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I posted this question as well in the Investing forum before thinking that this forum could also be a good place to ask (I hope people don't mind the double post):
I know this has been "covered" in many sites forums and threads:
Paying of Mortgage vs investing.
Many sites note that mortgages interest rates are still very low.
And you can receive a higher rate of return by investing.
However, what is the ... border zone? (For lack of a better term.)
At what mortgage interest rate, given the return rate of the market for the past couple of years as a comparison, do you think it is it OK/better to pay off your mortgage earlier rather than investing?
(I assume for FHA loans, adding on PMI, technically increases the mortgage rate .5 - 1%)
In various online retirement account calculators, the estimated portfolio growth rate is 5-8% (8% is way too optimistic IMHO starting from this year). Average annual rates of return over the last couple of years have been higher than that, so I wouldn't pay off mortgages until your annual rates of return drop under your mortgage rates (perhaps 2015). Also, while you are slowly paying interest on mortgage, there is also the tax shield effect, which should be a factor in the payoff equation.
I have looked at this as well and my thoughts are it depends on several factors.
How much time do you have before you retire?
What is the interest rate for the mortgage?
What will you be investing in?
Here is what my wife and I have come up with.
We will not be retiring for at least 30 years and we have another 26 years to go on our mortgage. What we decided to do first was to maximize our retirement account. With our 403B we can put up to $18,000 I think, per year, in my and my wifes account. (The maximum changes I think each year, and I am only guessing it is up to $18,000 a year.) For us that would be $36,000 being placed into a retirement account. If things work out right that money will grow during the time frame that we have.
We are also making at least one payment a year toward the mortgage. I have heard that it can knock a few years off of the total. I don't have the data in front of me, but you can check it out for yourself.
Our goal is to pay off our home early. We want it paid off before our youngest kid is done with high school in just under 10 years. To do that I also have a side business that provides additional income. It is not where we want it to be just yet but it keeps the goal alive. I don't know if we will meet this goal or not. Then again I am OK with that. It is secondary to our goal of saving for the future. The house will eventually get paid off.
If you knew a vehicle can give you exactly 8% clean after all fees, vs a 4% home interest then I would just invest instead. Now if you are in a position where you can pay say a 200k home in less than 5 or 6 years then I would just pay the house.. To pay it that fast you need to pay extra 2500 a month to the mortgage. Now, you didn't give any specifics so I wouldn't know what we are talking about. I usually recommend to pay off the mortgage since is 100% sure of the interest you will save! while other investments you could lose all your money. Invest the money when you can afford to lose it or if you very young... You don't want to retire with a mortgage.
I am currently buying a second home, I was going to pay my first house that cost me 230k in about 4.5years. Since I am buying now a 400k house I will stop adding extra payments to the principal and instead of paying the 100k I have left I will just pay the new house specially because it will have a higher interest. I am also investing more money in other places. Why I am buying the second house? Because I know it will appreciate quickly if I decide to sell it. So, you can think of your house as an investment. The best way to create wealth even if you make about the average USA household around 50k a year you can pay a 120k house in less than 6 years, obviously it won't be easy since you must be a bit frugal. But after 6 years you can buy another house do the same thing but this time pay it faster than 6 years since you will have it rented and plus your money coming in. In 20 years you can have your retirement done, and forget about social security money. But in America people prefer to pay a 30k car in 5 years rather than a home in less than 7 or six, whatever you can accomplish it sooner than later.
Nobody but yourself can answer that. But I'll make it easy for you.
Making a principal payment is equivalent to investing in a non-breakable illiquid CD with the same interest rate (even after tax). The maturity is equal to how long you will hold the loan (it could differ from the time to maturity of the loan). You can prove this, if you are good with amortization, interest income tax, interest expense deduction.
Imagine such CD exists. If you are willing to invest $X on this CD, then make $X extra principal payments towards your loan. If you rather invest in the market, then don't.
It depends on a variety of factors. If you're young and have a low mortgage rate, you may likely find it beneficial to invest the money somewhere else.
In a good balanced equity portfolio, you can reasonably expect to get around an 8% return over the long run. If you're paying a 4% mortgage rate, then that's fairly easy math that you'll be coming out ahead by investing.
However if you're close to retirement, you should be moving away from equities and into more conservative things like bonds. The returns on these will be lower (but of course so will the risks), making it not as clear of a choice.
For a more clear-cut situation, I see people sometimes bragging about paying off their auto loan super early. But the problem is that they had a really low promotional 0.9% APR. It's practically free money; there's no reason to pay it off early. That's virtually a no brainer that you should be making the scheduled payments and investing your excess money.
I paid off an auto loan early, even tho I had .9% APR. The reason was simple. I wanted that money to invest instead of pay on a car loan.
You had basically free money. For every extra dollar you put towards your car loan you saved 1%, but at the expense of not being able to put that dollar in a long-ish term investment where you could have reasonably gotten 8%.
Do you realize you did the opposite of what you wanted?
No I didnt, I did exactly what I wanted. As long as I was paying a $300 car payment, that was $300 that I wasnt investing.
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