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the problem with that is when it comes to investing time is your friend . by starting to invest later after the mortgage is paid you cut the chances of seeing greater compounding at work .
we know so many friends who put all their resources in to paying off the mortgage and then first started to really start socking away the money and burned themselves because they bumped the lost decade
Fair enough. However there is no assurance that the markets will perform in the same manner. Over 20-30+ year time horizon, sure the market does well, however if one used a decade to pay off a 30 year mortgage, perhaps they lost out on the stock market upside, however created the following:
1. Solid, albeit illiquid (compared to the shares), equity.
2. Removed a significant expense, as PITI is usually the largest expense in a household budget, with P+I being the greatest component of PITI.
3. Inoculated themselves from foreclosure risk, if they were to lose a job/business income. Sure, one can fall into foreclosure by not paying taxes/water & sewer bills, however the likelihood is greatly reduced because municipalities take a longer time to process foreclosures vs. banks.
Furthermore, there is a significant difference between informed (not even sophisticated) investors and the lay person:
1. The layperson may not be dedicated towards consistently investing in the market (dollar cost average), however the mortgage payments are a forced savings plan.
2. Your earlier post provides an excellent chart of how average stock market participants have financially hurt themselves by selling at the wrong times. Emotions driven. Due to Real Estate's illiquidity, transactional costs, most homeowners will not sell their homes at a click of button (as they would with equities).
I am not doubting that the stock market beats real estate -- that is given. However I am questioning the individual's discipline, psychology, and decision making with respect to investing in the stock market vs. paying off one's mortgage.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Quote:
Originally Posted by ncole1
If you inherited a house that was paid for, would you borrow against it to invest in the stock market?
Remember that there are costs associated with getting a mortgage in addition to the mortgage interest. When one already has a mortgage in place, there are no costs associated with it, other than the interest rate, so they are not the same things to compare. In any case, it still might make sense to borrow from scratch against a property to invest elsewhere. My brother does it all the time. Debt doesn't scare him, and he uses it to invest in other properties. Not everyone has the guts to do that, though, but it is perfectly legitimate way to invest for some people.
My mortgage interest rate is currently 2.875%. We are in the 15% or 25% bracket, depending on the year. Not including mortgage interest, we have a large amount of deductions above the standard deduction, so mortgage interest will be deductible for us no matter what, effectively making our 2.875% rate even lower. We'd be fools to pay that low rate off early. Our pretty conservative investments make well more than 2.875% rate and that includes keeping some of our money in a 2% CD for liquidity. Plus we have 14 1/2 years left on the mortgage. I have every reason to believe that rates will go up over the next 14 1/2 years, making my mortgage loan cheap money over that time period. And if they don't do as I predict, I can adjust my actions at the time I think it will change.
Keep in mind that there are risks no matter what you do with your money. If you pay off your 15-year 3% mortgage today, you are taking a risk - you are betting that paying off the loan is the best use of your money. If next month, the interest rates on money market accounts go up to 5%, you just made the wrong bet. If an amazing investment opportunity comes along tomorrow and you don't have the liquidity for it, you made the wrong bet. Yes, you are making a "safe" choice (but not a risk-free choice) to have the house paid for, but at the risk of losing potential investment returns.
On the other hand, my aforementioned brother who is also a CPA and CFP always says, you will do well if you have a plan. One plan may be better than another plan as far as which produces more money. But as long as you have a plan, you will probably be okay.
Fair enough. However there is no assurance that the markets will perform in the same manner. Over 20-30+ year time horizon, sure the market does well, however if one used a decade to pay off a 30 year mortgage, perhaps they lost out on the stock market upside, however created the following:
1. Solid, albeit illiquid (compared to the shares), equity.
2. Removed a significant expense, as PITI is usually the largest expense in a household budget, with P+I being the greatest component of PITI.
3. Inoculated themselves from foreclosure risk, if they were to lose a job/business income. Sure, one can fall into foreclosure by not paying taxes/water & sewer bills, however the likelihood is greatly reduced because municipalities take a longer time to process foreclosures vs. banks.
Furthermore, there is a significant difference between informed (not even sophisticated) investors and the lay person:
1. The layperson may not be dedicated towards consistently investing in the market (dollar cost average), however the mortgage payments are a forced savings plan.
2. Your earlier post provides an excellent chart of how average stock market participants have financially hurt themselves by selling at the wrong times. Emotions driven. Due to Real Estate's illiquidity, transactional costs, most homeowners will not sell their homes at a click of button (as they would with equities).
I am not doubting that the stock market beats real estate -- that is given. However I am questioning the individual's discipline, psychology, and decision making with respect to investing in the stock market vs. paying off one's mortgage.
there are lots of reasons why most Americans can't or won't invest . but that is not who i am referring to . i am talking about those folks who can and do exhibit good investor behavior .
for those folks waiting to invest in volatile investments they get riskier and riskier the shorter the time frame they have to grow them .
there has never been a 30 year period you would not have done very very well with equity's . but there are certainly poor 15 year periods
I took out a 30-year mortgage when I was 52, so the reality is that I won't likely live long enough to EVER pay it off. HOWEVER, I am reserving the hope that perhaps I might refinance down to a 15-year, if things work out the way I hope they do, and also if I get the rest of my debt down and can make extra payments. It would be nice, but I planned my mortgage to be something I could pay for with my pension in case I can never pay it off.
there are lots of reasons why most Americans can't or won't invest . but that is not who i am referring to . i am talking about those folks who can and do exhibit good investor behavior .
for those folks waiting to invest in volatile investments they get riskier and riskier the shorter the time frame they have to grow them .
there has never been a 30 year period you would not have done very very well with equity's . but there are certainly poor 15 year periods
The subset of those folks who can maintain good investor behavior is significantly narrower than the vast majority of Americans who are deciding between paying down mortgage debt vs. investing in the stock market. The underlying reason is knowledge and comfort with the equities markets vs. paying down the mortgage. The act of paying down the mortgage is a magnitude simpler (writing a check/setting up an online mortgage payment) than picking and holding the appropriate equities/mutual funds. The paydown of debt comes with a certainly that a tangible asset is now owned. While I think it's wrong to consider ones primary residence to be an investment, the reality is that the majority of the net worth of most Americans is tied up in Real Estate.
Experienced investors with the discipline do well in the stock market. Most of my 401K/Retirement accounts are tied up in the stock market. I believe in them, however my time horizon and investment objectives have been longer term. I also flip/rent real estate and I have enjoyed some terrific returns/benefits there as well. For the financially savvy, the stock market has been great.
However this is about most Americans who have mortgage debt: You pay it down and have the certainty of ownership of your home.
paying off the mortgage is a fine consolation prize if one is not made to be an investor .
And most people are not made out to be investors, defined as: somewhat knowledgeable about equities, have capital that they can afford to lose, financial discipline to withstand the markets peaks and valleys.
Better to have a 'consolation' prize of a paid off primary residence, rather than renting and blowing capital in the equities market by speculating, taking ill informed or ill advised positions at inopportune times.
Besides if they want to invest in the market, they can always enter it after paying off the mortgage, with the new found discretionary capital. Sure their upside potential is limited, however who knows they may luck out with the speculation. Even if they incur massive losses, at least they still have a paid off primary residence.
i agree , most people are not investors . but my point was that those who are, take on much more risk and likely give up more in compounding by waiting until the years after the mortgage is paid , IF THEY ARE ACCELERATING PAYMENTS . obviously if you have no money to invest because the mortgage payments normally eat up your free cash flow without accelerating than it is a moot point investing earlier . .. time is your biggest friend and you cannot get that back by throwing more money in over shorter periods of time into the markets .
you just increase the risk of having a crappy time frame . we have plenty of 10-15 year periods that sucked . but we have no 20-30 year accumulation time frames where you would not have done well .
so my vote is if you have a 30 year mortgage , are an investor type , don't accelerate the mortgage payments . channel the extra dough in to your investing as early on as you can .
Last edited by mathjak107; 02-24-2017 at 02:36 AM..
I've been a homeowner for 33 years but haven't paid one off yet! I just refinanced to a new 30 year term with the lowest interest I've ever had and plan on paying it of in 8-10 years. I didn't get a 15 year term on purpose because my plans don't always work out! I resigned myself to the fact that this is probably my last house, unless something crazy happens.
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