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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%.
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.
I picked 1953 because it was part of a convenient statistic I found online. (I didn't do the calculations.) Now, had I used 1912 or 1974, I am reasonably sure that my point would still be valid, perhaps not 9.45% but certainly above any mortgage rate in a 30 period.
The bottom line is, 1) Mortgage rates are at their historic lows and 2) the US stock market has been essentially flat for 10 years. What is the probability that the market will not annually gain at least what people are now paying in mortgage interest (around 4% though I just took out a 15 year at 3.675%)? By not paying down my mortgage and instead investing it, I would have to experience (something like - it's more complicated than that due to taxes and other things, but for simplicity...) less than 3.675% annual returns in the market for the next 15 years. I'll take those odds.
the key word was conservative return ,and equities dont ft that bill if you want something thats close to a lock to match the lock on the return of paying off your mortgage...
while i believe 15 years is probley enough time to almost guarantee a profit in equities its still chancey and going forward i believe returns on equities will average alot lower then they did historically,
back in the 70's market action was very different as the masses werent in it, their were no 401k plans and little ira investing. the markets were the play ground of just the gamblers and the wealthy back then.
today market action is intense and fast and the worlds sentiment is reflected in seconds. i would be very surprised to see a 15 year period that wasnt up nicely in more modern times .
but who knows,we used to think 10 years was enough time to guarantee good results..
time will tell but i would never take the money i had for my home and bet the ranch on things.
Ithe US stock market has been essentially flat for 10 years.
So what you are saying is you believe the masters of the universe when they say "invest long term, no wait....really long term."
Truth be told, Charles, I agree with your logic, perspective and math, but from a behavioral perspective, I am still going to try my best to fund retirement and get out from underneath a mortgage as quickly as possible.
I picked 1953 because it was part of a convenient statistic I found online. (I didn't do the calculations.) Now, had I used 1912 or 1974, I am reasonably sure that my point would still be valid, perhaps not 9.45% but certainly above any mortgage rate in a 30 period.
The bottom line is, 1) Mortgage rates are at their historic lows and 2) the US stock market has been essentially flat for 10 years. What is the probability that the market will not annually gain at least what people are now paying in mortgage interest (around 4% though I just took out a 15 year at 3.675%)? By not paying down my mortgage and instead investing it, I would have to experience (something like - it's more complicated than that due to taxes and other things, but for simplicity...) less than 3.675% annual returns in the market for the next 15 years. I'll take those odds.
Paying down the interest rate is risk free, of course it offers a lower rate of return.
Feel free to sink every cent you own in the stock market but its risky portfolio management.
I've touched on the 3 pertinent factors in my earlier post.
In our case, yes, it pays for us to pay it off early but we are not doing that just yet since I decided to stay home and take care of our daughter. I am on leave. As some have said, the money would have otherwise gone somewhere else that would be least productive to us.
Why? Right now we accept our limited (truly close to nothing) knowledge of the investing world. We understand the basics of investing. But we rely too much on emotion, i.e. fear, that an investor is out to steal our money. One reason for this is ignorance on our part and the other is because of media reports of people losing lots of money to investors like Madoff.
Obviously, this prudence will not make us rich but it does not make us stupid for the reason I stated above. That is, we are using our money for more productive ways, even if our choices are limited to our intelligence. It is still better than being spendthrifts or handing our money over to the stock market just because everybody else is doing it. Getting rich is for somebody else at this moment but then I am pretty well off when compared to most in my hometown.
I'll throw in my $.02 as somebody who's paid off a house...
I don't wake in the middle of the night with regrets, thinking "if only I had put that money in the market." Sure, I could have invested the money, but I don't miss what I never had, and investing is never risk-free. If you want the security of owning your house outright, then I think you should do it.
In our case, yes, it pays for us to pay it off early but we are not doing that just yet since I decided to stay home and take care of our daughter. I am on leave. As some have said, the money would have otherwise gone somewhere else that would be least productive to us.
Why? Right now we accept our limited (truly close to nothing) knowledge of the investing world. We understand the basics of investing. But we rely too much on emotion, i.e. fear, that an investor is out to steal our money. One reason for this is ignorance on our part and the other is because of media reports of people losing lots of money to investors like Madoff.
Obviously, this prudence will not make us rich but it does not make us stupid for the reason I stated above. That is, we are using our money for more productive ways, even if our choices are limited to our intelligence. It is still better than being spendthrifts or handing our money over to the stock market just because everybody else is doing it. Getting rich is for somebody else at this moment but then I am pretty well off when compared to most in my hometown.
i think this is sensible. but, most people have a lack of knowledge over investing, that's why there are people who manage money for us. it's difficult to take that step though, because you have to be comfortable with the person, kinda like picking out a doctor.
i'm fortunate in that my bro-in-law does it for a living, and i'm reasonably knowledgeable about it myself. but at the most basic level, you can always do US Treasuries and Muni Bonds. they make us think it's very difficult to invest so we have to pay people to manage our money. it's difficult to invest with riskier portfolios, but basic investing is easy.
either way, everyone's situation is different. good discussion!
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