Is it smart to carry a big, long mortgage?

[Coleroo]

Thanks Steve Thats why I love these boards.... I learn so much from them. Never thought about it all like the way you describe it!

[smooper]

For many of us, myself included, peace of mind is the main driver to pay-off the mortgage. It may not be the most sound financial move and I know I could make better use of the prepayments. When its all siad and done, my wife and I will determine where the not-needed mortgage $ will go. It will made things alot cleaner-no debt.
If this costs us 2 or 3 grand in the long run by paying off early, thats the price we're willing to pay to be free of debt.
We could be doing alot worse, i'm sure the percentage of paid off homes in the U.S. is pretty small.

[Scanner]

what if the market crashes 2 years... 1 year... 6 months before you planned to "pay off" that mortgage with your investing? Then what? To me the benefits of peace in having no mortgage asap outweighs the thought of "perhaps" being able to invest the extra money in better ways.

Well, those are good "what if" questions to ask and that's what I meant in another thread somewhere about long term goals and the quirky nature of the stock market.

I'll restate my case in point of what the worst can happen:

I bought Janus Global Technology for a UTMA for my son in 1999. The worst happened - it went from about $2800 to $1300 from 2000-2002. When investing in the stock market, you always have to ask, "What the worst that could happen?"

Even right now, it's very possible that the stock market could drop from 12,000 to 8,000 as I see it. Oh sure, the pundits will say, "No way." but really, it's possible.

But here's the rub.

The gains you make in the stock market tend to happen over a very short time period as well, like usually 45 to 60 days.

So, here it is, 2007 on my 9 year old's technology fund - what's likely to happen is in 2010 or something, it "bull runs" back up for an 80% return.

(that's volatility folks).

That's the pitfall and strength of a buy and hold strategy. . .you make your gains (and losses) in relatively short periods of time.

You bring up an interesting point - with my son's UTMA, when does it become appropriate for me to "lock down" some of gains though? I plan to, since I suffered a huge loss going in, to lock down some prinicipal after a 10-12% gain finally (after a bull run). I will then put some of into a bond fund.

However, had I not lost so much at the beginning and more and the middle, I'd be more likely to ride the ride shorter because there would be a greater chance of a dip approaching..

Know what I mean?

This discussion may be getting too complex but I guess in short what I am saying is, "Yeah, buy and hold. . .but that doesn't mean don't do nothing over the long haul."

I am hooked on the game show "Deal or No Deal" - there's a lot to be learned about investing in that show - sometimes it's okay to take some gains and paying down a mortgage is one way of "taking gains."

[LivingAlmostLarge]

It depends, I'm more a fancier of the pay into retirement before mortgage. If you have enough money to pay off the mortgage after maxing out retirement accounts why not? But until then that's too good a tax break (401k and IRAs) to pass up. I don't even look at the tax break of the mortgage in my calculations.

I'd be paying too much taxes if we didn't put $15k into a 401k To pay $15k to the mortgage, I'd need to have $19.5k to pay it. Why? Because assume it's just the 25% bracket, not even the 28% bracket and our state income tax of 5% and we're at 30% to taxes before we can even take that gross $15k and pay the mortgage. No thank you, I'll take my retirement accounts and then pay the mortgage, because paying an extra $5k/year for taxes is not cool.

[cheapdoggy]

When we took out our original mortgage we took 30 yrs. rather than 15. The 30 yr gives you the flexibility of a lower monthly payment if you fell on hard times, illness, etc. So, in my opinion, it makes more sense to take the longer term for that flexibiliby. However, we fully intended to pay early. And, every chance we got we paid extra toward the principal. We ended up paying our 30 yr mortgage off in less than 6 years. Yes, we could have chosen the 15 yr, but our third child was due, we had 2 small children, etc.
But, so it makes sense to opt for the longer term in even if you plan to pay it off much sooner.

I agree with that. I can and do pay extra every month I might not get it done in 15 but 20 years looks real good. I'd rather double up when I can and not make it mandatory.

[MonkeyMama]

You know what I find amazing? Your mortgage payments!!!!!!!!!!!! We pay $400 per month on our mortgage. We paid $50,000 for our home, actually borrowed $62 but we did some work on it, but the house was $50. I would be sick in the head if I had a $200,000 mortgage, that I could not handle. Of course we also don't make what I am sure most of the people with this high of payments make. If I paid that kind of price for a house around here I would have an absolutely KICKING HOUSE.

It's all relative. We grew up where a starter home was $500k+. We had a $200k mortgage on a condo (20% down) just to get in. We decided $200k as about our limit so we moved somewhere way cheaper. What to you is crazy is dirt cheap to us. So so so relative. But you could not rent a thing in the $400 range. A shack in the worst part of town is $1k/month minimum. & as steve alludes to, economy is strong, pay is good out here all the same. But you see why we are not so eager to pay it off faster either. IT is a big enough burden and frankly the rest of our finances suffer. No point to pay it off heavily now and have no money in the bank - that is ridiculous. But by having a $200k mortgage and not renting we are saving thousands a year all the same. Obviously how we all feel on the subject depends heavily on where we live and a variety of factors. Steve is another one in a high COL Area who is not paying off his mortgage though he could - seems to be the trend. & um yeah, you couldn't find a condo out here under $200k.

Yes, I am talking long term. Out here when you buy a house you stay in it forever. OR you cash out and leave the state - hehe. No one can ever afford to move up or out basically, probably why.

YEah we originally had a 15-year and I would keep it for the lower interest rate but we refied to 30 years when we had our first child and dropped our income in 1/2. I like the flexibility of having 30 years to pay, but pay a little more and more as our income goes back up. If you are getting a loan though and 15-years is very doable, go for it, the interest rates are usually 1/2% lower. I would love to refi back down our interest rate down the road to 15 years, but for today our 30-year rate is lower than today's 15-year rates. So I think we are in a good position, I would not be surprised if we paid it in 15 years, but nice not to have a $1800 mortgage I have to make in case I lost a job or something. Just felt too risky at our income level - the 28% rules I guess. When we both worked our 15-year was only 20% of our income - wasn't a biggie. When we went down to 1 income it was 40% until we refied out to 30 years. But my dh will work again and we will resume our old payment then. Our mortgage is only 20% of my income today. IT's cheap money when the average person in the area pays 60% of their income on rent or a mortgage. (a statistic I just saw).

[MonkeyMama]

I just have to say we live in a very litigous area and a flood plain. Since our mortgage is so "large" I would not feel warm and fuzzy having a paid off house. I Feel my money is better invested in retirement right now. Where it is safe. I have been saying this around the blogs and forums. Today my house compromises 80% of my net worth. Since I am adverse to putting all my eggs in one basket, just one more reason I Feel this way. IT would make me sick to pay off the house just to lose it in a flood. If it wasn't paid we may have a chance to walk away. If we were sued for every last dime if someone tripped in front of our house, our retirement funds would be safe, our house maybe not, if it was paid off. You can say we are stupid to live in a flood plain but to us it was a $200k mortgage in a flood plain or a $800k+ mortgage back home. I choose risk of flood, and have a hell of a lot of insurance to hedge the risk...

When you talk of bigger mortgages (mandated by the area you live) the warm of fuzziness of paying it off is somewhat muted.

I have seen people lose everything they own to a stupid lawsuit or a calamity. BUT at work I have had clients with employees who stole money from them - hundreds of thousands of dollars, but they still had a legal right to their retirement - it is so ridiculous - got me thinking because I realize more and more retirement funds are the safest assets you will ever own - no one can touch them with a 10-foot pole.

Just another angle to add to it all.

[disneysteve]

IT would make me sick to pay off the house just to lose it in a flood. If it wasn't paid we may have a chance to walk away. If we were sued for every last dime if someone tripped in front of our house, our retirement funds would be safe, our house maybe not, if it was paid off.

I don't follow your reasoning. Don't you have insurance? If your house is damaged in a flood, it wouldn't matter if it was paid off or not. Either way, you are responsible for it. That's what insurance is for. I'm not sure what you mean by walking away. If the house was paid off when destroyed, you would still collect on your insurance.

As for someone suing you, you can get an umbrella liablity policy to insure against that type of thing.

[PetMom]

Good points MonkeyMama the lawsuit factor, as in
being sued or having to sue.

Here in Texas we (hope we still do - last time I checked we
did) have the homestead exemption.

With the paid off housing and flood/disaster I think
of the people affected by Katrina and the difficulty
some are having
with collecting their ins. The bank takes the loss if it is
mortgaged, the homeowner if it is paid in full. Further,
the average homeowner does not have the financial
artillery to fight with big insurance; a bank has more of
these resources.

But this is just a reflection that all investments have
a risk factor in them that should be factored in.

[disneysteve]

The bank takes the loss if it is
mortgaged, the homeowner if it is paid in full.

Are you saying that if your house was destroyed, you'd just walk away and not repay your mortgage? Wouldn't that destroy your credit? Plus you'd lose any equity you have in the home. Sorry, I'm just not understanding the point here.

[PetMom]

Interesting as I was just reviewing homeowner's insurance policies
today and was realizing we have some equity built up. We therefore
would be in the league with those who pitch a tent or trailer
on the lot and start rebulding. (I have always been fascinated
with building a home on our own, I would hate to have to
really test it!)

Of course most people do not plan on not paying their mortgage,
but something like Katrina puts a different spin on how a huge
disaster can play out for a homeowner and a lot of homeowners
down there are not doing well at all. My guess those that did
not have much equity and were morgaged are not in such
straits as the others who are more equitied. I think just
survival financially would come into play more than concerns
about the credit rating.

Having a home is not a risk free investment by any means.