Save LOTS of Money in the Long Run

[puck36]

what ever. if you want to be in debt your whole life fine. but everyone I know and that I have talked to don't want to be in debt any more.

[LivingAlmostLarge]

I did not say I wanted to be in debt my whole life. What I pointed out is what happens if your emergency takes more than your 6 month EF? What will you do? Please don't say it can't happen because there are many people it's happened to.

Second, if you aren't maxing out your retirement accounts you can't go back in time and refund them later. What is your argument to that?

[safari]

There is a lot of peace of mind in knowing you own your home free and clear, no matter what anyone says! Kudos to your girlfriend!

Actually, for me there is more peace of mind in not pre-paying my mortgage, but investing that money instead. If something bad happens, like extended unemployment, illness, disability, etc., I'll still be able to make my mortgage payments and won't have to worry about losing my house.

[disneysteve]

This is always a polarizing issue. People fall on one side or the other. Neither one is wrong. Prepaying your mortgage is equivalent to investing for a guaranteed 4-5% return for most people. That isn't terrific, but it isn't bad. If you are happy earning 5% on your money and all of your other obligations (retirement, EF, college, etc.) are taken care of, go right ahead and prepay the mortgage.

If, however, the question is which will earn you more money in the long run, the answer is investing outside of your mortgage. My mortgage costs me 4.4%. I'm quite confident I can earn a lot more than that with my investments. My best fund currently is up over 40% YTD and a couple others are up over 20% YTD. It would make no sense to me to pull money out of those accounts and use it to prepay my 4.4% mortgage. I'd be sacrificing double digit gains.

All of that said, I actually do both. I have a home equity loan. After I fund our Roths, my wife's 401K, my daughter's 529 and some non-retirement investment accounts, I put what's left toward prepaying the HEL. I'm fortunate that our income allows us to do it all, but if it didn't, the home loan prepayment would be the first thing I'd cut out. JMHO.

[Broken Arrow]

Well said Steve. Given the situation, I would do a little bit of both as well. It doesn't have to be either-or.

[InDebtInDC]

what ever. if you want to be in debt your whole life fine. but everyone I know and that I have talked to don't want to be in debt any more.

Respectfully, as I said above, it boils down to how much risk you're willing to take.

I am very aggressive and I don't mind restructuring my assets to pull out cash.

To be fair, if your mortgage balance comes down you can enjoy some form of PMI reduction, but I would just use the equity and invest it since you get a tax break on mortgage interest. The tax deduction drives your cost of capital down to about 3-6%. Plus the earnings after-tax is about 7-13% depending on how aggressive you are. So you can essentially net 1-10% from using your home equity and investing wisely.

Not everyone should though depending on their tolerance risk. You should, however, invest up to your tolerance level for risk. This ensures you maximize your wealth.



To me, I do not consider primary residence to be an investment. As such, I do not like to carry equity in the primary residence, or any real estate for that matter. An experienced real estate manager will tell you that tying your business assets in real estate equity is one of the worst things you could do with your money. You're better off just paying rent and walking away any time.

Either way, make sure you consider all the alternatives and decide on what's best for your situation.

Thanks for your contribution and you've taught us all something valuable: being debt-free is a good thing if you're risk averse.

[FrugalFish]

I was reading an article not too long about American investors- the gist of the article was that the average American investor thinks he's a very savvy investor, but is not getting the kind of returns he actually thinks (and brags to his friends) that he is. This article didn't have anything to do with prepaying a mortgage, but it isn't the first time that I've read a study/article about that very subject with the same findings.

Granted the folks on this forum seem to be a pretty sharp bunch, but we all know those people out there who are not saving for retirement and they are not prepaying their mortgage. Needless to say, those kind of folks don't turn up on these forums a whole lot.

Prepaying your mortgage is certainly not the worst thing you could do with your money. To each his own.

[InDebtInDC]

I was reading an article not too long about American investors- the gist of the article was that the average American investor thinks he's a very savvy investor, but is not getting the kind of returns he actually thinks (and brags to his friends) that he is. This article didn't have anything to do with prepaying a mortgage, but it isn't the first time that I've read a study/article about that very subject with the same findings.

I don't know if you were referring to me, but I'll comment any way.

The financial market is amazingly complicated beyond comprehension. I have a business degree from a top tier school plus a few years of experience in the financial management field. I wholeheartedly admit that I know nothing about investing beyond stocks, bonds, and simple derivatives.

That said, I think 7-13% is very reasonable. Tax-free municipal bonds will yield almost that much. Otherwise, 10% for the average market return plus a 3% margin of error is reasonable, don't you think?

[xdork4lifex]

Hey guys,
I’m only 22, and I probably don’t know nearly as much about investing as any of you, so forgive me if I’m wrong on this, but aren’t you all assuming that the house will not appreciate in value at all?

Say, for example, the home initially costs 200k, the mortgage is at a 5% interest rate, 25 year amortization, and the price of the home appreciates a modest 4% per year. Making $250 prepayments every month would mean that the house would be paid off in ~20 years, saving 69k in interest, while the home (20 years later) will be worth 468k. In total, you will be up by 307k. On the other hand, investing 250 dollars a month at 8% for 20 years will only give 148k by my estimation. Again, correct me if I’m wrong.

Also, I know that some will argue that real estate slumps can occur, but the same can happen in the stock market. At least with real estate, you know that it will always be worth something and you will always have a roof over your head, while stocks can completely crash and be worth nothing tomorrow. I’m not saying that you should only invest in one and not the other, but there is nothing wrong with someone wanting to prepay their mortgage for security.

One last thing: I am only saying this because when I was 19 years old, my parents helped me purchase a condo to rent out as an investment. Since then, the condo has appreciated about 50k (I live in Canada, and the market is still strong here) while prepaying the mortgage has allowed me to significantly lower the balance owed. By the time I graduate from pharmacy school in 2009, I hope to have about 220k in equity. At that point, I can either move into the condo or pull out some equity to purchase another property. I’m sure you can do quite well investing in stocks as well, but I have pretty low risk tolerance… so yeah, real estate just works better for me.

[buzz]

Hey guys,
I’m only 22, and I probably don’t know nearly as much about investing as any of you, so forgive me if I’m wrong on this, but aren’t you all assuming that the house will not appreciate in value at all?

Whether extra money is applied to early payoff or to other investment, the house will appreciate/depraciate by the same amount, so it is not a factor in the debate.

[FrugalFish]

InDebtInDC- I was not referring to anyone on this forum, it was just a generic comment about investing in general, and findings of a couple of studies.

My Grandfather retired rather well off and later in his life did a little calculating (he was a mathematics professor at a top university, so I hope his calculations were good ). He discovered that over his lifetime of investing he earned 6% per annum (good investments balanced his bad ones). Needless to say he was shocked by the finding, thinking that the yield was much closer to 10%, but it supports the findings of those studies.

If someone is a good, educator investor, then investments that actually do yield a higher rate are obviously the way to go. If someone is not the sharp investor they think they are, then prepaying their mortgage would probably have been a better choice (but that guy is never going to know it). For someone who doesn't have the stomach for risk in investments, perhaps prepaying of a mortgage should be part of their master plan.

[xdork4lifex]

Whether extra money is applied to early payoff or to other investment, the house will appreciate/depraciate by the same amount, so it is not a factor in the debate.

Oh I see, thank you for the clarification!

[InDebtInDC]

InDebtInDC- I was not referring to anyone on this forum, it was just a generic comment about investing in general, and findings of a couple of studies.

My Grandfather retired rather well off and later in his life did a little calculating (he was a mathematics professor at a top university, so I hope his calculations were good ). He discovered that over his lifetime of investing he earned 6% per annum (good investments balanced his bad ones). Needless to say he was shocked by the finding, thinking that the yield was much closer to 10%, but it supports the findings of those studies.

If someone is a good, educator investor, then investments that actually do yield a higher rate are obviously the way to go. If someone is not the sharp investor they think they are, then prepaying their mortgage would probably have been a better choice (but that guy is never going to know it). For someone who doesn't have the stomach for risk in investments, perhaps prepaying of a mortgage should be part of their master plan.

I agree. Most of the money is not made on the open market. Instead, most of the money on stocks are made in backroom deals way before the public gets a chance to bid.

[kilcher]

It sounds to me like the OP has a 9% mortgage, which is why I suggested a refi.

Whoa, not even close. It's either 5.25% or 5.75%. My fiancee told me but I don't remember which.

I guess it might not be for everyone. I'm comfortable with how much we're putting in savings and just see this as an extension of that.

[simpleyme]

[QUOTE=InDebtInDC;136269
Not everyone should though depending on their tolerance risk. You should, however, invest up to your tolerance level for risk. This ensures you maximize your wealth.



To me, I do not consider primary residence to be an investment. As such, I do not like to carry equity in the primary residence, or any real estate for that matter. An experienced real estate manager will tell you that tying your business assets in real estate equity is one of the worst things you could do with your money. You're better off just paying rent and walking away any time.
------------------------------------------------------------------------------------------------

that is interesting that your primary residence is not considered a investment (I sorta agree, my disagreement comes with the fact if someone offers me a bundle for this place I am out of here LOL)) and that you do not care to keep equity in it?

how does one manage not to keep any equity in their properties? all my properties went up over 30K each ,do you all recommend that I keep an open line of credit on each? or refi each and every year? most years they go up
that's according to tax assessed not sure about real market values they tend to be higher than assessed value

edited for clarification that is 30K each this year, most go up every year or at least they have for the last 20 years ;-)