Investing vs paying off your mortgage

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Re: Investing vs paying off your mortgage

Thanks for the compliment.

I can't remember but there was a discussion somewhere on paying down your mortgage early. Something like if you add an extra $100/month, you save 7 years. Add $200/month, you save 8.5 years.

It got ridiculous after awhile, like adding an extra $2000/month only saved 10.5 years or something.

For paying down mortgages early it seems like a little extra is the best.

You know, we just do the equity income accelerator where they take out 2 1/2 payments instead of one per month. I beleive it has shaved about 4 or 5 years off of our 25 year mortgage doing that alone. I can't beleive how much that has worked - that was my wife's idea and I'm glad we did it.

[kv968]

Re: Investing vs paying off your mortgage

You know, we just do the equity income accelerator where they take out 2 1/2 payments instead of one per month. I beleive it has shaved about 4 or 5 years off of our 25 year mortgage doing that alone. I can't beleive how much that has worked - that was my wife's idea and I'm glad we did it.

You should make sure the extra 1 1/2 payments are being applied to the principle and not just as extra payments.

[MonkeyMama]

Re: Investing vs paying off your mortgage

Thanks for the compliment.

I can't remember but there was a discussion somewhere on paying down your mortgage early. Something like if you add an extra $100/month, you save 7 years. Add $200/month, you save 8.5 years.

It got ridiculous after awhile, like adding an extra $2000/month only saved 10.5 years or something.

For paying down mortgages early it seems like a little extra is the best.

You know, we just do the equity income accelerator where they take out 2 1/2 payments instead of one per month. I beleive it has shaved about 4 or 5 years off of our 25 year mortgage doing that alone. I can't beleive how much that has worked - that was my wife's idea and I'm glad we did it.

Yes for us it would be an extra 1.5 payments a year would minimize our payments, while maximizing how fast it will be paid off. I can't really see paying much more than that if I feel I could invest it well and make a better return.

But I still regret making those extra payments when money was tight. But on the flip side I don't see the point in paying much more than that extra...

A good point, something I weigh heavily in how fast we prepay.

[scfr]

Re: Investing vs paying off your mortgage

Okay, I'm in the mood to stir things up a bit .....

In this weekend's Personal Finance section of our paper, there was an article that laid out some numbers on renting vs. buying a house. They explained that if what you are looking to do is maximize the return on your investments over time, using historical returns on housing vs. the stock market, it is better to rent instead of buy and invest your money in the stock market instead.

So, for those who said they would not pay off their mortgage early because they can get better returns from the stock market, why not sell your house, move in to a rental, and invest the proceeds in the stock market?

Yes - I know that there are variables other than return such as the tax write-off for mortgage interest, etc. But what the article made very clear was that for the average person in the average tax bracket, homeownership was the better investment only for the first few years, and then the scales tipped in favor of renting and investing in stocks.

Don't get me wrong ... I'm not suggesting that anyone actually do this! [I am one of those who paid off my mortgage early and I'll be buying my next home with cash. I'm just wondering, if the numbers are what really matter, how do you justify owning?]

[Ima saver]

Re: Investing vs paying off your mortgage

I think everybody should read the book, "Banker's Secret" by Marc Eisenson.

[tinapbeana]

Re: Investing vs paying off your mortgage

Okay, I'm in the mood to stir things up a bit .....

Yes - I know that there are variables other than return such as the tax write-off for mortgage interest, etc. But what the article made very clear was that for the average person in the average tax bracket, homeownership was the better investment only for the first few years, and then the scales tipped in favor of renting and investing in stocks.

i agree that financially buying a house isn't always the exactly right and most profitable choice 'by the numbers'.

with that said, my personal view isn't of one where my house is an investment so to speak, my house is a safety net. we have a 30 year note, and even if we take the full 30 years to pay, the house should be ours free and clear well before i retired. i like this because it means that no matter what else happens, i won't be homeless (that's the saftey net part) because i won't ever worry about a house payment OR monthly rent unless i want to

[Ima saver]

Re: Investing vs paying off your mortgage

Tina, that is the way I feel. I haven't had a mortgage in 30 years to pay and I won't end up homeless if something happens. Plus, I consider my house an asset.

[LuxLiving]

Re: Investing vs paying off your mortgage

Paying mine off would feel more like 'a more tangible' security than pixelated digits in a far off brokerage account.

AND...you'll note that the three of us who have commented thusly so far are women, who are generally much more security concious than guys seem to be.

[scfr]

Re: Investing vs paying off your mortgage

Yes, and those who have commented are those who either have or would like to pay off their mortgage early. [Tina & Ima, not sure if you read my edited post, but I changed it to make sure it was clear I wasn't actually suggesting anyone sell their house and invest in the stock market!]

It will be interesting to see what the ones who don't want to pay their mortgage off early because the stock market is a "better" investment have to say!

[Hot dog]

Re: Investing vs paying off your mortgage

I am just reading Dave Ramseys book and he is clear that he is totally against investing instead of paying down your mortgage can't remember his exact argument but we know he is very one minded and strict in his views

[Scanner]

Re: Investing vs paying off your mortgage

why not sell your house, move in to a rental, and invest the proceeds in the stock market?

Try explaining that one to my wife

"Honey, I was punching the numbers and I think it would be much better for us to rent. . ."

Houses for women are kind of like how businesses are for men - it's an expression of themselves. They want to be able to hang poofey curtains and match carpet and furniture and stuff. It's a nesting thing. Sure. . .I'd do it in a second if I thought the numbers played out.

Furthermore, don't forget to take this into the equation - unlike stocks, I beleive a house is more easily "loaned" against, should you need something for an emergency or college or something.

Why? Because as Kisoysaki notes - it's an insurable investment - the land and house aren't going away (if insured).

Stocks are just paper - they can collapse tommorrow (remember ENRON).

So, if you need to borrow against some stocks you own or your Roth, you are probably going to pay a higher rate and then the interest isn't tax deductible.

I like to think of the Old Fashioned "Investment Pyramid."

Your house is the foundation of the pyramid, your Roth's and bonds are the next level, perhaps small caps and such are the next level and finally, speculative investments are the top.

Each level has it's place.

[Scanner]

Re: Investing vs paying off your mortgage

Furthermore, as house prices rise over the long haul, let's say a $350,000 home today is worth $600,000 when you retire. . .okay, not the best return. . .but for the safety and relative risk vs. reward, you can't beat it.

I forget there was a study done that showed a very, very high correlation between home ownership and wealth, which is why the US gov't started an initiative to get more poor into home ownership.

You see, I have thought of this - my goals are average - a million dollars by the time I retire in liquid assets + a paid off house. The average financial planner would say my goals are way too low - that I need 3.5 million or whatever to comfortable retire.

I think they forget "reverse mortgaging" - let's say I run out of a million from the time I am 65 to 80 (well over the average lifespan of a male and approaching that of a female). . .well. . .you can reverse mortgage your house that's now worth $600,000K (assuming you haven't liquidated already and moved to Florida).

Sure there's a lien on the house when you retire, that your heirs have to satisfy but they still more than likely walk away with something.

[zetta]

Re: Investing vs paying off your mortgage

I am one of the ones who has concluded that for me it is better to invest in mutual funds rather than pay off the mortgage early. I started this thread because I wanted people to think about the pros and cons so they would consciously choose which path was best for themselves rather than just assuming prepayment was the best path because so many people here are doing it.

Because of my tax bracket I don't think I would come out ahead by renting instead of owning, but just for argument's sake here are some financial reasons owning is better than renting:

• With a 30 year fixed mortgage you can "lock in" your payment, where as a renter you are always subject to rent increases

• If you are renting a single-family home, the landlord can sell and leave you only 30 days notice to find a new place to live. You are especially vulnerable during a hot market when prices of rent are rising.

• A well-timed home purchase in a rising real estate market can have a very high return -- I almost doubled my money on a townhouse I lived in for 4 years in California.

One point I haven't seen mentioned yet is that many people move quite frequently -- the longest my parents (who are in their mid-fifties) lived in any one city was 13 years, and in any one house was 9 years. Taking 5 years off the end of a 30 year mortgage doesn't make sense in that case. Even if you plan to stay right where you are, your hand may be forced by a layoff, promotion, or divorce that you didn't see coming.

[sweeps]

Re: Investing vs paying off your mortgage

There are lots of things that can could make housing prices plummet for a homeowner:
1. The local job market could tank.
2. There could be a natural event that may or may not be covered by your homeowners insurance (have you ever checked the list of exclusions in your policy?) Just a few examples: hurricane, mold, earthquake, termites, cancer clusters, flooding, etc.
3. Severe increase in taxes or change of other rules imposed by federal govt, state govt, county govt, city govt, homeowners association, or any other governing body.
4. Change in demographics
5. Increase in crime or gang activity
and I'm sure there's a host of other issues as well. If you're a renter, you can pick up and go whereever you need to go with little ownership risk.

... Not saying renting is necessarily better than owning a home, but you can't consider your primary residence a financial safe haven.

[MonkeyMama]

Re: Investing vs paying off your mortgage

Because my parents paid $150k for a house in Cali in the 80s that is paid off and worth $1 mil today and because we put $50k down on a home that is worth $600k today.

It would cost us $1k/month to rent a studio apartment vs. the $1300 mortgage for our beautiful home.

I have no idea if that makes sense in a different market, but in a crazy market like this a home is where it is at - renting gets you nowhere (for one no tax deduction, second - costs increase over time while our mortgage is locked in). OF course we bought our first home because it was cheaper to buy than to rent. A very unique market. Our mortgage was $1500, maybe $2k with property taxes, insurance and such, the same place was well over $3k to rent, just a modest condo with no garage or laundry or yard.

& yes we have considered moving somewhere cheaper - again. We could pay cash for a house somewhere else but we would rather keep a similar mortgage, and invest the cash to live off of if we do so. The main reason would be so we would have to work less while we raise kids. I wouldn't waste any of that money on rent.

The main thing about the people I know that rent is they are either moving every year (kicked out - sellers want to sell). Or I have a friend who had locked in to very low rents on a 2-bedroom place. She has 4 kids but they can't afford anything else... She just told me they were moving this summer finally, out of state, her youngest is 2. & when I say lock in they were probably paying $1500/month, looking at doubling that to find somewhere the same size in the same area today. I do not see the joy of renting in a high COL area.