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You have a house with a $100,000 mortgage on it. You make $45,000 a year, plus your friend is living in the house and paying you $600 a month in rent.
After expenses (including max 401k contrib), about $1200 a month is left over.
Would it be better to make extra payments on your house so you gain equity, and own it outright in about 8-10 years or invest elsewhere?
Assuming you have a low interest rate and an emergency fund, this a slam dunk. Invest. Roth IRA, then an index fund in a taxable account. Do not try to pay off a 3%, 4% or 5% mortgage.
Will you be able to get a return on your investments greater than the increase in equity in your home?
Odds are mixed -- if home prices are flat / fall and other investments grow then why pump money I to declining asset. If you are overweighed in real estate and have only limited kinds of savings / investments things are even worse.
Why not DO BOTH -- continue with SOME acceleration of mortgage pay down and SOME additional investments?
Diversifiaction is gnerally excellent strategy for the longer term...
Many will say invest it elsewhere, but i like paying the house off. Here's why: If you get into financial trouble you could lose the house and all the money you put into. Interest rates are low, so many will say put your extra money into the market because the returns will be so much better. And thats true, but that also assumes you dont lose the house later on.
Why not DO BOTH -- continue with SOME acceleration of mortgage pay down and SOME additional investments?
Diversification is generally excellent strategy for the longer term...
Wouldn't I be better off paying the minimum on the mortgage for tax deduction reasons unless I am planning on paying significantly more then the minimum payment every month?
Many will say invest it elsewhere, but i like paying the house off. Here's why: If you get into financial trouble you could lose the house and all the money you put into. Interest rates are low, so many will say put your extra money into the market because the returns will be so much better. And thats true, but that also assumes you dont lose the house later on.
I do want to get the house paid off, but just so that I have no mortgage payment each month and I am not locked in to any kind of long term debt.
If I had a place to live in that cost me nothing except utilities and property taxes, I would be much more free to make investments or open up a small business. Depending on my circumstances, I would love to buy a mixed use building in a city with a storefront, and a couple of apartments and try my luck.
Will you be able to get a return on your investments greater than the increase in equity in your home?
Odds are mixed -- if home prices are flat / fall and other investments grow then why pump money I to declining asset. If you are overweighed in real estate and have only limited kinds of savings / investments things are even worse.
Why not DO BOTH -- continue with SOME acceleration of mortgage pay down and SOME additional investments?
Diversifiaction is gnerally excellent strategy for the longer term...
How do you divide it up? Some arbitrary number like 50-50? There are hardly any scenarios (even if your long term ror is a measly 5 or 6%) which would provide a better nfv than 100% invest. a 25 year old should be aggressive as hell.
Wouldn't I be better off paying the minimum on the mortgage for tax deduction reasons unless I am planning on paying significantly more then the minimum payment every month?
Your tax deduction is on the interest paid. Because you are paying principal and interest, and not simple interest, with every payment your principal increases and your interest decreases. At some point (faster than people think) the tax deduction on your home isn't worth much. I mean it's a nice thing, but it's more like auntie giving you 5 bucks for your birthday.
If you get into financial trouble you could lose the house and all the money you put into.
So you sell the house, big deal. If he's young, he has plenty of time to recover and he hasnt put that much into it. if hes older with equity then by then his mortage payments are peanuts compared to his salary (which we will assume has risen).
Yes, the numbers would argue for best return from investments over dent reduction, but people are not calculators...
Quote:
Originally Posted by Charles
How do you divide it up? Some arbitrary number like 50-50? There are hardly any scenarios (even if your long term ror was a measly 5 or 6%) which would provide a better nfv than 100% invest.
I agree that NUMERCIALLY the odds of smart investment not returning more than the paltry long term insterest rates are remote, but people like the "warm fuzzes" they get from eliminating debt, or at least trying to...
If the psycholicigal benefits of allocating $300 or $600 toward the elimination of debt helps keep them from making really bad decisions (like spending it all or 'investing' with charlatans ) then the "loss" of investment return is well worth it.
Balance beats extremism!
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In some ways simple...
