How much is your mortgage payment (principal and interest only)?

[dawnwes]

Oh, boy! And he probably advises people to do the same.

Thankfully he doesn't do much advising, it is strictly on the tax end.

[Jluke]

Having no mortgage isn't all that great if you are diverting money from elsewhere that can make better return than your mortgage. Having a mortgage also allows you to refi and tap into your house value at lowest rates.

It's a decision for the owner, and not black and white.

Plus tax deduction is a bonus.

Some mortgage loans start where the person is paying $900/month in interest alone.

What investment makes $900/month?

Not picking on you; I've seen this comment many times. "I have a 4% mortgage, but my investments earn 10%, so I'm winning".

[Nutria]

Some mortgage loans start where the person is paying $900/month in interest alone.

What investment makes $900/month?

Not picking on you; I've seen this comment many times. "I have a 4% mortgage, but my investments earn 10%, so I'm winning".

Exactly. You'd need investments the same size as your mortgage to make that 10% a net 6% gain.

[phantom]

Some mortgage loans start where the person is paying $900/month in interest alone.

What investment makes $900/month?

Not picking on you; I've seen this comment many times. "I have a 4% mortgage, but my investments earn 10%, so I'm winning".

For this to be a fair comparison, you've got to look at the entire life of the mortgage verses the entire life of the investment. Let's say you have a $275,000 mortgage at 4%. Your monthly payment is $1312.89, and $916.67 of that is interest at the start. Over the life of the loan you'll pay $197,640.40 interest.

If you have a large windfall of $275,000 that could totally pay off your mortgage, the comparison is pretty easy. Assuming you really have an investment option that will earn 10%, that's $27,500/year and nearly $2300/month. You'll easily be out earning your $900 in mortgage interest and clearly come out ahead.

The comparison becomes tricker if you're talking about an extra $400/month rather than a windfall. Consider throwing that money on the mortgage. You would pay off the mortgage 10 years and 9 months sooner. Once the mortgage is paid off you have $1712.89/month to invest. After 10 years 9 months, at the end of the original 30 year term, you'll have $397,310.70 in your investments.

Consider throwing the $400/month into investments. That first month, making 10% on your investment, you'll only earn $3.33, nowhere near that $900 in interest on your mortgage. But, after 30 years, you'll have $911,730.13, and you'll be earning a lot more than $900/month.

My point is, you don't need to be out earning your interest at one particular moment in time, for investing to be a better option than paying down debt. Overall, if the interest on the investment is higher than the interest on the debt, investing wins every time.

Of course, the tricky question is whether or not your investments really will out earn the interest on your debt. Over a 30 year time period, I don't think it's unreasonable to assume you can out-earn 4%. If we're talking about what to do when there are less than 10 years left on a mortgage or when the mortgage interest is higher, it becomes a lot more of a gamble.

There's also the question of behavior, saying you'll invest $400 rather than put it on your mortgage is different than actually doing it. If you don't actually invest the amount you're not putting on the mortgage, the calculation falls apart.

[Jluke]

My point is, you don't need to be out earning your interest at one particular moment in time, for investing to be a better option than paying down debt. Overall, if the interest on the investment is higher than the interest on the debt, investing wins every time.

great post, key is the consistent investing alongside the mortgage payment AND a positive return on the investments.

[Fishindude77]

Here we go again with the old pay off the mortgage -vs- keep it and use excess funds to invest debate.

Here is my strongest case for paying it off.
We all need a place to live and most of us have chosen to buy a house to live in. Forget all of the upkeep, insurance expenses, taxes and all of that BS, you will have those with or without a mortgage.
The sooner you have a place paid for, the sooner you are done with that monthly financial drain. It's like FREE -vs- NOT FREE. Now you have a bunch of extra money to invest or do whatever you choose.

[parafly]

Here we go again with the old pay off the mortgage -vs- keep it and use excess funds to invest debate.

Here is my strongest case for paying it off.
We all need a place to live and most of us have chosen to buy a house to live in. Forget all of the upkeep, insurance expenses, taxes and all of that BS, you will have those with or without a mortgage.
The sooner you have a place paid for, the sooner you are done with that monthly financial drain. It's like FREE -vs- NOT FREE. Now you have a bunch of extra money to invest or do whatever you choose.

This strategy is fine and what I would recommend to most people.

However, from a PURELY MATHEMATICAL standpoint, you are better off investing the money if the returns are higher than the interest on the mortgage. The key is to be a disciplined investor and follow through on the plan.

As with most financial topics, a best of both worlds approach works very well. Pay a little extra on the mortgage and put a little extra toward investments. This helps you hedge your bets and spread your risk.

[Nutria]

However, from a PURELY MATHEMATICAL standpoint, you are better off investing the money if the returns are higher than the interest on the mortgage.

The problem with pure mathematics is that it simplifies and glosses over hard realities like actually finding investments that consistently return 10% per annum.

[sv2007]

HELOCs let you borrow only what you need when you need it.



Assumes that the mortgage interest deduction will bump you over the Standard Deduction (which for Married Filing Jointly is $12,600). Even if it is, it's a deduction, not a credit.

For most people, nothing beats mortgage. HELOC is not going to be 30-yr fixed at 3%, usually tied to prime rate that changes and more expensive than mortgage.

True, taking more money out during retirement means paying more taxes whether it's for mortgage or what nots.

By not paying off that mortgage, you can net (right now) 4% higher return. You can always pay mortgage off before retirement AND keep 4% of the return, for a $100k mortgage, that's $4k per year, so if I don't pay it off for 10 years (before drawing from retirement accounts), I'd get >$40k (compounding) MORE MONEY (and still have the the mortgage paid off).

I don't like using specific forward numbers, the 4% is just something for me to illustrate what may possibly happen. Should we suffer a deflation, one can always dump that money into mortgage.

[sv2007]

Some mortgage loans start where the person is paying $900/month in interest alone.

What investment makes $900/month?

Not picking on you; I've seen this comment many times. "I have a 4% mortgage, but my investments earn 10%, so I'm winning".

NP, Jluke, I'm really here to help.

If you can borrow money at 4% to make 10%, all other things begin equal, why wouldn't that be a good thing (i.e. making you more money) ?

[Nutria]

I don't like using specific forward numbers, the 4% is just something for me to illustrate what may possibly happen.

But that's the problem with hypothetical scenarios: we don't live there. In actuality, where we do live, investments go up and down and up and down on their own schedule, not on ours.

[Nutria]

If you can borrow money at 4% to make 10%, all other things begin equal, why wouldn't that be a good thing (i.e. making you more money) ?

Point me to an actual investment that is guaranteed to earn 10% over 30 years, and sooner or later we'll discover that it was a Ponzi scheme.

[sv2007]

The problem with pure mathematics is that it simplifies and glosses over hard realities like actually finding investments that consistently return 10% per annum.

Over the years, I've learned that there is really no such investments (you can substitute the 10% with 16% for the 1980's heydays, or 50% for the 1990's tech boom). Proper investing takes time and persistence; exactly like regular 401k salary deductions to achieve an averaging effect.

For example, take the stock market. If you've got less than 10 years, I wouldn't be looking at the stock market, way too risky. But, if investment is looked at over the long term 20-30 yaers with consistent contributions, then historical market data seems to be a good estimate. And I think here is where many people dig up 10%. (Although based on what I've been reading it is more like 8% on the large caps)

[sv2007]

Point me to an actual investment that is guaranteed to earn 10% over 30 years, and sooner or later we'll discover that it was a Ponzi scheme.

First, the 10% comes from the poster herself, not me.
So you probably should ask her to explain it.

Try this to give you exact returns on the S&P500:
play.google.com/store/apps/details?id=com.adamtai.android.whatif

I wrote it for some other discussion, but it seems appropriate.

[Nutria]

Over the years, I've learned that there is really no such investments ... And I think here is where many people dig up 10%. (Although based on what I've been reading it is more like 8% on the large caps)

Which is why simplistic "pure math" is a poor guide for determining whether or not to pay off a mortgage at the specified contract rate or at an accelerated rate. That's because it doesn't account for the reasonableness of the numbers that you stick in.

The bottom line is that you recommend long-term leveraged investments based on unrealistic ROIs. That, IMNSHO, is very unwise.