[Packer Fan]

I have a question for the landlords or those who have used a villages home as a rental. It involves the Bond.

I have just sold a large amount of stock at a nice profit. I am going to use it to do one of 2 things - pay down the mortgage or pay off the bond.

It have a 30 year mortgage that it is my intention to pay off over 5 years (part me and part the renters, I am on track to do this). I can't retire for 8-10 years (I know, it stinks). So this is rental property until I retire.

Also, let me say we will NOT sell this house and buy another, we love the location and it is the perfect place for us. So that is not a consideration.

The mortgage is at 4.18% and the Bond is at 5.128%.

I know the interest on the bond is not considered deductible for HOME OWNERS WHO LIVE IN THEIR HOME. However, it is deductible as an expense against rental income. In fact, I think the whole Bond payment should be deductible as an expense. This would mean I should probably pay down the mortgage because I can use the Bond Payment to offset rental income, whereas I can only use the mortgage INTEREST as an expense, not the principal payoff..

Any thoughts anyone has would be appreciated. I am sure I am not the only one who has had this dilemma

[redwitch]

I think this is one of those instances where the best advice would come from your accountant. That is who knows your financial situation best. I would be very leery of any advice given here since each individual has different needs and circumstances.

[dirtbanker]

I believe most people overlook the fact that a tax deduction costs you money. It is not a tax credit.

An example would be the interest deduction on your mortgage, figure out what you pay in interest a year and then look at what you save in taxes a year. If you have a $200,000 mortgage at 3.99%, you pay roughly $6,700 a year in interest (the first 10 years). That $6700 is applied as a deduction to your gross income. If you made $150,000 a year (roughly twice the average income of America today) you would have a tax rate of 28%. Thus you are paying $6,700 in interest for a net deduction of $1,876...That cost you $4,824 to save $1,876.

If it was a tax credit, the $6700 would be applied as a deduction to the taxes you owed.

Redwitch is correct, you need to discuss your options with your accountant as there are plenty more variables that would influence the decision. If you do not have an accountant or a professional financial adviser you might wish to get one, as there are many facets to what is tax deductible, and what is not, on rental property.

[sunnyatlast]

This is just my opinion. I would leave the bond alone and pay down the mortgage. There are unforeseen reasons that could cause you to want to sell the home sooner than you think. We've seen that happen due to aggravating neighbors, good neighbors move away or die, maybe the market value goes up to an all time high and you can make a good chunk of money by selling it at a certain point in time. And if you sell, the buyer assumes the remaining bond debt.

If you pay down your mortgage, you have equity you can use if you want to buy a different place or take out a home equity loan for something you need/want to do. If you pay off the bond, the money you spent on it is gone.

[RickeyD]

Originally Posted by sunnyatlast

This is just my opinion. I would leave the bond alone and pay down the mortgage. There are unforeseen reasons that could cause you to want to sell the home sooner than you think. We've seen that happen due to aggravating neighbors, good neighbors move away or die, maybe the market value goes up to an all time high and you can make a good chunk of money by selling it at a certain point in time. And if you sell, the buyer assumes the remaining bond debt.

If you pay down your mortgage, you have equity you can use if you want to buy a different place or take out a home equity loan for something you need/want to do. If you pay off the bond, the money you spent on it is gone.

I do not understand why people feel that a bond is something we need to accept. Every year it is money down the drain. It's not tax deductible so why keep it ? Even if it were, why keep it ? I feel it's an unnecessary expense. I don't hold a mortgage on my retirement house, why should I carry a bond ? That 23K is gonna cost me double and that $1700 per year could go to something beneficial to me, not some bond holder. Just my simple approach to a personal finance situation. I can sleep at night better knowing I owe no one.

[TJ_Woody]

My dad was laways of the opinion that less debt is always better. I'd pay the bond and put whatever I was using to pay that towards the mortgage. A debt free home in retirement is a real blessing.

[sunnyatlast]

Originally Posted by RickeyD

I do not understand why people feel that a bond is something we need to accept. Every year it is money down the drain. It's not tax deductible so why keep it ? Even if it were, why keep it ? I feel it's an unnecessary expense. I don't hold a mortgage on my retirement house, why should I carry a bond ? That 23K is gonna cost me double and that $1700 per year could go to something beneficial to me, not some bond holder. Just my simple approach to a personal finance situation. I can sleep at night better knowing I owe no one.

The difference is, unlike already retired people here, the o.p. is a) still working and earning for another 8-10 years; and b) has a mortgage. Chances are high that within 8-10 years they will want to sell to get another place in TV or elsewhere. It happens all the time with the average Villager moving within TV 3 times. If the o.p. pays off the bond and then sells in a year or two, that cash is gone when the buyer would have had to assume the bond balance.

Of course if a person is retired and debt-free, you'd want to get rid of the bond payments and interest. But a lot of things can change in 8-10 years for the o.p. who has not actually been able to live full-time in the home yet.

[PaulDenise]

I will second two prior point.

We bought 'the perfect house' two years ago. We were never going to move. Then found a more perfect house and MOVED. I would not put a 'never move' assumption into the equation.

Second, when we sold our first house, the buyers assumed the bond, and really never thought about it or asked a question because virtually all the other similar houses had a bond. Had I paid the bond off, I don't think that I could have asked $20k more for the house to compensate. Paying the mortgage off by that $20k would have put the money back in my pocket.

[justjim]

OP, congrats on your pick of stocks and your profits! It appears to me that you answered your own question. By paying down your mortgage and still being able to deduct the bond interest as an expense, you will be "money" ahead and still have options if your life should change in the future.

I would still take Redwich's advise and run this by my CPA tax advisor to be sure that this would be the most profitable thing for you to do at this time.

[Packer Fan]

Thanks for all of your input. I also did a search on this site, and here is what I have decided -
1. If you figure in the admin fee, the actual bond interest is 7.1%. Way more than the 4.18%.
2. With sinking my bonuses and the rental income into the house as well as the normal mortgage payment I am making, I will have the house paid off in 5 years, including the bond. I pay it now or when the mortgage is gone either way. No Debt!
3. Either way from a tax standpoint, you capitalize the bond on top of the home price and depreciate it over 27.5 years.
4. It is debatable weather the admin fee and interest are deductible, but they probably are. Either way, no reason to take a chance.
5. Just because the average person moves 3 times, does not mean Donna and I will. We looked at over 40 houses before choosing this one. We might buy another, but we will not sell this house. I know, some of you are laughing, but you are wrong. It does not hurt that every renter has told us that the location was a part of their decision to rent and we are walking distance to 2 pools. The house is also the right size.

That all being said, we sent in the bond payment today, along with another big mortgage buy down. It feels good - I am not sure there was a wrong decision for us. We made the right decision to begin with to buy our dream home in the Villages!

[sunnyatlast]

Originally Posted by Packer Fan

Thanks for all of your input. I also did a search on this site, and here is what I have decided -
1. If you figure in the admin fee, the actual bond interest is 7.1%. Way more than the 4.18%.
2. With sinking my bonuses and the rental income into the house as well as the normal mortgage payment I am making, I will have the house paid off in 5 years, including the bond. I pay it now or when the mortgage is gone either way. No Debt!
3. Either way from a tax standpoint, you capitalize the bond on top of the home price and depreciate it over 27.5 years.
4. It is debatable weather the admin fee and interest are deductible, but they probably are. Either way, no reason to take a chance.
5. Just because the average person moves 3 times, does not mean Donna and I will. We looked at over 40 houses before choosing this one. We might buy another, but we will not sell this house. I know, some of you are laughing, but you are wrong. It does not hurt that every renter has told us that the location was a part of their decision to rent and we are walking distance to 2 pools. The house is also the right size.

That all being said, we sent in the bond payment today, along with another big mortgage buy down. It feels good - I am not sure there was a wrong decision for us. We made the right decision to begin with to buy our dream home in the Villages!

Way to go! Low or no debt is the best position. I wish Washington had a clue about that concept!

[dewilson58]

Originally Posted by Packer Fan

Thanks for all of your input. I also did a search on this site, and here is what I have decided -
1. If you figure in the admin fee, the actual bond interest is 7.1%. Way more than the 4.18%.
2. With sinking my bonuses and the rental income into the house as well as the normal mortgage payment I am making, I will have the house paid off in 5 years, including the bond. I pay it now or when the mortgage is gone either way. No Debt!
3. Either way from a tax standpoint, you capitalize the bond on top of the home price and depreciate it over 27.5 years.
4. It is debatable weather the admin fee and interest are deductible, but they probably are. Either way, no reason to take a chance.
5. Just because the average person moves 3 times, does not mean Donna and I will. We looked at over 40 houses before choosing this one. We might buy another, but we will not sell this house. I know, some of you are laughing, but you are wrong. It does not hurt that every renter has told us that the location was a part of their decision to rent and we are walking distance to 2 pools. The house is also the right size.

That all being said, we sent in the bond payment today, along with another big mortgage buy down. It feels good - I am not sure there was a wrong decision for us. We made the right decision to begin with to buy our dream home in the Villages!

Good review of points. I think the total carrying cost of the Bond is extremely high, so I paid it off. Make sure you discuss with your tax person, the conversion of a rental property back to your primary residence........there are things to know in this situation.

[RickeyD]

Originally Posted by Packer Fan

Thanks for all of your input. I also did a search on this site, and here is what I have decided -
1. If you figure in the admin fee, the actual bond interest is 7.1%. Way more than the 4.18%.
2. With sinking my bonuses and the rental income into the house as well as the normal mortgage payment I am making, I will have the house paid off in 5 years, including the bond. I pay it now or when the mortgage is gone either way. No Debt!
3. Either way from a tax standpoint, you capitalize the bond on top of the home price and depreciate it over 27.5 years.
4. It is debatable weather the admin fee and interest are deductible, but they probably are. Either way, no reason to take a chance.
5. Just because the average person moves 3 times, does not mean Donna and I will. We looked at over 40 houses before choosing this one. We might buy another, but we will not sell this house. I know, some of you are laughing, but you are wrong. It does not hurt that every renter has told us that the location was a part of their decision to rent and we are walking distance to 2 pools. The house is also the right size.

That all being said, we sent in the bond payment today, along with another big mortgage buy down. It feels good - I am not sure there was a wrong decision for us. We made the right decision to begin with to buy our dream home in the Villages!

Congrats ! One less burden to bear...

[asianthree]

Loved our first house, then loved our second house, then really loved our third house. Every two years we bought a house. I think we are done. Nope never paid off the bond

[Packer Fan]

Originally Posted by dewilson58

Good review of points. I think the total carrying cost of the Bond is extremely high, so I paid it off. Make sure you discuss with your tax person, the conversion of a rental property back to your primary residence........there are things to know in this situation.

Like what????