortgage over investing.
If you tie up your assets in a mortgage you could be stuck in a financial bind and have no way to get the equity out of your house.
If you are unemployed or disabled you can’t get the equity out of your house.
If you are sued you can loose your equity but not your 401(k)
Never invest based on the tax savings.
You need to factor in the growth potential of the 529.
Mortgage your house for college would create new debt.
Here are some Ric Edelman’s top 50 financial tips
2. Never send in extra mortgage payments.
4. Want to save for college? Consider a 529 College
Savings Plan.
6. Never make an investment decision based on taxes.
10. A 30-year mortgage is better than 15.
17. Always carry a big, long mortgage — and never pay it
off.
Ric is one of the top financial planners in the country, best selling author.
http://ricedelman.com/cs/about_ric
You can run the math and figure it out $100 per month into a 529 for 18 years at 10% = $60,056.32
How much will $100 extra into your mortage save you?
I highly suggest Ric’s book “The Truth About Money.”
Point 1 – Paying down the mortgage does not “free up” money. In fact it freezes such funds into a usually illiquid asset called home.
Point 2 – Paying down the mortgage reduces the amount of interest deduction you can claim on your Fed Tax.
Point 3 – Claiming mortgage interest on your Fed Tax is only effective to the extent it helps you exceed the amount you could claim using the the standard deduction. Zero mortgage interest and full standard deduction is the best position.
Point 4 – Reducing the mortgage balance reduces your leverage in the house. If the house is appreciating annually more than the cost of borrowing the money (mortgage interest) you will be gaining each year. Conversely, if the house is continually going down in value(or at least not going up) then you might be well advised to reduce your leverage( pay the debt).
Point 4 – Inflation can and does make your decision easier. If the money you “save” by either paying down the mortgage or funding a saving account for college, appreciates by less than the rate of increase in college tuition, food, housing, etc. then you will never achieve your goal. Beware this is the cruelest tax of all.
I could go on, but the point is this. Put your money where you get the greatest return (within tolerable risks) and don’t fret the tax too much. A home is most families largest asset and usually the one which pays off the best. After all where else can you get free rent (and usually get more than you paid when you sell.) As Yogi might say, “…. and that’s as good as Cash”
regards,
Texian
Let me first say that I’m not all that impressed with the 529 plans that I’ve seen. (I’m also not too impressed with the “advice” given by most of the financial planners and others employed by brokerage firms, mostly because they’re still preaching the same old doctrine–”buy, hold [and pray the stock goes up]” and “diversify, diversify, diversify”.
Second, I commend you on having rental property! That’s one of the smartest things you could ever do. But I’m curious as to why you have 15-year mortgages on both your domicile and your rental properties.
Here’s my advice: Since I’m not certain what interest rates are right now, check with your bank to see if it would be possible to refinance one (or both) of your mortgages–at LEAST the one on the rental(s)–at a comparable rate for a 30-year-mortgage, then take out the “equity” and invest in more rental properties. This is a favorite strategy of Diane Kennedy, CPA, who has a website called “Legal Tax Loopholes” (see below). This is just a “condensed” version of the strategy, but there are ways you can do it so that you can maximize your passive income in very tax advantaged ways. Every 5 (or so) years, repeat the process, and by the time your daughter hits college age, the income from your investment properties should be enough to pay for college plus some. (Actually, plus A LOT!) Between now and then, invest as much of that passive income as you possibly can into other investment properties.
ALSO, and this is VERY important, find competent accountants and attorneys who KNOW what you’re trying to do and can help you set things up so that your personal and tax liabilities are minimal. I’ve known a lot of “very good” CPA’s and lawyers who have NEVER dealt with this sort of thing, and think you’re nuts for wanting to own more than one house.
You’re actually on a very good path! What “average” people are taught about money and investing will keep them broke, but it’s so counterintuitive to think they way rich people do (as opposed to everyone else) that it’s hard to get out of that “rut”.
While you’re working on funding your daughter’s college education, keep working on your own! I think you’re going to do GREAT!
It’s really great to read a question from someone who is trying to decide between two GOOD options! It’s refreshing to see someone who has enough extra cash to pay down debt and SAVE some money (rather than maxing out every dime they earn toward a house they can’t afford or a fancy car).
The interest rate on your mortgage is a good one. Additionally, your loan is being amortized over 15 years so you’re putting money toward the principal balance more aggressively.
On the other hand, the cost of a college education is much more volatile. If you put money aside now, then it’s more likely to have a greater payoff in the future (in terms of reducing the hugely inflated cost of a college education). I think the 529 and other college savings plans “lock in” the tuition rate, so you’re hedging a volatile risk.
The VALUE of an overly inflated college education is something I question, but that’s another question altogether.
I suggest putting extra cash toward the 529 plan. Your mortgages will be paid off relatively soon anyway. If you begin earning more money over the next few years, then you can put the extra toward retiring your mortgage debt (the higher interest rate mortgage first). Again, you can’t really go wrong either way.
Congratulations for being such a wise steward of your finances!