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There is NO logic here. Either way the OP might be getting a new mortgage. If he invests and makes more money then he might decide to take a smaller mortgage. The question is which will leave him with more money, paying more to the mortgage or investing.
Long term investing will return more. Short term who knows? Personally even for the short term of 4 years, I would put the money into investments. First, the odds of coming out ahead a better. Second, it is better to have ready access to your money instead of having it tied up in a house. Third, wise money management means investing. Now is better than later. We always want to aim for returns due to the power of compounding. Finally, there are indeed some psychological considerations. Many people just seem to "feel" good when they pay off low cost loans. Instead they would have come out way ahead by investing that money. Next, when the OP does sell they will receive a chunk of equity in the current house. It is tempting to roll that over into an even more expensive house. People do this frequently and end up paying for more house than they should. Houses are typically poor investments.
We're not Vulcans!
A lot of things people do defy logic or conventional wisdom. My point is if you have a plan for your investment side, why not pay down debt. It's a decent return on your safe money and psychologically awesome to watch your debt fall as much as your investments grow. Sure, over time you'll probably make way more by investing. My goal was to hi an investment side number and use the rest to do other things. We have very little debt and by following my plan, a well funded investment side. I love not having payments and because of that, my financial planning is way easier, and I sleep extremely well at night.
The other part of little debt is the market could drop like a rock and it doesn't bother me. I have plenty in safe stuff to weather the storm. YMMV but not everything is about that one number.
My own view is I feel the standard amortization schedule for paying off a mortgage is about as much money as I want to lock up in something that is what it is and can’t change no matter what inflation or markets do .
For every year you delay investing more in other assets you put greater and greater pressure on your shorter time frame being a good one . There is no pressure on rates changing for the worse delaying to pay off the mortgage..
The more time you give the money the less pressure on a shorter time frame.
People make this mistake many times by channeling extra money in to the mortgage and delaying getting more in to other investments until the mortgage is paid .... that put a lot of pressure on the shorter time frame to perform ...time is your greatest friend in investing since unlike the mortgage that does change
Last edited by mathjak107; 07-31-2019 at 09:55 AM..
We're not Vulcans!
A lot of things people do defy logic or conventional wisdom.
psychologically awesome
I love ......
People do all sorts of stupid things based on feelings, emotion coupled with ignorance.
There are no guarantied returns with investing, but it certainly helps to know the facts and do some analysis. If you want to invest or live any part of your life based on feelings that is certainly your choice but don't complain if the results are not what you hoped.
I can only assume the OP is asking for some facts and analysis not just a collection of opinions from those with no knowledge.
Lol. If I wanted real advice, I’d pay for it. What you get here is ideas that you can research yourself. To give anyone solid advice here would require a full financial disclosure and hours of meetings to define the goals and how to get there.
Knowledge? Lol. I did extremely well for being stupid.
I would hope you can do better than 4.14%, + your actual Cost of funds is less than 4.14%, and you have TIME on you side. (paying back with deflated currency)...
Not everyone does. Do even "most people" achieve this? How many plain-Jane Americans just "invest" in CDs or whatnot, earning 1%/year or less?
Quote:
Originally Posted by StealthRabbit
As long as my RE $ are spinning off a 10 - 12% cap rate, I am fine with a personal mortgage or even renting the rest of my life.
If I could consistently find properties with a 10%-12% cap rate, not only would I jump on such opportunities, but I'd liquidate a considerable portion of stocks, take out mortgages, and go heavily into real estate... with leverage. But by similar reasoning, if I could consistently find stocks that returned say 15%, I'd be buying them on margin. Both scenarios are flagrantly unrealistic - at least for me. Assuming that the OP is even more conservative, and even less adept at finding screaming-deals, the rationale for pre-paying the mortgage looks compelling.
Let's consider another scenario. You buy a commercial building for $1M, in cash. Your annual property tax is $30K. Maintenance is another $30K. But you're only able to find tenants who, in aggregate, are paying you $60K/year in rent. Your cap-rate is 0%. Oh BTW, it's in a declining, economically-depressed area. Every year, the building is worth 1% or 2% less than the prior year. 40 years later, upon your death, your heirs sell the building as-is for $300K.... after 40 years of 0% annual returns.
If THAT is how one "invests", then it would be better to put one's money into a certificate of deposit at the local bank, to prepay one's mortgage, and maybe even to buy an annuity. A low-return investment is superior to a disinvestment.
Remember, we are moving out of state and selling the home in four years so getting a new mortgage to save 1% would not make it mathematically.
Basically, the question is: Would you take 4.14% annual GUARANTEED in a 4 year fixed period or would you gamble with the balanced mutual fund and hope you do better in the next four years?
Op: if you had a crystal ball that could tell you in advance what the next 4 years brings, then you would know exactly what to do. Your thinking isn't wrong, it just doesn't meet the CD test for political correctness.. Finance is somewhat like blackjack. There's a strict way to play based on history and the odds, but sometimes you have to do what feels right to you. In the end, it's all really a gamble anyway.
Remember, we are moving out of state and selling the home in four years so getting a new mortgage to save 1% would not make it mathematically.
Basically, the question is: Would you take 4.14% annual GUARANTEED in a 4 year fixed period or would you gamble with the balanced mutual fund and hope you do better in the next four years?
To me, it depends on your age. Are you retiring or in it for the long haul?
I'd not compare the mortgage to a balanced fund. I'd instead compare it to a low-volatility bond-fund, which basically means short-term bonds. Interest on such bonds is far, far less than 4%.
Consider the stock/bond allocation in your investment portfolio. Think of your mortgage as a bond that's invested against you. If you're overwhelmingly in stocks, and are comfortable with that allocation, then keep paying the mortgage at normal rate. But if the bond-portion of your portfolio is large, and for whatever reason you prefer it that way, then consider pre-paying the mortgage, instead of contributing more to the bond portion of your portfolio.
A more aggressive investor would invest in stocks and keep paying the mortgage, counting on higher rate of return from stocks. A less aggressive investor who is already skittish and relies overwhelmingly on bonds, would instead benefit from paying down the mortgage.
Beat me to it.
As Dave Ramsey often points out, so many people familiar with investment theory know how to make apples to apples comparisons with portfolios, and that you should compare your mutual funds to a reference index with similar risk characteristics. But when it comes to debt, all of a sudden it is like they throw all their knowledge out the window and are totally oblivious to the concept of risk as applied to debt.
The main caveat, of course, is that mortgage prepayment is very illiquid. This means you need to be sure you have enough liquid funds elsewhere for emergencies and for buying the next house (if you do that before selling the old one).
As Dave Ramsey often points out, so many people familiar with investment theory know how to make apples to apples comparisons with portfolios, and that you should compare your mutual funds to a reference index with similar risk characteristics. But when it comes to debt, all of a sudden it is like they throw all their knowledge out the window and are totally oblivious to the concept of risk as applied to debt.
The main caveat, of course, is that mortgage prepayment is very illiquid. This means you need to be sure you have enough liquid funds elsewhere for emergencies and for buying the next house (if you do that before selling the old one).
a total bond fund as an example would be a poor choice too since the op is talking only a four years time frame ... you need 6-8 years for an intermediate term bond fund to not lose money if rates rise. a short term bond fund would hardly be worth considering .
there is no comparison you can do that makes sense mathematically unless you WERE DOING SOMETHING BETTER WITH THE MONEY and that is always going to involve higher volatility and a longer time frame.
there would be no point in comparing unless that was the case
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