Investing vs paying off your mortgage

[tinapbeana]

Re: Investing vs paying off your mortgage

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.

ok, i agree with everything else in your post, scanner, but just wanted to point out: "They want to be able to hang poofey curtains and match carpet and furniture and stuff. " WTF? broad generalization much (and those who think there's a pun there, please pardon it)?

[jIM_Ohio]

Re: Investing vs paying off your mortgage

A lot of people here talk about the strides they are making toward paying off their mortgage early. In a lot of cases you will actually come out ahead by investing that money regularly in a mutual fund instead.

Here is a calculator I found that will do a comparison for you (it takes the interest tax deduction into account.):

http://www.hughchou.org/calc/prepay_v_invest.cgi

In my case, if I choose a very conservative 7% return on my mutual fund, and look at either paying an extra $200 on my mortgage every month or investing that $200, my loan will take 4 years longer, but my fund will be worth about $123k -- $20.7k more than the interest saved.

(One assumption this calculator makes that I disagree with is that I will make an extra investment each year equal to the taxes I saved due to having a higher interest deduction. I think this is unlikely. In my case these investments add up to $13.3k.)

If I assume a return of 10% (which according to Common Sense on Mutual Funds is an index fund's long-term historical return), my fund will be worth $160k, $59k more than the interest saved.

I have almost enough in liquid assets to pay off my mortgage, but I won't be doing it. I believe in the long run I will come out far ahead by keeping that money invested. (Another calculator from the same site, http://www.hughchou.org/calc/payoff_v_borrow.cgi, says I will -- to the tune of $292k at 7% return, or $833k at 10%!)

Another advantage of investing vs prepaying is that a mutual fund is liquid enough to act as a backup emergency fund, whereas once you've made a prepayment you need a home equity loan to tap those funds.

My personal opinion would be:

1) Save 10% of Gross Income (401k suggested, 4xy plans for other)
2) Pay off consumer debts (non deductable and non tax advantaged debt)
3) Fund Roth
4) Pay Down tax advantaged debt (mortgages, student loan)

By the time most people get to #4 (myself included) the standard deduction will be better than the itemized deduction.

People need to keep in mind mortgage interest, while tax deducatable, is like paying someone $100 to get $33 in return. The money may grow faster elsewhere, the discussion becomes more about

"time value of money" than it does about investment returns.

[Scanner]

Re: Investing vs paying off your mortgage

Quote:
Originally Posted by Scanner
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.

ok, i agree with everything else in your post, scanner, but just wanted to point out: "They want to be able to hang poofey curtains and match carpet and furniture and stuff. " WTF? broad generalization much (and those who think there's a pun there, please pardon it)?

Tina,

You don't think the female sex and male sex are the same, do you? Generalizations help. Stereotyping does not.

Generally speaking, I do think women regard a house much different than a man.

A man would be happy with a single nail on a white wall and a picture hung there. A home is just a refuge, a place to relax.

Of course, there are men like Christopher Lowell, I suppose who are into decorating.

Alright, I hear Queer Eye for the Straight Guy knocking at my door

[tinapbeana]

Re: Investing vs paying off your mortgage

no, i'm not saying that men and women are the same, of course there are differences (innies vs outies ).

the gender difference of regarding a house as a 'home' versus a place to crash is one thing. making the jump from that to every woman hanging poofy curtains and matching carpet to furniture is another.

personally, i'vd had temporary paper blinds in my living room and dining room for 7 months b/c i won't get up off the money to buy custom sized blinds. i'd do mini blinds, but they're a pain to clean...

[Trillian]

I'm just wondering, if the numbers are what really matter, how do you justify owning?]

Well, that's easy -- renting offers no equity at ALL, doesn't even build credit history, whereas having a home and paying off a good low rate mortgage at just slightly faster than financed for, along with an emergency fund and a retirement fund offers many benefits, including:

a) Renting just to gain more by stock market is "only money" not HOME.
b) Pride of Ownership you cant get with renting
c) Equity in your home should you need it -- so you dont need high rate credit cards as a secondary emergency fund
d) A mortgage paid on time builds your credit and improves your credit score, while renting makes largely no difference at all.
e)Later, after its paid off, you can do a reverse mortgage if you need cash in retirement years -- a bank pays YOU a mortgage monthly so that when you finally vacate (eg move upstairs with the Big Guy) they own the home.

My DH and I just made an offer on a home yesterday and it was accepted. It is our first home. We do not like to have debt, but this is a dream of ours. We worked REALLY hard to clean up my credit history and mistakes from years ago, after which I had given up credit in favor of just cash-- that ALSO did not build my credit.

When my DH told me it was his dream to own a home after we got married, by carefully researching and taking the advice of professionals to help me build my credit and credit scotre, we got it up from 550ish to 750 and now, Im about to hit 800. DH was already there!

We are going with a 15 year mortgage rather than a 30 year mortgage, so we wont be paying 3x for the house. And trust me, we went over all the logic from all sides.

In the end though, most people DO want to own a home, as part of the American Dream and most DO want to be safe with diversified assets. And for us, paying down more than 30% to begin with to avoid PMI, keeping our PITI reasonable for our income, and keeping perspective that not all debt is created equal has made the home buying a huge success.

The best part? Our mortgage lender told me he should have me tell his clients how to improve their credit! Now THAT was a sweet thing to hear after all the struggles in my past!

Yes, I understand people who have had bad things happen in their financial pasts may just feel emoptionally better not in that frying pan, or those who view 'all debt as evil' shy away from these points of view -- but as with all things -- healthy is balanced, not extremist, in general.

I hope that those not yet healed from the past can be blessed with that healing. There's no worry to please anyone else, though, so if your own way of doing things works for you -- go, you! If though, you may need to finance a car or home or condo later, it may be wise to keep reaching for balance.

[jIM_Ohio]

A lot of people here talk about the strides they are making toward paying off their mortgage early. In a lot of cases you will actually come out ahead by investing that money regularly in a mutual fund instead.

Here is a calculator I found that will do a comparison for you (it takes the interest tax deduction into account.):

Prepay vs. Invest

In my case, if I choose a very conservative 7% return on my mutual fund, and look at either paying an extra $200 on my mortgage every month or investing that $200, my loan will take 4 years longer, but my fund will be worth about $123k -- $20.7k more than the interest saved.

(One assumption this calculator makes that I disagree with is that I will make an extra investment each year equal to the taxes I saved due to having a higher interest deduction. I think this is unlikely. In my case these investments add up to $13.3k.)

If I assume a return of 10% (which according to Common Sense on Mutual Funds is an index fund's long-term historical return), my fund will be worth $160k, $59k more than the interest saved.

I have almost enough in liquid assets to pay off my mortgage, but I won't be doing it. I believe in the long run I will come out far ahead by keeping that money invested. (Another calculator from the same site, Invest vs. Payoff, says I will -- to the tune of $292k at 7% return, or $833k at 10%!)

Another advantage of investing vs prepaying is that a mutual fund is liquid enough to act as a backup emergency fund, whereas once you've made a prepayment you need a home equity loan to tap those funds.

The issue is paying down the mortgage is "risk free" % of return. if my mortgage is 5.875%, paying it down is a guaranteed rate of return.

The 10% from the market is far from risk free.

If you add in time horizons... it becomes less in favor of investing. For example if someone has 7-10 years prior to retiring, what is their bang for the buck?

The crash of 2000 has JUST BARELY recovered in 2006-2007. So someone choosing this strategy with a shorter time horizon needs to factor in TIME.

If someone has 30 years to pay off their mortgage, it makes sense to invest, because 30 years is more than enough time to ride out a recession/bear market (or two, or three).

I am actually one of those which pays down the mortgage with 30 years to go... a few reasons.

We are 34/33. Payoff is by age 50 for me. My wife's 50th b-day present will be a real nice trip with the mortgage payments from that 51st year.

Paying off mortgage is a requirement for early retirement for me. I like the idea the "4 years sooner". Might buy some flexibility those last 4 years.

401k is at 10%, Roth is fully funded. Wife things we save too much. If I asked for more money to invest, I'd be sleeping on the couch. But paying down the mortgage is something she likes sound of... so no reason to turn down improving the financial position of the family.

[jIM_Ohio]

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.

Here is what I figured out...

adding $625 either once, twice, three times or 4 times a year (we have 4 months without an IRA payment, and that money can be used to pay down mortgage.

twice a year shortened from 360 payments to 206 payments on the 2nd mortage. Three times a year reduced this only to 184 payments and 4X a year was 164 months. gained "4 years/42 payments" with the extra payments- did not seam worth it.

After 206 payments on second, if all is applied to remainder of first mortgage, first is paid off in 317 months. Paying more than $625 2X shortened this 6 months to 311. Not worth it for the extra.

Microsoft has ammortization schedules on their web site to download and do comparisons... I modified spreadsheet to be more "if then" friendly, but basic sheet was quite helpful.

The strategy I have read which is quite effective is pay "next month's principal". This accelerates extra payments as mortgage balance becomes lower.

The reason the extra cash does not impact the paying down as much, is the pay down works best when their is a high interest payment. By year 10 or 15, you start paying down more principal than interest, so the "pay extra" becomes less effective.

[jIM_Ohio]

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.

1,4, and 5 sound like Flint, Michigan. Do you speak from experience? That's a rhetorical question.