Paying off the home versus investing?

[cinder465]

"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."

We have $100K and were planning on refinancing to bring down our principal blance, therefore our payment. Should we do what you did instead?

[swanson719]

When you consider the house pay-off vs. investing, also look at the real estate markets vs. stock markets comparison. `Common sense says that Jack and Suzy building a house now while everything is dirt cheap and then selling it 10 years from now when the economy is back to normal would make a great deal of money from two angles. 1 - Builders are in a hurt for work so labor and materials are cheap, effectively earning up to 30%, on the principle that discounts are returns in the future. 2 - The home keeps up with inflation, earning usually 4% to 5%. So if you were to build a house today, and re-sell it 10 years from now, you're effectively seeing a 70% to 80% return on it, or 7% to 8% annualized. Therefore, paying down your home early is a good idea in bad markets. However, also to consider, buying stocks today in something like GM, if it doesn't go bankrupt, would have a much greater return in the long run, depending on how much you're willing to invest. $10,000 of GM at $2.72 is roughly 3600 shares. When the economy rebounds, and GM goes back to it's average of $24 - $30 a share, you're ranging from $86,000 to $108,000 gross. You're not likely to see the same kind of returns on your home.

[flavor]

Four years ago we paid off our mortgage. Our house is probably worth now about 420K. Since we're in our early 40's, and had many years till retirement, few people suggested we should invest that money and not pay off the mortgage. I'm glad we did not listen. So far we've saved over
80K, on one income under 90K. Now we're thinking of purchasing a condo for around 150K, with 10/15 yr financing of 70K. We want to make sure our monthly expenses are covered by the rent, and we think we can pay it off in about 5 years.

Many financial gurus adviced people to pay themselves first by investing all their money in the market, and paying off the mortgage should come last. I'm glad we did not listen. We contributed in my husband's 401K up to the company match only, and the rest went in the bank CD. As the market crashed we also lost lots of 401K money, but not our bank savings. Lots of people want to get rich quick. There's nothing wrong with a good all fashioned way of saving.

[LivingAlmostLarge]

Flavor did you really lose money in your 401k or just on paper? It's not a loss until you sell. And if you have 20 years until retirement, how do you know it's a loss?

[flavor]

At the moment to us it's a loss because it came out of my husbands paycheck and went into the 401K.

[wincrasher]

Well it depends on what you consider financial security.

Gains in the market are subject to siginificant risk. That's why you'd expect a higher return.

The return on paying your mortgage is fixed, and thus risk free. So it is potentially lower.

In some states, your home is hard, if not impossible to take from you in bankruptcy. In others, it's like any other asset.

If you are the type that is fixated on the worst case scenario, then having a paid off home and low monthly expenses can give you alot of peace of mind. Also, you need to save less for retirement if you are the stay-at-home type.

If you're investment accumen is low, or you are a nervous investor, then you are probably looking at the returns on CD's or Treasuries and thinking paying off the house is a MUCH higher return.

So nothing is a "no-brainer". You have to balance risk with any coarse of action.

[noppenbd]

When you consider the house pay-off vs. investing, also look at the real estate markets vs. stock markets comparison. `Common sense says that Jack and Suzy building a house now while everything is dirt cheap and then selling it 10 years from now when the economy is back to normal would make a great deal of money from two angles. 1 - Builders are in a hurt for work so labor and materials are cheap, effectively earning up to 30%, on the principle that discounts are returns in the future. 2 - The home keeps up with inflation, earning usually 4% to 5%. So if you were to build a house today, and re-sell it 10 years from now, you're effectively seeing a 70% to 80% return on it, or 7% to 8% annualized. Therefore, paying down your home early is a good idea in bad markets. However, also to consider, buying stocks today in something like GM, if it doesn't go bankrupt, would have a much greater return in the long run, depending on how much you're willing to invest. $10,000 of GM at $2.72 is roughly 3600 shares. When the economy rebounds, and GM goes back to it's average of $24 - $30 a share, you're ranging from $86,000 to $108,000 gross. You're not likely to see the same kind of returns on your home.

The rate that the house appreciates in value has NO BEARING mathematically on whether you should pay off your mortgage. Your house is going to be worth the same amount whether you have a mortgage or not. The question is whether the extra money you pay down on your mortgage will have a better return elsewhere. That has to do only a few things: mortgage interest rate, investment return, tax increases from investing and loss of deductions from less mortgage interest. Investment return is the big question mark and incorporates risk tolerance and timeline among many other things.

The rate of house appreciation should be a factor in deciding whether to buy or rent, not in mortgage paydown questions.

[arthurb999]

This topic is situational... for some it's the right move for others it is not.

[swanson719]

The mortgage paydown does become a factor if and when you have the mobile life-style of moving frequently, every couple years or so. In that case, depending on market values, if you consistently pay money down on your mortgage, you're going to see a return on that when you re-sell the house in that you won't be losing money. If you roll closing costs into the price of the loan, you just financed an extra $2,500 over 30 years. Stupid, but most people do. So, paying down more, and then re-selling it in a few years, and having more cash in hand would be a better idea than investing money, then continually buying and re-selling properties every few years as people move and having to finance in high markets and sell in low, which is why we see so many short sales right now. If those people hadn't invested in Roth's and 401K's, they could have paid down their house, and not had the huge ding on their credit.

[jIM_Ohio]

At the moment to us it's a loss because it came out of my husbands paycheck and went into the 401K.

using this logic, any money I do not spend is a loss.

[jIM_Ohio]

Well it depends on what you consider financial security.

Gains in the market are subject to siginificant risk. That's why you'd expect a higher return.

The return on paying your mortgage is fixed, and thus risk free. So it is potentially lower.

In some states, your home is hard, if not impossible to take from you in bankruptcy. In others, it's like any other asset.

If you are the type that is fixated on the worst case scenario, then having a paid off home and low monthly expenses can give you alot of peace of mind. Also, you need to save less for retirement if you are the stay-at-home type.

If you're investment accumen is low, or you are a nervous investor, then you are probably looking at the returns on CD's or Treasuries and thinking paying off the house is a MUCH higher return.

So nothing is a "no-brainer". You have to balance risk with any coarse of action.

Paying off mortgage is NOT risk free. Nothing is risk free.

Your first statement is correct (higher risk in market should generate higher return than the fixed rate return of paying down mortgage).

Risks with paying down mortgage:
1) liquidity- you cannot get access to your money easily or quickly if you invest it (pay down) the mortgage.
2) tax- you have a risk your taxes paid will increase if you use the mortgage as a tax deduction (I write off 25% of my income on my mortgage alone and 43% of my overall income in part because I have a large mortgage).
3) inflation- the money used to pay down the mortgage will lose value to inflation. The inflation risk is not as high as a savings account, but it is not zero either.

[jIM_Ohio]

The rate that the house appreciates in value has NO BEARING mathematically on whether you should pay off your mortgage. Your house is going to be worth the same amount whether you have a mortgage or not. The question is whether the extra money you pay down on your mortgage will have a better return elsewhere. That has to do only a few things: mortgage interest rate, investment return, tax increases from investing and loss of deductions from less mortgage interest. Investment return is the big question mark and incorporates risk tolerance and timeline among many other things.

The rate of house appreciation should be a factor in deciding whether to buy or rent, not in mortgage paydown questions.

what s/he said

[jIM_Ohio]

The mortgage paydown does become a factor if and when you have the mobile life-style of moving frequently, every couple years or so. In that case, depending on market values, if you consistently pay money down on your mortgage, you're going to see a return on that when you re-sell the house in that you won't be losing money. If you roll closing costs into the price of the loan, you just financed an extra $2,500 over 30 years. Stupid, but most people do. So, paying down more, and then re-selling it in a few years, and having more cash in hand would be a better idea than investing money, then continually buying and re-selling properties every few years as people move and having to finance in high markets and sell in low, which is why we see so many short sales right now. If those people hadn't invested in Roth's and 401K's, they could have paid down their house, and not had the huge ding on their credit.

I would argue people are short selling not because they move often, but because they bought more than they could afford, or did not have a sound financial plan.

Suggesting to pay down mortgage instead of any 401k investment is fools logic, IMO. A person needs to do BOTH, not one or the other.

[EEinNJ]

"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."

We have $100K and were planning on refinancing to bring down our principal blance, therefore our payment. Should we do what you did instead?

If you already have a competitive interest rate, and you don't want to change the time remaining on the loan, I would say yes. Recasting the loan cost me $250, and took 4-6 weeks. The trick is to find the right person at the loan servicer/bank that handles it. Re-financing can cost several thousand, income & credit verification, an appraisal, etc.