Save LOTS of Money in the Long Run

[jIM_Ohio]

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.

you need to compare the 69k in interest saved compared to the amount you would have is $250 were invested every month, earning a "8%", return. $236,000 by my calculation.

House will appreciate regardless (both situations).
Does not take into account taxes (mortgage interest is tax deductable on long form, investment earnings might be taxable).

In 25 years you have the same equity in the house regardless, so the question is did you want to save 69k and improve cash flow, or have more money in bank on the 25th year.

There is a middle choice of invest until amount equals mortgage payoff, then payoff, then invest previous mortgage payment. More conservative than just investing the difference, more aggressive than just paying down debt.

[disneysteve]

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?

I also don't consider my home to be an investment. We didn't buy it to make money, which is the point of an investment, isn't it? We bought it to have someplace to live. We've been here since 1994 and plan to stay indefinitely.

As for equity, I don't believe you should continue to pull equity out of your home, but I also don't believe you should be in any hurry to pay it off for all the reasons already discussed.

[InDebtInDC]

I also don't consider my home to be an investment. We didn't buy it to make money, which is the point of an investment, isn't it? We bought it to have someplace to live. We've been here since 1994 and plan to stay indefinitely.

I respectfully disagree. I interpret "investment" broadly to mean anything that can net a return, even if the return is non-financial. Shelter is an investment because you get some benefit from it.

Posting on this board is an investment of your time because you expect to learn something from it.


Semantics aside, I think you should consider a home an investment, but not in the sense most people think. You buy a home to give you benefits, usually a roof over your head, and if you're lucky, location, space, amenities, etc. The more savvy of an "investor" you are, the more home you can buy with your money.

[simpleyme]

I disagree with the investment part as I did not buy my first home as an investment but moved out of it and turned it into a rental so it turned into an investment ,my current home is a triplex so while it is my home it is an investment
when i start selling off properties my plan is to look at them all and move into the one that is worth the least and sell the rest

[jIM_Ohio]

A house will (can?) improve your net worth. The net investment return might be 3%, and might be negative depending on interest rate, local market and many other factors.

Considering the CDs I have my EF in earn more than 3%, I don't think of the house I live in as an investment. It is more of a liability, IMO.

It does create net worth (in the long run). So in primitive terms in behaves like some investments, but in complex terms, it is one of most expensive investments for such a low return, it's easy to see why many people do not consider a house to be an investment.

[LivingAlmostLarge]

No investment. I think it's just a place to live, but I could be renting and have a place to live. But it's nice to own.

[simpleyme]

I keep smiling at these posts ;-)

unless you actually have enough to pay your property off to say you would not if you could
is pointless

as is people who say that having a million dollars is not what it used to be and not enough when they do not even have a million dollars LOL

they may be right but cannot really know

so go ahead and tell everyone how worthless actually owning property is if you ever own any you may feel differant ,maybe only when you own by default after 30 years of payments LOL

[DebbieL]

Xdork,

I sure hope you aren't living anywhere NEAR Vancouver or Vancouver Island (as I do). We are due for a HUGE housing correction and condos will be the first to go (they always are - trust me). Real estate is hugely overpriced here right now. I would seriously get out while you still can if you are living in one of these bubble areas. Edmonton and Calgary have already started on the way down. This is going to be UGLY (especially in Vancouver), and no the Olympics won't make one bit of difference. It never has for any other city, and it won't here.

If you are in the Toronto area or somewhere else, I don't know as much about those places so I cannot comment on them. If you are on the West coast like me, please consider getting out while you are ahead. It won't be pretty here for a long time after all this shakes out.

[lgslgs]

I keep smiling at these posts ;-)

unless you actually have enough to pay your property off to say you would not if you could
is pointless

I have the money to pay off my mortgage if I want to, and if you back and read my previous post you can see why I choose not to.

This isn't just a "what if" scenario for me. It is real cash $$$ of investment return that I'd lost the minute I paid off my mortgage - a mortgage on a house & land that I'm not going to sell in my lifetime.

I'd have to be a fool to put any extra money toward my mortgage, so keep smiling all you want to.

Lynda

[lgslgs]

OK - Maybe you should smile. I actually hadn't posted in this particular thread. However, I intentionally do not pay off my mortgage early. It would cost me about $900 per month in lost investment income if I were to do so.

Not paying off the mortgage early was very helpful in our being able to retire in our mid 40s. And yes, we do have the money to do so if we ever decided we wanted to kiss away that extra $900 per month in income.

Lynda

[disneysteve]

I keep smiling at these posts ;-)

unless you actually have enough to pay your property off to say you would not if you could
is pointless

Our investment portfolio is more than 4 times our mortgage balance. I could pay off the mortgage tomorrow. I CHOOSE not to for all the reasons stated. I'm earning FAR more by NOT paying it off. There is no advantage at all for me to pay off the loan early.

[simpleyme]

sounds like keeping debt does work for some ;-)

If you haven't notice from all my post I am just not comfortable with debt ;-)

but I am comfortable with having money ;-)

when this current property is paid off I will have that money to invest as well , a little over welm ng having money no debt and figuring out what to do with it that is different than what I had been doing ;-) What I have done has worked really well but I just do not want to buy anymore real estate although I may do so

[lgslgs]

If you haven't notice from all my post I am just not comfortable with debt ;-)

but I am comfortable with having money ;-)

I'm no fan of debt. Seriously. Every time a "pay off your mortgage early" thread comes up I do a double check to make really sure that I'm right about how much income I'd lose if I paid it off.

But as debt averse as I am, I just can't throw away over $10,000 per year in income just to "feel good" about having no mortgage.

If I didn't have the money invested properly, and had it sitting in a bank savings account then the story would be different.

One thing that was pretty important is that before we retired we didn't just talk or think about investing the money saved by not paying off the mortgage. We saved over 50% of our income and then we'd work hard to spend less than our budget and save that too. Every month the money saved went straight off to our investment firm and we put it right into mutual funds.

This approach wouldn't work well for people who are a bit hesitant to invest in the first place. There's only money in it if you really are moving that money into higher yielding investments and earning those investment returns.

I'm really glad we did that and did not get drawn into paying off the mortgage for emotional reasons. I'd still have to be working if we did that.

Lynda

[LivingAlmostLarge]

Our investment portfolio is more than 4 times our mortgage balance. I could pay off the mortgage tomorrow. I CHOOSE not to for all the reasons stated. I'm earning FAR more by NOT paying it off. There is no advantage at all for me to pay off the loan early.

This and lglgs is what I aspire to. Having enough in taxable accounts to easily pay off my mortgage and not worry. If that should happen then I'll be sitting pretty.

That's the main point, it's about net worth. You can always have a $500k paid for home and no investments. Or what if you have $1M assets, $500k home, same thing. Please don't say not, because what if the $1M in assets are in a savings account. Or a bond.

But I'd love to have 4x the amount in my portfolio as a mortgage. One day...when my portfolio is equal to my mortgage then I know I'm doing fine.

[disneysteve]

If I didn't have the money invested properly, and had it sitting in a bank savings account then the story would be different.

Great point, Lynda. Whether or not it makes sense to prepay the mortgage depends very much on what you would be doing with the money if you don't prepay. If you would just spend it frivolously, by all means use that money to prepay the loan. If you would hold it in low-yielding cash instruments like money market accounts and CDs, you should also probably use it instead to prepay the loan.

If, however, you are going to invest that money fairly aggressively in a diversified equity portfolio, that's when prepaying doesn't make sense. We hold several funds that are up at least 10% for the past year. Our international fund is up over 30% and our gold fund is up 56.24%! Passing up returns like that in order to pay off a 4.4% mortgage would be wacky.