Paying off the home versus investing?

[disneysteve]

All I can say is I still have a mortgage although I could have easily paid it off.

Same here. We have more than enough in savings to pay off our mortgage. We choose not to because it doesn't make sense financially.

[LivingAlmostLarge]

Jim, I was considering that but he said that using home equity as part of net worth made it a bad argument because I'm comparing it to stocks. But i can't figure out how saving cash is bad.

Maat, here's an interesting point. I heard Dave Ramsey tell that to a couple who wanted to pay off their home instead of saving for retirement on a show once, flipping through. He was really impressed by their dedication but he said you still have to pay insurance, property taxes, maintenance on the home. So it's not a free home.

The couple said but it's debt. And he said that it real estate still costs money. He's a big real estate fan, by the way, but he was explaining all this crap about houses and depreciation, etc. They wanted to buy a rental after they paid off their home as a retirement investment.

His answer was it's not easy and all this crap about cash on hand and landlording. I was impressed because I thought he'd say great idea it's no debt instead of telling them that RE can be risky. He made a fortune in RE before.

[jIM_Ohio]

He says though that if you read the link, most of us DPOH are putting too much stock into returns higher than 6%. It's ridiculous. But I'm not sure, what do most people return?

My own returns are usually pretty high but it's because we actively diversify. But I thought even just normal index investing might yield 8%. I typically use 8% number in my assumptions.

Now where is jim when I need him? To help me crunch more numbers.

This is his response to paying off the mortgage.

You are correct in that you should first make sure you maximize your 401(k) contributions, at least to the point of your employer match, before prepaying your mortgage. But anything over that is not a sure bet. If you don’t believe me, just ask a lot of people who, after many years of making the minimum mortgage payments, what their 401(k) plan is worth today.

To me and those who think like me, a home is not an investment. It is a place to live. Whatever money I make on it when I finally decide to sell, is a fringe benefit. That’s all.

I look at it this way: If I choose to pay off my mortgage early and the world economy goes in the tank, I still have a rent-free place to live that I can always call home.

I think maat, I should ask you, because this sort of sounds like something you might say to be debt free. But why pay off the home just to live in debt free?

I chimed in already, reading some of these posts for the first time.

Putting only 4%-8% into retirement plans is a joke. That really accomplishes very little.

Knowing the tax implications of the mortgage is important- advising anyone in 35% or 33% bracket to give up their largest tax deduction is foolish (the goal should be highest after tax return on money used to pay down mortgage, the goal should NOT be to get debt free fastest or pay the least amount of interest possible).

The author came to a conclusion without stating what the goal is (best return. least interest paid, lower taxes, best after tax return, lowest risk, highest reward, earliest retirement date, highest net worth now, highest net worth in 10 years).

Each of those goals has a different investment profile and pay down mortgage profile.

[jIM_Ohio]

Jim, I was considering that but he said that using home equity as part of net worth made it a bad argument because I'm comparing it to stocks. But i can't figure out how saving cash is bad.

I did not read the replies to the blog, only the blog itself. Like I said- the blogger is a big ID 10 T type.

He did not state his objective, only his conclusion.

He refinanced a 20 year note to a 30 year note. He needs to still send the original payment just to prevent a 40-50 year mortgage payoff timeline (and that was not in the blog entry anywhere).

He is such an idiot that I will not stoop to his level to argue with him- his mind is already made up. I'll deal with a higher class of people here.

[EEinNJ]

Philosophically this comes down to 2 questions, do you think you can get a better rate of return by investing, and would you rather be debt free. Paying down/off your mortgage may not have the best potential return, but it is a very safe investment. Sort of like putting money in bonds, to reduce risk and generate income. Paying off a mortgage saves all those interest payments, which is like guaranteed savings!
A couple of years ago, in order for us to live on just my income, I sold some investments and made a big principal payment and re-cast the mortgage. This is a little known way to save big without refinancing- it simply lowers your payment by re-amortizing the loan over the remaining term, at the same rate. I now have 2/3rds the payment, and almost half that is taxes anyway. In my view, paying extra principal monthly only works as 1) forced savings at no interest 2) if you are staying in the house until you pay it off.

Sometimes with investing we lose sight of what we would do if we already had the money. For some people, one answer is pay off the house!

[simpletron]

inflation has no point in this arguement. last time i checked, my impact on the inflation rate is negligible. so whether I invest in the stock market or prepay on my mortgage will not have change the inflation rate. therefore inflation will eat away at the mortgage savings and investment earnings at an equal rate. so which ever one is bigger in absolute terms is bigger after inflation.

the secular bear market of 1966 to 1982 ... an interesting comparsions to today. does anyone know what the annual return of sp 500 was between 1975 to 82 and 75 to 85 was? 6.8% and 8.9% respectively and that is before dividends, which didn't yield less than 4% over that time period. he should of pick a better example before saying "the average buy-and-hold investor doesn’t have a prayer of averaging 10% annual returns over the next decade." because the buy and dividend reinvestor did, the last time. I wouldn't listen to anybody that says the stock market can't do this or is going to do this, because the stock market will always surpise you.

my vote has always been put your money where you believe you'll get the highest after-tax return whether it be debt or some sort of investment. right now, I believe that my after-tax return in the stock market will beat my mortgage at 5% before any deduction, so I invest in the stock market. I could be wrong and the blogger could have the right conclusion, but it is far from a no-brainer.

[scfr]

To me, it's not a topic worth arguing about. For some people, paying off their mortgage is smarter. For some, investing more is smarter. If the discussion were "should I buy a wardrobe full of designer clothes or save for retirement" it would be a different story (and would indeed be a stupid question), but really, paying off a mortgage early and investing are both responsible uses of money.

It's kind of like asking whether it is better to own your own business or work for someone else and getting heated up about which is better. Both are great options (and both certainly beat not working at all), and what you choose to do is going to depend on what suits you. To each their own.

[Len]

jIM_Ohio,

He is such an idiot that I will not stoop to his level to argue with him- his mind is already made up. I'll deal with a higher class of people here.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak.

The irony in your quote immediately followed by your subsequent signature is priceless. Why the ad hominems, Jim? Don't you think that kind of discourse, rightly or wrongly, reflects poorly on your character and overall maturity level?

The post clearly stated that paying off the mortgage is "for those who want to reduce risk by agreeing to trade the desire of making more money over the short run in exchange for the security and promise of a steady, risk-free return." It doesn't say it is the best course of action for those who wish to chase maximum returns. It is meant to reassure those who desire the peace of mind that comes with owning their home free and clear. There are those of us who are out there that find peace of mind virtually priceless.

You also incorrectly note that the post doesn't address the previous interest payments. It does. Those that have been following my blog already knew why I went from a 20-year back to a 30-year mortgage. I also reiterated it in the comments section of the post. In hindsight I should have restated it directly in the post though. (It was all about increasing my financial flexibility in case I lost my job in this tough economy). I'm a newbie blogger, so I am learning the hard way. :-)

Of course, you always have to pay taxes and maintenance. But that counter argument is a red herring because you have to do that whether the mortgage is paid off or not. Right?

Cheers.

Len

[jIM_Ohio]

My point still exists you presented your conclusion before suggesting what problem you were fixing.

If you are looking for "risk free" and also state a need for this economy, I have argued here cash on hand is better than paying down mortgage, until the mortgage is paid off.

Meaning put the extra payments in I-bonds or TIPs (low risk), then once the account has enough to pay off the mortgage, cash it in.

Again paying down the mortgage is more of a convenient way to avoid the middle step (investing), it is not efficient as "risk free", it is not efficient as "liquidity" for this economy. It is efficient for peace of mind and lowest interest paid to bank.

[LivingAlmostLarge]

Actually Len, you write it's a no brainer to pay off the mortgage. One would argue the no brainer would be to stash cash in the bank and like many here and in real life have more in the bank than the mortgage.

It's a lot less risky if you had 2-3x the savings in the bank. BUT you don't. Which is a bit frightening, because certainly that's how I feel. But I believe that eventually having an asset base which is substantial would lessen any risk including a mortgage.

Do you think you'd sleep better with your $120k mortgage gone and $200k in the bank versus, someone here who has a $120k mortgage and $800k in the bank?

[jIM_Ohio]

Len also calls paying off mortgage "risk free", and as most here know, I always state NOTHING is risk free. One can minimize risk of one kind or another, but there is always a risk with anything you do, as risk takes on many forms.

[LivingAlmostLarge]

Unfortunately there is always risk. But you can minimize risk.

[ericjohnson1981]

I think your mortage should be paid first, since unlike investing, you actually have an obligation to pay it.

[Tree0164]

I believe in having a house paid for and an retirement fund. It depends on your age and income as to how much you invest and how much you pay towards the house, and the price of house is very important in this senario.

Ditto.... you need both

We are saving for retirement plus plan on having our house paid off in our mid 50s

I wouldn't forgo retirement savings before paying off a house

[disneysteve]

I think your mortage should be paid first, since unlike investing, you actually have an obligation to pay it.

You have an obligation to make the scheduled monthly payments.

You do not have any obligation to make extra principal payments or retire the loan early.