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Your investment doesn't have to beat the borrowing rate. You have to aim to break even. Keep the money 100% safe and don't forget you can (for now) write off mortgage interest which offsets the difference in the current CD rates Vs mortgage rates. If you get a 30 year fixed mortgage now at a sub 5% rates and keep saving extra cash in the bank rather than paying off that low rate you will certainly make out as rates rise. But that is not really the point. Cash on hand is security for yourself / family. We have been taught to pay off our mortgage as quickly as possible and that having a house paid off is security but really that is security for the bank. What if any number of emergencies happens to you and you need large amounts of cash...think the bank is going to give it back? What if your house becomes unlivable. Say there is a nuclear plant leak or a chemical 9-11. You going to be better off with no mortgage or a large mortgage and $400k in the bank? It's really mental...having your house paid off feels good - I get that. But having enough money in the bank to pay if off if you want to feels smarter to me....especially when it doesn't cost you anything to do it...or could actually make you money (if / when interest rates go up).
excellent post, couldnt said it better myself. but you will never change most people's mind from the old school thought of paying off as much as you can. I would go even 1 step further and say invest your money.
Although it seems like a bad joke now, i dont think there is any doubt the equity market will significantly outperform that mortgage rate in the longer term(10+ years) at the current level we are at. For example if you invest in the relatively safe sp/dow/russell indices etc...
Also keep in mind the rate we have now is an anomaly due to the govt, we will not see such rate probably for another decade after it starts to go up in a year or two. Why would you waste such a valuable rate by paying back now?
One of the argument i keep hearing is if you invest the money instead of paying off the mortgage, it's not safe/peace of mind... That couldnt be further from the truth, by paying off the mortgage you are transfering the risk from the bank to yourself, and taking a bigger risk than invest in some relatively safer products like index fund mentioned above or just sitting in liquid cash.
You are betting 100% that:
1) You can pay the mortgage for the next 30 years
2) The value of your house will not decline significantly (ie: house drops 100k from purchase price: you paid 50k, you walk you save 50k. you paid 100k, you walk you save nothing)
3) There will not be a blackswan event that destroys/causes the value of the house/area to significantly decline.
4) All your networth is locked in an illiquid vehicle, aka dead money.
I guess the bottomline comes down to how much confidence do you have in managing your own money, or do you rather give it to the bank and not deal with it. For me if i could get a zero down mortgage, i would. It has nothing to do with buying something i cannot afford, but more with because it is SAFER.
excellent post, couldnt said it better myself. but you will never change most people's mind from the old school thought of paying off as much as you can. I would go even 1 step further and say invest your money.
Although it seems like a bad joke now, i dont think there is any doubt the equity market will significantly outperform that mortgage rate in the longer term(10+ years) at the current level we are at. For example if you invest in the relatively safe sp/dow/russell indices etc...
Also keep in mind the rate we have now is an anomaly due to the govt, we will not see such rate probably for another decade after it starts to go up in a year or two. Why would you waste such a valuable rate by paying back now?
One of the argument i keep hearing is if you invest the money instead of paying off the mortgage, it's not safe/peace of mind... That couldnt be further from the truth, by paying off the mortgage you are transfering the risk from the bank to yourself, and taking a bigger risk than invest in some relatively safer products like index fund mentioned above or just sitting in liquid cash.
You are betting 100% that:
1) You can pay the mortgage for the next 30 years
2) The value of your house will not decline significantly (ie: house drops 100k from purchase price: you paid 50k, you walk you save 50k. you paid 100k, you walk you save nothing)
3) There will not be a blackswan event that destroys/causes the value of the house/area to significantly decline.
4) All your networth is locked in an illiquid vehicle, aka dead money.
I guess the bottomline comes down to how much confidence do you have in managing your own money, or do you rather give it to the bank and not deal with it. For me if i could get a zero down mortgage, i would. It has nothing to do with buying something i cannot afford, but more with because it is SAFER.
Thank you! Someone gets it. The person I wrote it too immediately wrote back that it was nonsense. Some people can't even think outside the box for a second.
Your additional points are interesting. I am digesting them now...
Thank you! Someone gets it. The person I wrote it too immediately wrote back that it was nonsense. Some people can't even think outside the box for a second.
Your additional points are interesting. I am digesting them now...
No, I didn't write that it was nonsense. I was expressing skepticism, and that a first glance, your argument looked like nonsense. You didn't offer much in support of your position, except a vague request to "think outside da box"
Your explanation for your position wasn't very convincing -- your argument was essentially that you need to hold cash reserves to avoid risk, which isn't a very strong argument.
BTW, if it's optimal to carry a high debt load, why bother messing around with an amortizing loan ? Would it not make more sense to keep your debt load constant and take out some kind of interest only loan ?
excellent post, couldnt said it better myself. but you will never change most people's mind from the old school thought of paying off as much as you can. I would go even 1 step further and say invest your money.
I never suggested you should pay it off as fast as possible.
Quote:
Although it seems like a bad joke now, i dont think there is any doubt the equity market will significantly outperform that mortgage rate in the longer term(10+ years) at the current level we are at. For example if you invest in the relatively safe sp/dow/russell indices etc...
I agree that it's a good idea to invest in these.
I'd favor a mix of mid term and long term investments in conjunction with paying down mortgage debt.
I take it you would ideally prefer an interest-only zero down loan, if a bank were foolish enough to give that out ?
Quote:
Also keep in mind the rate we have now is an anomaly due to the govt, we will not see such rate probably for another decade after it starts to go up in a year or two. Why would you waste such a valuable rate by paying back now?
If you're confident that this is the case, you could always go short bond futures or similar.
Quote:
One of the argument i keep hearing is if you invest the money instead of paying off the mortgage, it's not safe/peace of mind...
That's a little simplistic. You get a risk free return on the interest you don't pay.
Quote:
That couldnt be further from the truth, by paying off the mortgage you are transfering the risk from the bank to yourself, and taking a bigger risk than invest in some relatively safer products like index fund mentioned above or just sitting in liquid cash.
So you're basically arguing that you should discount the returns by your credit risk, and not treat the return (on the interest you don't pay) as risk free, because if you default on a mortgage payment, then you wouldn't have to pay the interest.
There are arguments both ways as far as this is concerned. Companies do actually count declining credit as a balance sheet gain, this is a necessary accounting evil (to avoid double-counting debt forgiveness on taxes).
Basically, when I do the accounting for this, I'm not assigning value to the implicit "insolvency put" on my debt.
Here's an interesting article that discusses this issue
BTW, if it's optimal to carry a high debt load, why bother messing around with an amortizing loan ? Would it not make more sense to keep your debt load constant and take out some kind of interest only loan ?
If you could get a fixed rate interest only loan then that might be a great idea. Any bank offering such a thing right now is going to be bankrupt in a few years though so I doubt you can find such a thing.
"high debt load" isn't optimal. More debt and some liquid investments/savings is just better than better than less debt and no liquid investments/savings. There's a line somewhere but it likely depends on lots of factors.
Note we are talking about long term debt not short term debt. Paying long term debt off results in that money being "tied up" for a long term and you need a better "return" to compensate for that. Current mortgage rates don't make the cut in my opinion (which along with $5 might get a coffee at starbucks...)
Your explanation for your position wasn't very convincing -- your argument was essentially that you need to hold cash reserves to avoid risk, which isn't a very strong argument.
it is very convincing to me and thousands of underwater homeowners who walked and walking out out of their no downpayment mortages without losing their cash reserves. you really need to think outside the box.
2) The value of your house will not decline significantly (ie: house drops 100k from purchase price: you paid 50k, you walk you save 50k. you paid 100k, you walk you save nothing)
This I walk mentality is so uplifting, every deadbeat should be in jail!!!
it is very convincing to me and thousands of underwater homeowners who walked and walking out out of their no downpayment mortages without losing their cash reserves. you really need to think outside the box.
They should be in jail, they screwed things up for everybody else
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Amazing ...
