Paying off the home versus investing?

[jIM_Ohio]

Originally Posted by 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.

Paying off mortgage is NOT risk free. Nothing is risk free.

Your first statement is correct (higher risk in market should generate higher return than the fixed rate return of paying down mortgage).

Risks with paying down mortgage:
1) liquidity- you cannot get access to your money easily or quickly if you invest it (pay down) the mortgage.
2) tax- you have a risk your taxes paid will increase if you use the mortgage as a tax deduction (I write off 25% of my income on my mortgage alone and 43% of my overall income in part because I have a large mortgage).
3) inflation- the money used to pay down the mortgage will lose value to inflation. The inflation risk is not as high as a savings account, but it is not zero either.

[jIM_Ohio]

Originally Posted by noppenbd

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.

what s/he said

[jIM_Ohio]

Originally Posted by 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.

I would argue people are short selling not because they move often, but because they bought more than they could afford, or did not have a sound financial plan.

Suggesting to pay down mortgage instead of any 401k investment is fools logic, IMO. A person needs to do BOTH, not one or the other.

[EEinNJ]

Originally Posted by 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?

If you already have a competitive interest rate, and you don't want to change the time remaining on the loan, I would say yes. Recasting the loan cost me $250, and took 4-6 weeks. The trick is to find the right person at the loan servicer/bank that handles it. Re-financing can cost several thousand, income & credit verification, an appraisal, etc.