Is there anything wrong with doubling up on your mortgage payment every month? (Houston: real estate, refinance)

[Hangster]

In my opinion, nothing beats a GUARANTEED return. All these analysis on investing the extra money in the market or what not, is all based on the ASSUMPTION that you will get an average return that is higher than your interest rate. But in the end, it is all just an ASSUMPTION.

I think of it this way, if investing long term in the market is such a sure thing, why would the banks rather loan that money in mortgages instead of investing it in the markets themselves?

[Meyerland]

Originally Posted by Texas6023

Ok. Thanks everyone. Well I was just wondering if I paid off the note in about 5 years if I would get in trouble?

You may have a prepayment penalty. Check your paperwork. Our first home had that and we didn't even know it, as we were just happy to get a mortgage.

See if you can refi into a 15 year mortgage if you have a 30, since you want to pay it early. your interest rate will probably be lower.

[cy_flembeck]

Originally Posted by Lowexpectations

Did you know that the S&P 500 total return for the last 15 years was 2.98% annually?

Also most people don't run the math on this but I will spell it out

200k 30 year mortgage @ 4% is 954.00 a month, applying 954.00 a month pays off the loan in less than 11 years

954.00 a month invested @ 8% for 11 years is 200k

This is a flawed comparison/calculation. You forgot to include the fact that if you just paid the $954 a month for 11 years you would have paid down $48,000 of the principal to go along with the $200k you would have by investing the additional $954 a month.

[cy_flembeck]

Originally Posted by Hangster

In my opinion, nothing beats a GUARANTEED return. All these analysis on investing the extra money in the market or what not, is all based on the ASSUMPTION that you will get an average return that is higher than your interest rate. But in the end, it is all just an ASSUMPTION.

I think of it this way, if investing long term in the market is such a sure thing, why would the banks rather loan that money in mortgages instead of investing it in the markets themselves?

A little thing called the spread. They borrow at 1% or less and loan in out at 3.5% or more with collateral that minimizes their risk.

It is hard to argue against the long term returns of the stock market. The S&P averaged an 8% return from 1975 to 2015 and that does not include any dividend reinvestment.

[gwarnecke]

We didn't time the bottom of the market, but we did time the bottom of the mortgage rates. I make an extra payment here and there on our 15-year note but don't regularly double up on the payments, and don't plan to pay off the mortgage significantly early. Regardless of stock market returns - my rationale is as follows:

For the next house that we buy (either for ourselves or as an investment), we'll be paying a higher interest rate than we locked in on our current house. We'd be better off applying whatever prepayment we make on our current loan to reducing the amount financed with the next loan.

[Lowexpectations]

Originally Posted by cy_flembeck

This is a flawed comparison/calculation. You forgot to include the fact that if you just paid the $954 a month for 11 years you would have paid down $48,000 of the principal to go along with the $200k you would have by investing the additional $954 a month.

Not flawed but lacking some information for sure. We should take that into account as well as actually questioning the 8% especially after tax. The last 15 years the s&p has a total return less than 3% and even with dividends reinvested is less than 5%. The fact you quoted a 41 year timeframe of s&p returns is off because it in no way compares to the time the average person is in their house.

This also doesn't take into account that paying down the mortgage is a guaranteed return/savings that you don't have to pay taxes on it. With the investment account you are creating a potential tax liability with interest income, dividend income or capital gains.

[LonghornHotspur]

Originally Posted by Hangster

In my opinion, nothing beats a GUARANTEED return. All these analysis on investing the extra money in the market or what not, is all based on the ASSUMPTION that you will get an average return that is higher than your interest rate. But in the end, it is all just an ASSUMPTION.

I think of it this way, if investing long term in the market is such a sure thing, why would the banks rather loan that money in mortgages instead of investing it in the markets themselves?

As a market risk guy, this is all a variance vs. return question. As such, there is no quantitative answer IF you think the return for the risk employed (Sharpe ratio for stat geeks) is the same for a 3.5% mortgage (i.e. fixed income) payoff vs. whatever equity return hurdle you apply (in which you take overall market, industry, individual company, currency, credit, and other risks). Instead, its your risk tolerance for making a levered investment in stocks (borrow cheap in the form of a mortgage to get higher return in the equity market, which is really your position)

The more appropriate comp might be fixed income returns; 10 year Treasuries yield 1.99% today. If you assume that is risk-free (I don't, not with this Fed and President), perhaps a 2.6% after tax return on mortgage payoff isn't that bad.

[Ghost Town]

Originally Posted by detachable arm

Yes, pay it off and stop being a slave. Unless you like that sort of thing...

Well in Texas you will be slave forever. End of mortgage doesn't mean end of your property taxes. And property tax rates in TX are 3rd highest in the country. My bank interest is 3.15% and property tax is about 3.6% with mud tax. And bank interest is applicable only to your principal amount, but property tax is applicable to the total appraised property value.

End of slavery = move out of Texas and stop paying huge property taxes.

[Lowexpectations]

Originally Posted by Ghost Town

Well in Texas you will be slave forever. End of mortgage doesn't mean end of your property taxes. And property tax rates in TX are 3rd highest in the country. My bank interest is 3.15% and property tax is about 3.6% with mud tax. And bank interest is applicable only to your principal amount, but property tax is applicable to the total appraised property value.

End of slavery = move out of Texas and stop paying huge property taxes.

Do you have a homestead exemption? If so your effective property tax rate isn't 3.6% and thus you aren't taxed on the appraised value

[gwarnecke]

Originally Posted by Ghost Town

Well in Texas you will be slave forever. End of mortgage doesn't mean end of your property taxes. And property tax rates in TX are 3rd highest in the country. My bank interest is 3.15% and property tax is about 3.6% with mud tax. And bank interest is applicable only to your principal amount, but property tax is applicable to the total appraised property value.

End of slavery = move out of Texas and stop paying huge property taxes.

Plenty of parts of Texas have much lower tax rates than Houston/Harris County.