[adios]

•Taxes. If you pay off your mortgage, you'll lose the mortgage deduction on your federal income taxes. That lowers your overall return from repaying the mortgage. (Taxes also lower the return from most other investments.) More important, the mortgage interest deduction, either by itself or with other deductions, is typically more than the standard deduction on your federal income taxes. Of all the people who itemized in 2003, 82% claimed mortgage interest as a deduction. Unless you're a real saint, it's probably your mortgage that allows you to itemize deductions and pay less in taxes.


I'd like to point out that the AMT limits how much of a mortgage deduction you can take. On your rental property FWIW I would think that the favorable tax treatment of debt would be a factor in keeping the note on the property.




•Leverage. If you pay off your mortgage, you'll also lose the advantage of using someone else's money to invest. Let's say that your mortgage is paid off, and your home gains 5% in price this year, to $210,000 from $200,000. You've gained $10,000.

But let's say you had $20,000 in equity in your home and a $180,000 mortgage. If you were to sell your home for $210,000, you'd repay the $180,000 loan, keep the $20,000 in equity and pocket $10,000 - without tying up $200,000 of your own money.


Leverage is a two way street, you win and lose more than you would have otherwise. You're not that highly leveraged IMO though.




•Liquidity. If you suddenly need money, you may not be able to sell your house quickly. You'll also have to pay a broker's commission to do so. True, you can tap a home equity line of credit - but then you're back where you started before you paid off your mortgage.


But to really make the decision, you have to compare your return with another investment. Over long periods of time, you could probably beat 5.91% by investing in stocks. The stock market has averaged a 10.4% gain since 1926, according to Ibbotson Associates, a Chicago research firm.


And there's the rub. Investing in this kidney stone of a market would make most people balk. When people talk about paying off their mortgage, they're often considering investing the money they save in real estate. Stocks have gone nowhere since 1999, but home prices are going wild in many parts of the country. "I talk to one or two people a week who ask about buying another house and just flipping it," says Malcolm Makin, a financial planner in Westerly, R.I.


That's not the time to load up on real estate. Although the word "bubble" is batted around too frequently - true bubbles are rare - you can make a strong argument that housing gains will ease:

The liquidity you feel comfortable with is a personal decision of course. What you might consider is paying off your house and establishing an equity line of credit if you had liquidity concerns. I would think that you drive a hard bargain and get some really good rates since you have all your equity if you paid it off.


•Rising rates. Every quarter-point increase in mortgage rates eliminates potential buyers from the market. The Mortgage Bankers Association thinks the rate on 30-year fixed-rate mortgages will rise to 6.6% by the end of 2005, and 7.3% by the start of 2007.

Could be a concern.


•Cooling prices. Home prices, like stock prices, don't normally double in a year or two. Typically, home prices rise 1 or 2 percentage points above inflation, currently running at 3.1%.

If this was a big concern just sell your property.


•Soaring expectations. In 1999, people would talk about how much they made from their tech stocks. These days, the topic is usually how much they have made from their houses. That's not a good sign. People who buy now are "doing the same thing they did with tech stocks," says Tim McIntosh, a financial planner in St. Petersburg, Fla. Should home prices actually fall, the magic of leverage will work in reverse. If you buy a $200,000 house with $20,000, you'll be in trouble if your home price falls 10% to $180,000.

Again if you thought prices were going to fall sell. I don't think this has much to do with paying of your loans given the amount of equity you do have.


One thing I'd consider is limiting my liability in your rental property. Perhaps set yourself up as an LLC such that the LLC runs the rental business such that your personal assets are protected like the equity in the property you live in. FWIW I'd tend to pay off the note on the property where I lived and tend to keep the note on my rental property.

My wife and I are debating the merits of selling our property. I look at real estate prices in other markets, compare them to prices in the market I live in, see how fast prices are rising in the market I live in and I'm inclined not to sell at this point. Her opinion is that if we can get a certain price we should sell. I agree but my price target is about 25% higher.