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why is it assumed that everyone wants or needs to take or have a mortgage so they can keep adding more and more money in to volatile assets instead of cutting costs ?
i think that is a poor assumption that no one should decrease costs and everyone needs more in volatile stuff.
there is no right or wrong answer. it is as silly as saying those who utilize bonds are foolish because 100% equities will average more regardless of your desired level of volatility.
everyone has a comfort level and a balance between cutting expenses and increasing gains or income. to assume your level is someone else's is a wrong assumption.
I have no need nor desire to own anymore in volatile assets than i do already.
We will pay cash for our coop
Last edited by mathjak107; 04-19-2015 at 12:53 PM..
why is it assumed that everyone wants or needs to take a mortgage.
The OP HAS a mortgage! The question is why would they use their liquidity ($200,000) to then spend over 15 years trying to get to where they already were. See how that makes little sense?
You should put the cash in an like minded fund with either Vanguard or Fidelity. Choose an established fund older than 10 years so you can see how the fund performed during the crash. True nothing is absolute but that would help with the inflation. If you do nothing the government will take a significant percentage anyway due to inflation.
while you can use the drop percentage to simulate the down turn the fact is many funds got crushed in a one time event that would never happen to them again .
this is one past that will likely not effect the same funds the same way.
the problem was funds were going outside the scope of what they typically invested in and bought this toxic paper to bolster yields on the bond side of things if the fund owned bonds.
so you had nice conservative funds like fidelity floating rate high yield or ultra short conservative bond fund taking hits that were so large and way out of character .
fidelity even maintained a central core fund filled with these mortgage bundles that were no different than any other mortgage bundles but that offered higher rates because of the way they went to market.
any fund that wanted to bolster yield could buy this paper and add it to their fund.
so they did and when this paper turned toxic it killed the funds who bought it.
that stuff is long gone and today new restrictions mean these same funds will likely not have the issues of the past so any comparison to 2008-2009 is likely not going to mean much for that fund..
The math is not on your side. Let us look at the look at your theoretical retired individual or couple who can make ends meet without a mortgage. Now if they take a $200k mortgage at 3.75%, they will pay mortgage interest of $7500/year. Total payments will be about $11,000/year. They have $200k to invest and historically will make about 7.5% annual returns; i.e., $15,000/year. So they come out $4000/year ahead in the first year and over time that money just keeps compounding. In 10 years they will be making close to $30,000 returns on the investment and making a net of $19,000/year after paying the mortgage. In another 10 years that $30k amount will be nearly doubled again and the mortgage payment will be the same.
Of course calculations such as this are based on averages. A more sophisticated approach is to use Monte Carlo simulations to calculate a range of outcomes. We know every single simulation would show a substantial improvement for taking a mortgage and investing.
If you think you cannot earn more with liquid assets over 30 years then sure pay off the mortgage. But if CD's etc. go to more "normal" rates....then you'll be happy paying 2020-2045 debt with 2020-2045 money. Bank CD Rates Graph Think time value of money and all.
Plus if you don't have LTCi all that equity will just end up in the nursing homes pocket. Maybe you'll get lucky and die only 15 years into the mortgage. I'd rather have the 15 years of enjoyment of the $200,000 than dying with a paid off house.
Whoa - you are contradicting yourself. First you talk about trying to outearn the mortgage rate with investments, then you turn around and talk about "enjoying" the money (read: SPENDING it). You cannot do both on the entire sum - either you spend the money, or you don't. It cannot be both ways as that is logically impossible.
On the plus side, very few investments return as much as a paid off mortgage with as little risk. For a retired person, not having to pay a mortgage or rent often makes the difference between being able to make ends meet on SS and a pension. Depending on the housing market, that can be the equivalent of an extra $10,000 to $25,000 a year, tax free. For seniors facing taxation of their SS benefit, the tax free part can mean an additional several thousand dollars a year in their pocket.
This was referring to buying more real estate, not to paying off an existing home. The latter is really more like an investment in laddered bonds than in real estate, since you already have the real estate to begin with. You "earn" the interest on the mortgage by paying off the home. Buying more real estate is a different story, as you earn the cap rate plus appreciation.
Whoa - you are contradicting yourself. First you talk about trying to outearn the mortgage rate with investments, then you turn around and talk about "enjoying" the money (read: SPENDING it). You cannot do both on the entire sum - either you spend the money, or you don't. It cannot be both ways as that is logically impossible.
Nope! First, if I'm TRYING to out earn a 3.75-4.25% mortgage I'm probably not a good investor. Second, I'll spend the first 15 years spending the $200,000 plus its earnings and inflation will take care of the last 15 years. OR sweet, sweet death.
Doesn't that sound better than plowing all that liquidity into an asset and then turn around and plow any savings into a low paying investment in small increments over 15+ years?
There may be better websites for Monte Carlo simulations but I use Firecalc. I would guess a google search would provide many other choices.
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