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American companies are in the business of making money. We as investors stand to benefit by investing with those companies. If we look at the past ten years (a small period in the overall scheme of things) we'll see a pretty flat performance. We need to look at a longer time line and the whole philosophy of why we invest. Our American financial system is based and geared on American business working with investors. Those businesses have a lot of PhDs and MBAs working to make money for your benefit.
If they are so smart, then why are they lending you money at 4% when they could be earning 8% on their money?
How much interest you aren't paying is irrelevant. In the end it is the overall difference in net future value that counts.
I just did do the math myself and it is better to not pay it off. My assumptions: 4% loan, 8% investment return in taxable accounts, $2000 mortgage payment, $1000 extra to either pay down (like in the quote above) or invest at 8%.
Where does anybody make an 8% return on their investment for any length of time? Stocks and mutual funds are not paying thet are they? CD's are paying 2%. Where does one go to get an 8% return safely?
If they are so smart, then why are they lending you money at 4% when they could be earning 8% on their money?
I don't know exactly. But I do know that the S&P 500 long term rate of return is at least 8% but mortgage rates and fixed investments are usually higher than they are now too.
There are very few (if any) scenarios in which over a 30 year period (and probably a 15 year period too), paying off a mortgage early will net a person a higher net worth than had they invested in stocks/mutual funds instead. Since 1953, the lowest rate of return on the S&P500 in any 30 period has been 9.45%.
about the closest thing i own to a 7-8% return is my un-traded reit which dosnt fluctuate in price daily and pays 7-1/4%. but but but, you dont know what the entire deal is until the properties are sold at the end of 7 years...
last two averaged over 17% a year when all was said and done. to early to tell how these will do so i wont call them conservative.
the one i own only buys extended stay motels and gets marriot or hilton to run them. so far the occupancies held up fairly well.
I don't know exactly. But I do know that the S&P 500 long term rate of return is at least 8% but mortgage rates and fixed investments are usually higher than they are now too.
There are very few (if any) scenarios in which over a 30 year period (and probably a 15 year period too), paying off a mortgage early will net a person a higher net worth than had they invested in stocks/mutual funds instead. Since 1953, the lowest rate of return on the S&P500 in any 30 period has been 9.45%.
Why not pick 1912 or 1974 etc. as starting points? Just saying that 1953 precedes one of the best economic stretches in the history of the USA.
They make money on mortgages with fees, so why not. Borrow from the Federal Reserve for almost free, lend to Fannie/Freddie, they are on the hook, or if not the US government, then private investors like Lehman. It's almost free money for them. If someone promised to give me a 4% return on investment, I'd be dumb not to take it.
Bunch of say 6% mortgages are pooled together. Bonds are sold on them, with the most senior notes yielding 4%, lowest notes 7% or something. No foreclosures, everyone gets their money. A few foreclosures, the senior note get the proceeds, lowest notes get nothing. A bunch of foreclosures, those AAA notes are worthless too...
His recent 15-year number was 11.10 percent a year.
11.35%: 1-year return 12.01%: 10-year return
When SP500 lost 37% in 2008, he lost 23%. Up 63% in 2009, compared to 26% with SP.
Yacktman is widely regarded as a conservative investor. Do your homework and be careful though, just because he's been hot for over 15 years doesn't he will be forever. If it looks like he's starting to lose his bearings, get out. If this seems to risky for you, just pay off your mortgage (but keep some cash).
Last edited by jhtrico1850; 09-14-2010 at 07:53 PM..
I don't know exactly. But I do know that the S&P 500 long term rate of return is at least 8% but mortgage rates and fixed investments are usually higher than they are now too.
There are very few (if any) scenarios in which over a 30 year period (and probably a 15 year period too), paying off a mortgage early will net a person a higher net worth than had they invested in stocks/mutual funds instead. Since 1953, the lowest rate of return on the S&P500 in any 30 period has been 9.45%.
the S&P "rate of return" is soley based on the assumption that a person dollar-cost-averages in and never reacts emotionally. it's not a fair rate of return. the real rate of return measures how real investors did over those same periods, and it's much lower.
that being said - paying off depends on each individuals situation. a few people hit the full point, many hit pieces of it.
my mortgage rate is 4.875% interest. i get a tax break on that, so it lowers my effective interest. no one should decide to not pay it off because of the tax break alone. that would be silly. but, the tax break does lower your effective rate, so use that in your comparison.
investments - there are plenty extremely low risk investments out there that can net a person 4-6% return. subtract capital gains, and you have your effective rate of return. it's very easy to see that, more often than not, you can make more in investments than you can by paying down your mortgage. but there are intangibles that people mentioned. if having debt bothers you, paying it down is a positive benefit for you. that makes the lost investment income less painful for that individual.
me, i'll never pay off something early if i can do better with that money elsewhere.
i have part of my student loans at 1.675%. i will never, ever, ever, make an extra payment on those. part at 3.5% - maybe i will, but not likely. car loan is 3.99%. closer to justified, but still no. mortgage at 4.875% (minus my tax relief), it's not likely i'll make extra payments on this. i pay weekly instead of monthly, so i reduce my interest expense nicely, but i have no incentive with my mortgage rate so low to seriously consider forgoing investment income.
houses are risk free? how do you figure? over long term, houses do appreciate at a modest amount (slightly higher than inflation) - but if you get caught in one of the not so normal time periods, your house can go down in value as well, easily losing out to inflation. not sure i see how a house is risk free?
You might look at doing a refi - your interest rate must be through the roof! I send in an extra $200 a month, and that will knock 8 years off our loan. An extra $1000 should do a lot more than 15 years.
How much interest you aren't paying is irrelevant. In the end it is the overall difference in net future value that counts.
I just did do the math myself and it is better to not pay it off. My assumptions: 4% loan, 8% investment return in taxable accounts, $2000 mortgage payment, $1000 extra to either pay down (like in the quote above) or invest at 8%.
That's why you diversify. You put x amount in the market, x amount in something guaranteed (conservative), x amount liquid, x amount extra mortgage payment...
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