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Here's a pretty good, simple article in yesterday's LA Times. Looks like all you'd have to earn in the market is 4.5% interest in the market (or any other investment) for not paying off a mortgage to be a better idea:
It seems from reading the posts in this thread that this is the feeling of a lot of the posters: "Investors have a tendency to believe that whatever happened most recently is most likely to happen in the future"
The article has a lot of if's and assumptions. Remember that when you finished paying your mortgage after 15 years, You have the FULL mortgage payment to invest for the next 15 years. No matter what the markets does in that 15 years, you will still have your home.
Why does everyone on this board want to pay off their mortgage to feel good? It's driving me batty!! Anyway here is my 2 cents:
Current mortgage rate on a 30 year fixed is roughly 5%. With a mortgage deduction your rate is more like 3.5% depending on your tax bracket. Where in the world can you find a loan that cheap?.....answer is you can't, so please keep that loan!
Debt is not bad!!!!!!!! Debt gives you leverage. Instead of trying to pay off that mortgage early, take that extra money in your pocket and invest it! You can beat a 3.5% rate of return in a business, in the stock market (long term), and in real estate.
Perhaps you need the extra money to save for a down payment, help a friend, buy life insurance, save for that vacation, etc.
The only way it makes sense to pay down a mortgage is if you are in the latter years of the mortgage and the deduction is not as significant or you are upside down on a property that you want to make whole when you sell it so you don't have to bring money to the table.
Depends on where you would invest this money. The house payment is a guaranteed tax-free return, and it sure seems like there aren't too many places to do that right now.
Here's a pretty good, simple article in yesterday's LA Times. Looks like all you'd have to earn in the market is 4.5% interest in the market (or any other investment) for not paying off a mortgage to be a better idea:
It seems from reading the posts in this thread that this is the feeling of a lot of the posters: "Investors have a tendency to believe that whatever happened most recently is most likely to happen in the future"
I have worked it out with a mortgage calculator. If you have a 30 year loan of $100000 at a rate of 4.5%. You have extra $6000 and want to invest it. Now if you invest it for a period of 5 years by paying it in the first month after the mortgage started. After 5 years you would have saved $1498.41 of interest and you would have paid $7598.69 more off the mortgage. This ads up to $9097.10 that you have more after 5 years.
If you invest the same $6000 for 5 years with compound interest, you would need a growth rate of more than 8.5% after taxes to do better than paying off your mortgage, because that is the actual growth of that $6000. So thinking you are loosing at 4.5% on your mortgage is a mistake, especially in the beginning of the mortgage. Mortgages is a bit more complex than most people think.
for what it's worth on the investment strategy angle....
YTD returns for my father's 401k, which is fairly conservative, is 4%. YTD returns for mine, which is moderately aggressive, is 7.9%.
jan - i'd have to look at your numbers, but if your rate on the mortgage is 4.5% (pre tax cost of course) i'm not sure how you come up with 8.5% as the rate needed for investment growth to beat 4.5%. you're adding an additional number in there somewhere that is not a fair comparison i think, unless i'm missing something.
...Now if you invest it for a period of 5 years...you would need a growth rate of more than 8.5% after taxes to do better than paying off your mortgage
Your calculations are only considering the first five years. What growth rate would be required over 30 years to do better than paying off your mortgage?
Quote:
Originally Posted by Jan Olivier
Mortgages is a bit more complex than most people think.
Which is why I think a lot of people are jumping to conclusions and assuming paying off your (4.5%) loan quickly is a good idea. There are hardly any scenarios which would support (other than "feeling good") paying off a low interest mortgage loan like that early.
Like was written above: "Investors have a tendency to believe that whatever happened most recently is most likely to happen in the future"
alot of america commits financial suicide because they have no set goals.. they let their lives and finances just keep drifting to wherever they end up.
it all goes back to what i keep saying. success in life is about about meeting goals.
you wouldnt bet your food money in vegas, you wouldnt throw your kids college money at risk after you saved it. if you met the goal of having the money to pay off your house the smart thing to do is pay off the house and not put that money at risk again..
investing is for meeting goals...its for accumulating money that you dont yet have to meet those goals ... the prudent person meets those goals, uses the money for that goal and goes on to meet their other goals. when those are met the money should not be put at risk.. its just not a smart thing to do and that kind of greediness to squeeze every last nickel usually ends up failing to meet alot of goals as eventually things move against you.
when it comes to investing and accumulating money the smart thing to do is dont keep playing when you already won the game...
hit the goal, that share of the money is taken out of play...
but human nature being what it is we all want to squeeze out every cent thinking we are being smart and beating the system. but most times the system is smarter then you and markets irrational behavior can last a lot alonger then you can remain solvent.
alot of america commits financial suicide because they have no set goals.. they let their lives and finances just keep drifting to wherever they end up.
it all goes back to what i keep saying. success in life is about about meeting goals.
you wouldnt bet your food money in vegas, you wouldnt throw your kids college money at risk after you saved it. if you met the goal of having the money to pay off your house the smart thing to do is pay off the house and not put that money at risk again..
investing is for meeting goals...its for accumulating money that you dont yet have to meet those goals ... the prudent person meets those goals, uses the money for that goal and goes on to meet their other goals. when those are met the money should not be put at risk.. its just not a smart thing to do and that kind of greediness to squeeze every last nickel usually ends up failing to meet alot of goals as eventually things move against you.
when it comes to investing and accumulating money the smart thing to do is dont keep playing when you already won the game...
hit the goal, that share of the money is taken out of play...
but human nature being what it is we all want to squeeze out every cent thinking we are being smart and beating the system. but most times the system is smarter then you and markets irrational behavior can last a lot alonger then you can remain solvent.
We who choose not to pay off our house early have goals too. The situation isn't all (pay it off, minimize risk) or nothing (blow your money, HELOC yourself to the poorhouse). We understand risk, rewards, probabilities, history, financial culture, economics, and personal finance. If you plotted (hypothetically) reward vs. risk, you'd find a d(reward)/d(risk) = 0 at some point and that's where we usually drive our portfolios to. We are objective and not emotional (paying house off early just so we can "sleep at night"). We look at the numbers and make decisions. We accept worst case as a possibility too.
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Don't pay off your mortgage!!!!!!
