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Because the term is 30 years and if you don't pay off the mortgage early you are invested for 30 years.
Comparisons are better when fewest variables get changed. I normalized the two by investing the mortgage payment over 8 years which actually greatly improves the appearance of the payoff scenario. That is the better way to compare the two options but let us do it your way, it won't matter one bit.
22 years you would save 37k paying the mortgage off early
22 years at $200 a month @ 8% is 143k
6% 109k
4% 84k
So even if returns completely suck, it is still better to invest over pay off. The two are not even close. Which is why it is really humorous but scary how many people think the opposite.
The majority of the interest savings occur in the early years not the later years while the biggest equity gains are in the later years not the early years. Run the comparison paying down principal for 10 years and investing in equities the remaining 20 years.
I'm a little confused on how home appreciation would influence the decision. Whether a home has debt or not will not influence if they have home appreciation or not. It's a wash either way, right? I know what my neighbor's home is, but I have no idea how much they owe the bank.
As for home losses, positive equity will absolutely not save a lender from a forced sale. If money is owed, secured by a property, and not being paid to terms, the lender will eventually move to foreclose upon the property. Once title is obtained and restitution rights have passed, the holder of title (lender) will move to evict the (now) illegal tenants. The property will then be sold and any proceeds remaining after the leverage and legal costs are returned to the former owner....but there's no obligation for the bank to be nice about it. The bank will charge the property with any/all attorney and collection fees, and will then likely sell it at auction, bidding the price up to the point where they collect all and then not caring from there.
The home appreciation was a mistake on my part.
One should avoid foreclosure and a forced sale at all costs. Better to conduct a quick sale on the market. Your net gain/loss will be your sale price + equity - mortgage balance. Any additional principal paid will impact the net, either reducing the loss or increasing the gain.
The majority of the interest savings occur in the early years not the later years while the biggest equity gains are in the later years not the early years. Run the comparison paying down principal for 10 years and investing in equities the remaining 20 years.
This is the last one. If you understand the math you will know that it doesn't matter how fast you pay it off.
There is always the opportunity cost of the money you are NOT INVESTING. Since this money is earning a higher rate than you are paying on the loan, you are almost always better off not paying off the loan all things equal.
Lets do your example.
200k, 3.5% loan at 30 years is 898 payment
200k 3.5% loan at 10 years is 1977 payment
Let's compare how we turn out. Market returns 8% a year. Difference in payment is $1079 per month.
Scenario 1, I keep the mortgage and invest the extra payment:
1079 @ 8% for 30 years = 1.6m
Scenario 2, I pay down the mortgage and invest after i pay off the house in 10 years:
$1977 @ 8% for 20 years = 1.16m
If you want to move the goal post yet again do your own math.
The majority of the interest savings occur in the early years not the later years while the biggest equity gains are in the later years not the early years. Run the comparison paying down principal for 10 years and investing in equities the remaining 20 years.
huh ???? you have to be kidding with that statement
this is false when it comes to markets .
markets are time frame sensitive . the 17 years from 1987 to 2003 as an example if you were starting out when i did saw almost a 14% cagr average . the years from 2000 to 2017 saw 5.37%
however every rolling 30 year period ends up within 2% of each other . sometimes the biggest gains are early on and sometimes they are later . this is why you need to give equities as much time as you can .
when it comes to the mortgage you pay on the balance -period . when you owe more money you pay the same interest rate as when you owe less money . only the amount changes because the balance changes .
if the biggest market gains come in the later years for you instead of the earlier years , then you would want to maximize what you invest in the early years at lower prices as well as getting in as much as you can so the better years down the road have what to compound on .
in any case your theory is all wet ...... nonsense !!!!!!
Last edited by mathjak107; 12-10-2018 at 02:46 AM..
Depends on:
1) How old you are and how far away from retirement.
-if after 40, Id pay off my mortgage for peace of mind.
-after I pay it off, Id find a business to start thats my passion or
buy govt treasuries or safer stocks.
2) If you’re younger
Id save my money until NASDAQ drops a bit more, then buy.
as i try to stress all the time , be careful with the peace of mind and feeling good stuff .
good financial sense and "feeling good" tend not to go hand in hand . feeling good can produce lower results which may or may not eventually be a factor .
you can't make up for time spent accumulating more assets for compounding to work on when you are younger . you either need more saved for markets to compound on if the best years are later . or you need more saved to make up for crappy years later when your fuel tanks are getting fuller . either way the longer the time frame you channel more in to investing the better the outcome will likely be .
over funding one part at the expense of another is not good financial sense . the only friend you have in investing is TIME . don't waste it!
Last edited by mathjak107; 12-10-2018 at 03:47 AM..
Please tell us how buying a new car on credit is a good investment.
Can you tell us what you did with the cash? Invest it in the market? Rentals?
Well, it wasn't a good investment... It just wasn't as bad as if I had paid cash for it.
The money that I didn't spend that day on the car has found itself into a mix of a higher 401k contribution (though that has been a admittedly flat investment this particular year), buying my own company stock (which has done exceptionally well), and a modestly higher balance in my savings account which now pays over 2%.
"What do you think is the annualized return of the S&P 500 (including dividends) over the past 20 years? 8% 10%? 15%? Try 4.5%. Really. Here’s the chart."
as i try to stress all the time , be careful with the peace of mind and feeling good stuff .
good financial sense and "feeling good" tend not to go hand in hand . feeling good can produce lower results which may or may not eventually be a factor .
you can't make up for time spent accumulating more assets for compounding to work on when you are younger . you either need more saved for markets to compound on if the best years are later . or you need more saved to make up for crappy years later when your fuel tanks are getting fuller . either way the longer the time frame you channel more in to investing the better the outcome will likely be .
over funding one part at the expense of another is not good financial sense . the only friend you have in investing is TIME . don't waste it!
I like to think of it in terms of my favorite football sports team. We have a great defense. So our coaches philosophy on offense is to take very little risk, grind the clock and play a ball control game. They don’t want turnovers to give the other team points because they know the defense won’t give up many points on its own.
But...I always think that we should do the opposite. Be aggressive on offense because the defense can bail out the offenses turnovers. We should be MORE aggressive on offense because that just makes it that much harder for the other team to score enough points to keep up. Playing it safe on offense keeps us one bad play by the defense of losing the lead.
Instead...we play it conservative...the game stays close...and one mistake blows up in our face and ends the seasons goals.
Yeah. I’m bitter.
I nearly always disagree with the low risk approach in investing. The low risk “play” locks in a bad outcome and leaves less margin for error.
"What do you think is the annualized return of the S&P 500 (including dividends) over the past 20 years? 8% 10%? 15%? Try 4.5%. Really. Here’s the chart."
ha ha ha , you better find a correct source if you are going to try to discredit investing in equities. . shame on forbes for not proofing this as the chart is wrong. . it either failed to include dividends or the author screwed up and used inflation adjusted returns not cagr or nominal returns and failed to state it , both come out to about the 4.96% as shown .
in either case the chart is wrong ..RETURNS WERE ACTUALLY 7.23% for that period. so yeah your example which is one of the worst on record was 7.23% . that is pretty damn close to 8% ..
this article appeared in forums all over the place when it came out . the data is wrong .
the author is only correct if he is talking inflation adjusted returns and not nominal OR if he is looking at the raw s&p data which does not include dividends . dividends accounted for 1/3 the gains .
including dividends from oct 1998 to oct 2018 real returns are 4.96% not nominal or cagr returns which is what the article eluded these returns were by not stating other wise.. .
don't forget it took 13 years from 2000 to 2013 to recover once inflation adjusted so those numbers are subdued more than typical which is around 9% nominal .
Last edited by mathjak107; 12-10-2018 at 09:00 AM..
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