Paying off the home versus investing?

[simpletron]

inflation has no point in this arguement. last time i checked, my impact on the inflation rate is negligible. so whether I invest in the stock market or prepay on my mortgage will not have change the inflation rate. therefore inflation will eat away at the mortgage savings and investment earnings at an equal rate. so which ever one is bigger in absolute terms is bigger after inflation.

the secular bear market of 1966 to 1982 ... an interesting comparsions to today. does anyone know what the annual return of sp 500 was between 1975 to 82 and 75 to 85 was? 6.8% and 8.9% respectively and that is before dividends, which didn't yield less than 4% over that time period. he should of pick a better example before saying "the average buy-and-hold investor doesn’t have a prayer of averaging 10% annual returns over the next decade." because the buy and dividend reinvestor did, the last time. I wouldn't listen to anybody that says the stock market can't do this or is going to do this, because the stock market will always surpise you.

my vote has always been put your money where you believe you'll get the highest after-tax return whether it be debt or some sort of investment. right now, I believe that my after-tax return in the stock market will beat my mortgage at 5% before any deduction, so I invest in the stock market. I could be wrong and the blogger could have the right conclusion, but it is far from a no-brainer.

[scfr]

To me, it's not a topic worth arguing about. For some people, paying off their mortgage is smarter. For some, investing more is smarter. If the discussion were "should I buy a wardrobe full of designer clothes or save for retirement" it would be a different story (and would indeed be a stupid question), but really, paying off a mortgage early and investing are both responsible uses of money.

It's kind of like asking whether it is better to own your own business or work for someone else and getting heated up about which is better. Both are great options (and both certainly beat not working at all), and what you choose to do is going to depend on what suits you. To each their own.

[Len]

jIM_Ohio,

He is such an idiot that I will not stoop to his level to argue with him- his mind is already made up. I'll deal with a higher class of people here.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak.

The irony in your quote immediately followed by your subsequent signature is priceless. Why the ad hominems, Jim? Don't you think that kind of discourse, rightly or wrongly, reflects poorly on your character and overall maturity level?

The post clearly stated that paying off the mortgage is "for those who want to reduce risk by agreeing to trade the desire of making more money over the short run in exchange for the security and promise of a steady, risk-free return." It doesn't say it is the best course of action for those who wish to chase maximum returns. It is meant to reassure those who desire the peace of mind that comes with owning their home free and clear. There are those of us who are out there that find peace of mind virtually priceless.

You also incorrectly note that the post doesn't address the previous interest payments. It does. Those that have been following my blog already knew why I went from a 20-year back to a 30-year mortgage. I also reiterated it in the comments section of the post. In hindsight I should have restated it directly in the post though. (It was all about increasing my financial flexibility in case I lost my job in this tough economy). I'm a newbie blogger, so I am learning the hard way. :-)

Of course, you always have to pay taxes and maintenance. But that counter argument is a red herring because you have to do that whether the mortgage is paid off or not. Right?

Cheers.

Len

[jIM_Ohio]

My point still exists you presented your conclusion before suggesting what problem you were fixing.

If you are looking for "risk free" and also state a need for this economy, I have argued here cash on hand is better than paying down mortgage, until the mortgage is paid off.

Meaning put the extra payments in I-bonds or TIPs (low risk), then once the account has enough to pay off the mortgage, cash it in.

Again paying down the mortgage is more of a convenient way to avoid the middle step (investing), it is not efficient as "risk free", it is not efficient as "liquidity" for this economy. It is efficient for peace of mind and lowest interest paid to bank.

[LivingAlmostLarge]

Actually Len, you write it's a no brainer to pay off the mortgage. One would argue the no brainer would be to stash cash in the bank and like many here and in real life have more in the bank than the mortgage.

It's a lot less risky if you had 2-3x the savings in the bank. BUT you don't. Which is a bit frightening, because certainly that's how I feel. But I believe that eventually having an asset base which is substantial would lessen any risk including a mortgage.

Do you think you'd sleep better with your $120k mortgage gone and $200k in the bank versus, someone here who has a $120k mortgage and $800k in the bank?

[jIM_Ohio]

Len also calls paying off mortgage "risk free", and as most here know, I always state NOTHING is risk free. One can minimize risk of one kind or another, but there is always a risk with anything you do, as risk takes on many forms.

[LivingAlmostLarge]

Unfortunately there is always risk. But you can minimize risk.

[ericjohnson1981]

I think your mortage should be paid first, since unlike investing, you actually have an obligation to pay it.

[Tree0164]

Originally Posted by maat55

I believe in having a house paid for and an retirement fund. It depends on your age and income as to how much you invest and how much you pay towards the house, and the price of house is very important in this senario.

Ditto.... you need both

We are saving for retirement plus plan on having our house paid off in our mid 50s

I wouldn't forgo retirement savings before paying off a house

[disneysteve]

Originally Posted by ericjohnson1981

I think your mortage should be paid first, since unlike investing, you actually have an obligation to pay it.

You have an obligation to make the scheduled monthly payments.

You do not have any obligation to make extra principal payments or retire the loan early.

[cinder465]

"A couple of years ago, in order for us to live on just my income, I sold some investments and made a big principal payment and re-cast the mortgage. This is a little known way to save big without refinancing- it simply lowers your payment by re-amortizing the loan over the remaining term, at the same rate."

We have $100K and were planning on refinancing to bring down our principal blance, therefore our payment. Should we do what you did instead?

[swanson719]

When you consider the house pay-off vs. investing, also look at the real estate markets vs. stock markets comparison. `Common sense says that Jack and Suzy building a house now while everything is dirt cheap and then selling it 10 years from now when the economy is back to normal would make a great deal of money from two angles. 1 - Builders are in a hurt for work so labor and materials are cheap, effectively earning up to 30%, on the principle that discounts are returns in the future. 2 - The home keeps up with inflation, earning usually 4% to 5%. So if you were to build a house today, and re-sell it 10 years from now, you're effectively seeing a 70% to 80% return on it, or 7% to 8% annualized. Therefore, paying down your home early is a good idea in bad markets. However, also to consider, buying stocks today in something like GM, if it doesn't go bankrupt, would have a much greater return in the long run, depending on how much you're willing to invest. $10,000 of GM at $2.72 is roughly 3600 shares. When the economy rebounds, and GM goes back to it's average of $24 - $30 a share, you're ranging from $86,000 to $108,000 gross. You're not likely to see the same kind of returns on your home.

[flavor]

Four years ago we paid off our mortgage. Our house is probably worth now about 420K. Since we're in our early 40's, and had many years till retirement, few people suggested we should invest that money and not pay off the mortgage. I'm glad we did not listen. So far we've saved over
80K, on one income under 90K. Now we're thinking of purchasing a condo for around 150K, with 10/15 yr financing of 70K. We want to make sure our monthly expenses are covered by the rent, and we think we can pay it off in about 5 years.

Many financial gurus adviced people to pay themselves first by investing all their money in the market, and paying off the mortgage should come last. I'm glad we did not listen. We contributed in my husband's 401K up to the company match only, and the rest went in the bank CD. As the market crashed we also lost lots of 401K money, but not our bank savings. Lots of people want to get rich quick. There's nothing wrong with a good all fashioned way of saving.

[LivingAlmostLarge]

Flavor did you really lose money in your 401k or just on paper? It's not a loss until you sell. And if you have 20 years until retirement, how do you know it's a loss?

[flavor]

At the moment to us it's a loss because it came out of my husbands paycheck and went into the 401K.

[wincrasher]

Well it depends on what you consider financial security.

Gains in the market are subject to siginificant risk. That's why you'd expect a higher return.

The return on paying your mortgage is fixed, and thus risk free. So it is potentially lower.

In some states, your home is hard, if not impossible to take from you in bankruptcy. In others, it's like any other asset.

If you are the type that is fixated on the worst case scenario, then having a paid off home and low monthly expenses can give you alot of peace of mind. Also, you need to save less for retirement if you are the stay-at-home type.

If you're investment accumen is low, or you are a nervous investor, then you are probably looking at the returns on CD's or Treasuries and thinking paying off the house is a MUCH higher return.

So nothing is a "no-brainer". You have to balance risk with any coarse of action.

[noppenbd]

Originally Posted by swanson719

When you consider the house pay-off vs. investing, also look at the real estate markets vs. stock markets comparison. `Common sense says that Jack and Suzy building a house now while everything is dirt cheap and then selling it 10 years from now when the economy is back to normal would make a great deal of money from two angles. 1 - Builders are in a hurt for work so labor and materials are cheap, effectively earning up to 30%, on the principle that discounts are returns in the future. 2 - The home keeps up with inflation, earning usually 4% to 5%. So if you were to build a house today, and re-sell it 10 years from now, you're effectively seeing a 70% to 80% return on it, or 7% to 8% annualized. Therefore, paying down your home early is a good idea in bad markets. However, also to consider, buying stocks today in something like GM, if it doesn't go bankrupt, would have a much greater return in the long run, depending on how much you're willing to invest. $10,000 of GM at $2.72 is roughly 3600 shares. When the economy rebounds, and GM goes back to it's average of $24 - $30 a share, you're ranging from $86,000 to $108,000 gross. You're not likely to see the same kind of returns on your home.

The rate that the house appreciates in value has NO BEARING mathematically on whether you should pay off your mortgage. Your house is going to be worth the same amount whether you have a mortgage or not. The question is whether the extra money you pay down on your mortgage will have a better return elsewhere. That has to do only a few things: mortgage interest rate, investment return, tax increases from investing and loss of deductions from less mortgage interest. Investment return is the big question mark and incorporates risk tolerance and timeline among many other things.

The rate of house appreciation should be a factor in deciding whether to buy or rent, not in mortgage paydown questions.

[arthurb999]

This topic is situational... for some it's the right move for others it is not.

[swanson719]

The mortgage paydown does become a factor if and when you have the mobile life-style of moving frequently, every couple years or so. In that case, depending on market values, if you consistently pay money down on your mortgage, you're going to see a return on that when you re-sell the house in that you won't be losing money. If you roll closing costs into the price of the loan, you just financed an extra $2,500 over 30 years. Stupid, but most people do. So, paying down more, and then re-selling it in a few years, and having more cash in hand would be a better idea than investing money, then continually buying and re-selling properties every few years as people move and having to finance in high markets and sell in low, which is why we see so many short sales right now. If those people hadn't invested in Roth's and 401K's, they could have paid down their house, and not had the huge ding on their credit.

[jIM_Ohio]

Originally Posted by flavor

At the moment to us it's a loss because it came out of my husbands paycheck and went into the 401K.

using this logic, any money I do not spend is a loss.