Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Ramsey does have a good question that he asks in these situations: If you had a fully paid for house, would you take out a $150K mortgage on it to invest in the market? It's the same thing that you're asking.
Some would say yes, some would say no. But that's your answer.
If anything I would pay my mortgage down monthly over the next five years, make extra payments here and there. I have had my home paid off once and I was only 28 years old. Let me tell you I have a mortgage again because of IRS taxes. Yes, the freedom was nice...relief...but not when tax time came the following year and I had no intrest from my loan to write off. So I moved (becuase I wanted to) purchased another house with my net from the paid off house put 1/2 down, stuck the rest away (spent a little...) got a 15 year loan and make my payments every month sometime I pay more, sometimes I don't.
I frankly do NOT agree that it is "the same thing" to mortgage a fully paid off house for the sole purpose of investing. The major difference as it that in purchasing a home and paying it off over time as you ALSO should build your savings / wealth so that you will be broadly diversified VS "taking all your eggs" out of the broad basket that would include the equity in a paid off house (illiquid though that may be...) and shifting it toward something is clearly a different kind of risk.
Further the common definition of "investing" has, over the years, become synonymous with 'speculating' but in a TECHNICAL sense ONE activity strongly favors the placement of funds at a certain / knowable rate of return for a given level of risk while the OTHER has much more sense "limitless loss".
Given what I said above, about being able to get an "no net interest" situation should tax rates increase, yield on TIPS increase and mortgage interest deductability remain in-place it would seem to be pretty easy to EVEN go to the extreme of actually taking out a mortgage on paid off house HOWEVER the "ifs" are generally structured so that you DO NOT get another shot at a super low (OP has 4.375%) mortgage WHILE other rates are high so the decision to "pay the thing off" should ONLY be made if the likely savings in interest is very high, and I think that does NOT apply to the OP...
Bought a home for $129K in 2001- 7% for 30 years, about $1200 in property taxes every year. Given those numbers, we got something like $1,000 or less in benefits come tax time for going over the standard married-jointly threshold. (don't recall the exact numbers, but it seemed hugely underwhelming given the amount of hype the deduction gets)
Refinanced to a 15 year note for 4.875% about two years to the date after we bought the house. Cost- about $150 more per month.
I did some back of the envelope math in June about whether we'd been better off keeping the original mortgage and investing that $150/month into a DJIA index fund or paying that $150 more to the new mortgage. We were something like $20K ahead by going the pay down the mortgage route instead of going the investment route. Granted the markets have rebounded since then, but over the 6.5 years (medium run time frame) since the divergence point, we're still significantly ahead by paying down the house.
I'm also in the camp that thinks we're going to see less than historical rates of appreciation in the stock markets- the demographics alone seem to suggest more sellers than buyers in coming years.
Assuming that the $150K mortgage has a payment of about $750 a month, if you paid it off and invested the mortgage amount at something that earned 10% interest you'd have your money back in savings in 10 years, when you retire.
It really boils down to what you are comfortable with personally. I'd prefer having a smaller nut to make every month, so I'd pay off the house and put all of that money toward savings and retirement. To me, having fewer monthly bills means that I not only can save more toward retirement but I can also focus my life on my family rather than on needing to make a certain amount of money each month just to pay the bills.
I'll readily admit that I'm not the brightest rock in the box, but if I follow your logic, wouldn't it make better sense to keep my $150k in the market @ 10% and just continue to pay the 4.4% mortgage as scheduled (or with modest additional payments). Explain to me where I'm missing the boat.
Bought a home for $129K in 2001- 7% for 30 years, about $1200 in property taxes every year. Given those numbers, we got something like $1,000 or less in benefits come tax time for going over the standard married-jointly threshold. (don't recall the exact numbers, but it seemed hugely underwhelming given the amount of hype the deduction gets)
Refinanced to a 15 year note for 4.875% about two years to the date after we bought the house. Cost- about $150 more per month.
I did some back of the envelope math in June about whether we'd been better off keeping the original mortgage and investing that $150/month into a DJIA index fund or paying that $150 more to the new mortgage. We were something like $20K ahead by going the pay down the mortgage route instead of going the investment route. Granted the markets have rebounded since then, but over the 6.5 years (medium run time frame) since the divergence point, we're still significantly ahead by paying down the house.
I'm also in the camp that thinks we're going to see less than historical rates of appreciation in the stock markets- the demographics alone seem to suggest more sellers than buyers in coming years.
Cut interest rate from 7% to 4.875% AND go from a 30 year to a 15?!? How is that remotely similar to doing a "lump sum pay off from savings"?
I mean it -- you get MAJOR KUDOs for the refi, and the extra $1800 out of pocket a year may have meant you had some tight periods if that represents a solid chunk of your income, but the refi rule is simple -- if the "break even" point is BEFORE you plan to move then it is a no-brainer. The OP here is asking for something that is completely different, as it involve an "unknown" return on the money "invested" in paying down the mortgage...
I'll readily admit that I'm not the brightest rock in the box, but if I follow your logic, wouldn't it make better sense to keep my $150k in the market @ 10% and just continue to pay the 4.4% mortgage as scheduled (or with modest additional payments). Explain to me where I'm missing the boat.
It's a matter of risk. You have to take risks to get 10% in the market, while paying down is a guaranteed 4.4%.
I bought my current home in 2000. Due to the timing of the relocation, my interest rate was 8%. Six months later, rates had dropped to closer to 6%. I wanted to refinance but the mortgage company wanted a large fee. Since the market was really high, I cashed out a portion of my portfolio and paid off the mortgage. My (former) broker blew a gasket telling me that I was stupid for taking my money out of the market to pay off a home.
Six months later, two things happened. The stock market tanked and I ended up in the ICU for a week with a life threatening illness. As I was in the hospital, all I could think of was that my family had a place to live should I not make it and that they were taken care of.
I have been without a mortgage for nine years. Without a mortgage payment and without a car payment, you would be surprised how quickly your retirement accounts grow. It makes it a lot easier to max out Roth and 401(k) contributions. Also, we have the money to take an occasional vacation. We also now have the ability to change jobs when the need arises.
While I tend to be more logical, there is a certain peace about owning your home outright.
Without a mortgage payment and without a car payment, you would be surprised how quickly your retirement accounts grow. It makes it a lot easier to max out Roth and 401(k) contributions.
We also paid off our house, and I absolutely agree about how fast money accumulates in the absence of a mortgage and car payments. Our CFP asked a few questions to make sure that we understood what we were doing, but in the end, he supported us. Then, he jokingly asked me if I would give his wife a few lessons in frugality.
I bought my house in '98 for $129k. 20% down and a 7.25% 30yr fixed loan. Refinanced in 2003 to a 15yr @ 5%.
Loan balance is ~$58k. I put another $100 a month toward the principle when I pay, typically. House value? I dunno, let's say $200k in this lousy market. $230k in a good market.
We have the cash to pay it off, but at the same time would like to get into a bigger place.
If we choose to pay it off, we'd feel obligated to stay put for a couple years and hope that the market doesn't dip too bad, which some are predicting for 2010.
Otherwise to pay it off, and then move within the next year...probably not a good move. Job security is also a factor here, to cover a larger mortgage payment. As does what we'd be able to sell for. We'd put 100% of our sales proceeds towards the next place, and then some.
Situations vary, and there are many factors to consider. I've been batting this around for a while...
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Apples to advaarks ...
