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I don't think there is a right or wrong answer in this thread as its all personal based upon your individual circumstances. At the core of the issue from a financial perspective is that to make an early payment on your mortgage is to bypass the cost of interest on that amount. To recognize that savings which means you have to stay in your house to the end of term of your dont avoid the interest. The cost is an opportunity cost of taking the same money and putting it in the market over time. IMO you should think of the paydown mortgage route akin to a bond that you must hold to maturity where the coupon is your APR. Of course the market will outperform it over time with a more risky profile but will also be somewhat more liquid/accessible overt time.
If you have an APR of 4% and you are in the 2nd year of a 30 year mortgage but wish to make a $10k premium. Can you assume that your return in interest avoidance is $10,000*.04 = $400 *28 = $11,200 over the life of the loan?
On the market you could put the money into an index fund and get 8% return over the period of time that would compound. So $10,000 * 1.08% ^28 = $86,271 or about $65k more than paying off your mortgage during the same period of time.
yes , the way these work is you buy the tax lien the locality has on the property because the owners have not paid taxes ...it cost you all the taxes due , usually two years plus some filing fees .
the owners have the option of paying you the taxes plus back then 18% interest on the tax money you spent out .
99% of the time they get the money and pay you off , but if not you get the property
I feel I may have already stated the obvious. But it seems to me that many will make the mortgage payment, by hook or by crook. But, having the capital, many would not turn around and invest it, or invest it wisely. After fifteen or thirty years with a mortgage they have the deed to the property. But the person who does not a) invest wisely, b) invest the equivalent amount, or c) gets poor returns from investments may not do so well in comparison.
Some people will only save, or invest, if it is forced upon them.
The first time that I bought real estate, I got a mortgage. I needed the mortgage to buy the property, and with buying the property it gave me an income stream. The mortgage payments were less than the income stream, so I thought it was a good deal.
I repeated that sequence four times until I reached retirement. Then I cashed out and used the capital to buy our retirement home [with no mortgage].
So this is a question, not a statement of fact. I’d be interested if this makes sense regarding the risk of of carrying a mortgage and investing vs. paying off a mortgage.
Scenario 1: Buy a house for $250,000 cash in year 1. Home prices fall 10% in 2 years, and the owner is forced to unexpectedly have to sell in year 2. Excluding real estate commissions, etc, the buyer walks away $225,000. Loss of $25,000.
Scenario 2: Buy a house for $250,000 in year 1, get 100% financing (assume this for simplicity...I don’t think it really has a material effect on the point I was pondering), and make normal payments on a 30 year mortgage. Home prices fall 10% in 2 years. Owner invested the $250,000 in an S&P 500 index fund, and say over that relatively short period of time equities fell 10%, which I assume is reasonably possible given the relatively short period of time. Owner needs to unexpectedly sell house. Given the payments are limited to the first 2 years of the mortgage, little principal has been paid down, and when he goes to sell the house, he only gets $225,000, but he still owes $250,000 (in reality a bit less), but he only has $225,000 in his equity investment to meet his obligation. So basically he is down $50,000 vs. the $25,000 in scenario 1.
I’m not suggesting that the second scenario is likely but home prices and equity markets don’t always go up (atleast in the short term), and seems to me that if you aren’t able to ride out down markets (e.g. forced to sell a property prematurely) having a paid off house could insulate you from some investment risk.
Thanks for any insight re my (possibly incorrect) analysis.
You forgot to subtract the mortgage payments he also made for the 2 years in your second scenario. If they were around $1500/month, that would leave your hypothetical person another $36,000 poorer.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Originally Posted by Movn-on
You forgot to subtract the mortgage payments he also made for the 2 years in your second scenario. If they were around $1500/month, that would leave your hypothetical person another $36,000 poorer.
Nope, he factored in the mortgage payments at 25k. Hence the 50k loss versus the 25k loss.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by Submariner
The first time that I bought real estate, I got a mortgage. I needed the mortgage to buy the property, and with buying the property it gave me an income stream. The mortgage payments were less than the income stream, so I thought it was a good deal.
I repeated that sequence four times until I reached retirement. Then I cashed out and used the capital to buy our retirement home [with no mortgage].
So in each case did you pay off the mortgage before selling it to get the next property?
Nope, he factored in the mortgage payments at 25k. Hence the 50k loss versus the 25k loss.
I don’t think so. In each case the person “ invested” $250k. One 100% in the house and 2 100% in the market. In 2, the house depreciated $25k and so did the market-independent of the monthly mortgage payments, which total approximately $36k in my example. So why is the $36k not added to the losses? In scenario 1, there have been two years of making no house payments, so the loss in that case is just the $25k drop in home value. What am I missing?
Location: Formerly Pleasanton Ca, now in Marietta Ga
10,441 posts, read 8,678,932 times
Reputation: 16857
Quote:
Originally Posted by Movn-on
I don’t think so. In each case the person “ invested” $250k. One 100% in the house and 2 100% in the market. In 2, the house depreciated $25k and so did the market-independent of the monthly mortgage payments, which total approximately $36k in my example. So why is the $36k not added to the losses? In scenario 1, there have been two years of making no house payments, so the loss in that case is just the $25k drop in home value. What am I missing?
I reread it and I was wrong and you are right. The other 25 k I alluded to was the loss in the market, not his payments.
So in each case did you pay off the mortgage before selling it to get the next property?
No.
We still owned the first Rental Real Estate property, when we bought our second.
We sold our first property and we sold our second property right before we bought our third property.
Then we bought our fourth property and sold it while still holding the third property.
We transferred all the equity into the third property and re-financed the third property, to give us the cash to buy/build our retirement homestead.
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