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Anything you like.
What matters is the MORTGAGE amount (vs your income) and the house value vs your total net worth.
This is pretty true within limits. For example, if you had $2M cash and your income allowed for a $200K mortgage, the property taxes would be so high on a $2.2M home, that it wouldn't be possible to buy the home.
"Imagine how much wealthier you'd be today if you took out the loan at 3% or so and put the rest in an index fund."
S&P500 September 2000: 1520
S&P500 March 2009: 683
In 9 years, you've lost 60% of your hard-earned money, and wondering why you didn't just pay off that mortgage.
Actually it would be less than 60% because the numbers above do not include dividend payments. Those would be captured by an equity index fund. However, your main point stands.
"Pay down the mortgage early" vs. "make required payments and invest the rest" has been debated countless times on message boards since they were created (and probably in bars, living rooms and park benches long before the intermawebz were around). The short answer is that the effective after tax interest rate on many mortgages today could be under 3%. At that rate, one is likely (but not certain) to wind up better off financially over 15 (or 30) years if one were to invest money in outside assets rather than pay down the mortgage early. Having liquid assets available outside one's house also gives additional flexibility if adverse events happen (yes, one can have a HELOC on their home and use that if Something Bad Happens to access their equity in their house, although there are limits to that and of course interest rate risk on that path).
That said, "paying down the mortgage" is essentially equal to a guaranteed 3% or so (after-tax) annual return. Investing in equities, as the two earlier posts reflect, has a lot of volatility (even though over the long haul an investment in, say, an equity index fund will likely return greater than 3% after-tax, possibly much greater. But over the short term it can return a lot less, as noted above. It depends on the goals of the person in question and their risk tolerance.
Either way can work just fine, as long as you're not "biting off more risk than you can chew", and as long as you're consistent and disciplined. IOW, if you're going to use half your "excess" money to invest in "other stuff" and half to pay down the mortgage early, don't jump into "all equities all the time" 3 years down the road because the stock market got hot. That's a good way to "buy high and sell low". Know your risk tolerance and your situation and make an informed decision.
Anything you like.
What matters is the MORTGAGE amount (vs your income) and the house value vs your total net worth.
Keep your debt level/payment affordable (that's where the 2-3X comes into play).
Keep your use of resources responsible (house value in the 10-30% of net worth range).
I feel like alot of this is dependent on your age.
For example, for a house to be worth no more than 10-30% of your net worth Most people would need to be worth 700k-1 million.
Do you really expect 26-30 year olds to be worth that amount? I could see a 45-50 year old seeing that as reasonable.
Our house is just under 2x our annual income, but the good thing about this is we are also at the beginning of our earnings life cycle.
Quote:
Originally Posted by MrRational
if you had $2M cash... you could afford to but that $200,000 house outright.
I think he was referring to adding a 200k mortgage to 2 million in cash to buy a 2.2 million dollar house.
For example, for (the net equity you have in your) house to be worth no more than 10-30% of your net
worth most people would need to be worth 700k-1 million (once they get to full ownership).
That's about right.
Quote:
Our house is just under 2x our annual income...
Again, look at the mortgage loan amount vs your income (3X is the upper limit of reasonable debt).
Quote:
but the good thing about this is we are also at the beginning of our earnings life cycle.
And because of things like a better school district and deducting most mrtg costs vs paying private tuition
you might even justify being at or a bit beyond the upper limit of reasonable debt.
Well, that's what the RE agents will want you to think.
Last edited by MrRational; 09-17-2013 at 08:39 AM..
Again, look at the mortgage loan amount vs your income (3X is the upper limit of reasonable debt).
And because of things like a better school district and deducting most mrtg costs vs paying private tuition
you might even justify being at or a bit beyond the upper limit of reasonable debt.
Well, that's what the RE agents will want you to think.
If you are just talking about the mortgage loan amount vs. my income it is only 1.5x. I thought you were referring to the full purchase price of the house.
I thought you were referring to the full purchase price of the house.
I wanted to focus on the principle of distinguishing the DEBT obligation from the price paid.
For too many, and especially first time buyers, the two are close to the same.
In some cases... the loan is even larger than the purchase amount.
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