Anybody read the "Don't Rush To Pay Off Your Mortgage" article on MSN???

[redgtxdi]

http://articles.moneycentral.msn.com/ba...ncing/homefinancing.aspx?wa=wsignin1.0


My only question.......(as someone who puts extra money toward the principal each month)........is how can you put a value on having your home paid off???

 

[mugs]

I haven't, but I've read a similar article a year or so ago. I can put a value on having your home paid off - $0.

 

[bsobel]

Originally posted by: redgtxdi
http://articles.moneycentral.msn.com/ba...ncing/homefinancing.aspx?wa=wsignin1.0

My only question.......(as someone who puts extra money toward the principal each month)........is how can you put a value on having your home paid off???

The problem with putting a 'value' on your paid off home is that you can't sel less than 100% of your home to finance future expenses. However with investments you can. Alot comes down to investment returns vs home interest rates. But if you locked in sub 7%ish I do beleive that a lot of advanaced paydown is a mistake. I don't think you should take the extra money and hit vegas, but if you truely invest it for later use, its a good thing (think of it this way, you get a better return and worst case you can sell the investments in X years and pay down more home principal than if you had been making smaller payments all along)

Bill

 

[redgtxdi]

But if you read the article it says that EVEN IF you've got money socked away.......(let's say a year's worth of unemployment).........and plenty of insurance......and anything for the kid's future is financially taken care of.........that leaves the only debt being the mortgage.


Why not pay down the mortgage??

Only other real option is to squander the dough, no?

 

[d3n]

I agree with bsobel and the article. Other investments get a much better rate of return. Having access to funds is also valuable in case opportunities come up. Money makes more money, unless its locked up in your house.

 

[spidey07]

Originally posted by: redgtxdi
But if you read the article it says that EVEN IF you've got money socked away.......(let's say a year's worth of unemployment).........and plenty of insurance......and anything for the kid's future is financially taken care of.........that leaves the only debt being the mortgage.


Why not pay down the mortgage??

Only other real option is to squander the dough, no?

You're only squandering money if you pay it down. Money makes more money and it isn't locked into a house that can be difficult and life changed to get back.

 

[ElFenix]

because the house mortgage is likely the lowest interest rate loan you'll ever get in your life, except maybe subsidized student loans, and just about every investment can give you a rate of return higher than what you're getting paying down your house earlier.

unlocking value on your house is a hard process, whereas unlocking value in investments is easier (because you're not out a house if you sell your investments, or having to fill out a mountain of paperwork like a second mortgage)

 

[BlueWeasel]

What if you have all of those things, though?

Wife and husband contributing ~20-25% (total, including max company matches) to 401k, have a emergency savings fund, life and disability insurance, and no CC debt. Would it be better to take the extra $200 a month (equal to 3 extra payments per year) that I put toward principal and invest? Possibly in a Roth IRA, since we are both already getting the maximum company match on our 401k's?

 

[DivideBYZero]

Meh. Dunno about the US, but you can get Equity Release loans in the UK.

 

[redgtxdi]

Originally posted by: DivideBYZero
Meh. Dunno about the US, but you can get Equity Release loans in the UK.

Agreed..........someone will ALWAYS give you money for your equity!


Besides that.........money makes money even when it IS in your house. The most money I've ever made in my life has been in the equity in my home over the last 10 years. Plus, the goal is to no longer have payments freeing up monthly stroke to be pure cash.

A better argument is the combination of lower interest rate + tax writeoff, thus the author's suggestion for tax-free or tax-deferred investments such as kids' college and retirement.

Well, what if you sock all of your money away for retirement & never make it to 65, yet you could've enjoyed life to the hilt when your home was paid off at 45 and you had the last 20 years of your life to live like a pimp?

 

[puffff]

i think there's great value in terms of having a paid off home because of the security it gives you. once you own your home, you wont be as concerned with any life altering events later in life, such as job loss. someone with a mortgage must find a way to make those monthly payments. someone without just has to worry about putting food on the table.

 

[bsobel]

Originally posted by: redgtxdi
But if you read the article it says that EVEN IF you've got money socked away.......(let's say a year's worth of unemployment).........and plenty of insurance......and anything for the kid's future is financially taken care of.........that leaves the only debt being the mortgage. Why not pay down the mortgage?? Only other real option is to squander the dough, no?

Just remember, that 500k loan (as an example) you took out yesterday is much much much less in 20 years (in inflation adjusted dollars). Every year you wait on principal it in effect goes down by 3% on its own. And while (as some posters noted) their biggest gain in the last 10 years was on their homes appreciation, percentage wise that gain is multiplied since they HAD a loan. Their return with gains would be LESS without the mortgage.

Bill

 

[Engineer]

I can tell you that there is a certain satisfaction to paying your home off. Could I have beaten the 7% mortgage that I had for 6 years and 8 months with other investments? Maybe and maybe not. However, I still made other investments so I'm not too much worried about the strategy. Doesn't take long to build a large invesment once your home (and all other debts for that matter) are paid off.

Advise is to do what your heart desires on this one. If you already have investments and emergency fund(s) and feel the need or desire to pay it down or off, feel free to do so. It has brought me a sense of freedom and gratification in doing so. Also, at times, I feel like I can tell my work to fvck off!

 

[msparish]

Originally posted by: puffff
i think there's great value in terms of having a paid off home because of the security it gives you. once you own your home, you wont be as concerned with any life altering events later in life, such as job loss. someone with a mortgage must find a way to make those monthly payments. someone without just has to worry about putting food on the table.

If you had been investing all that money the entire time, you'd be even more secure.

Edit: Meant the extra towards principle each month, not buying a home in general.

 

[redgtxdi]

And to step off the devil's advocate podium for a second..........


My "ideal" setup is to be debt-free as best I can be.......(savings, retirment, etc. etc.).....and get my mortgage down to the equivalent of my liquid savings. That way, once I get there, I can achieve a similar feeling of "mortgage-free" and ride it out, knowing I could use my savings to pay my way thru if I suddenly couldn't work anymore.

Also, I think that sem-justifies riding the last x-years of mortgage left when the majority is going to principal and you're basically riding out time using the bank's dime.....(as they earn very little interest at the end of your loan).

???

 

[puffff]

Originally posted by: spidey07

Originally posted by: redgtxdi
But if you read the article it says that EVEN IF you've got money socked away.......(let's say a year's worth of unemployment).........and plenty of insurance......and anything for the kid's future is financially taken care of.........that leaves the only debt being the mortgage.


Why not pay down the mortgage??

Only other real option is to squander the dough, no?

You're only squandering money if you pay it down. Money makes more money and it isn't locked into a house that can be difficult and life changed to get back.

money spent paying it down is still making money. you earn roughly the interest rate you borrowed the money at.

 

[Dr. Detroit]

Originally posted by: BlueWeasel
What if you have all of those things, though?

Wife and husband contributing ~20-25% (total, including max company matches) to 401k, have a emergency savings fund, life and disability insurance, and no CC debt. Would it be better to take the extra $200 a month (equal to 3 extra payments per year) that I put toward principal and invest? Possibly in a Roth IRA, since we are both already getting the maximum company match on our 401k's?

Yes. If you are elegible* to particpate in a ROTH IRA than once you have hit the maximum company match on your 401, all retirement savings should then be placed in a ROTH IRA.

*HCE's are not eligible to particpate in a ROTH IRA.

 

[Cattlegod]

ok, i have one question. what if your interest rate on your home loan is 8% (11% before tax writeoff)? if investing over 30 years only returns 8%, then it is a wash right? and in actuality, you should pay down the home loan because that is guaranteed.

 

[Engineer]

Originally posted by: Fmr12B


*HCE's are not eligible to particpate in a ROTH IRA.

That depends on what level of HCE you are. I'm an HCE and it effects my ability to contribute to a 401k plan (discrimination tests). The HCE status there has no effect on my eligibility to contribute to a Roth IRA however. I'm assuming that you mean the HCE limits for a Roth though?

 

[Engineer]

Originally posted by: Cattlegod
ok, i have one question. what if your interest rate on your home loan is 8%? if investing over 30 years only returns 8%, then it is a wash right? and in actuality, you should pay down the home loan because that is guaranteed.

Home interest is simple interest. Investment interest is compounded and the same rate would grow at a much larger rate than the interest paid on a simple interest loan.

 

[ponyo]

Originally posted by: puffff
i think there's great value in terms of having a paid off home because of the security it gives you. once you own your home, you wont be as concerned with any life altering events later in life, such as job loss. someone with a mortgage must find a way to make those monthly payments. someone without just has to worry about putting food on the table.

I agree. You can't put a price on peace of mind. I'm putting extra towards my mortgage and have no regrets even though my investments have far outperformed the interest rate. I'm so close to paying off my mortgage I can see the finish line.

 

[FoBoT]

if you don't have very much equity built up yet, it may be a good idea for a few years to get it built up

or maybe you live in an area with declining housing values, it might be good to offset that equity loss

but paying off the whole thing is more of a "feel good" thing than a strictly financial benefit

 

[bsobel]

Originally posted by: puffff
i think there's great value in terms of having a paid off home because of the security it gives you. once you own your home, you wont be as concerned with any life altering events later in life, such as job loss. someone with a mortgage must find a way to make those monthly payments. someone without just has to worry about putting food on the table.

You miss a primary point, if you truely are investing the principal and not spending it on your life style then at any time you can liquidate that investment and pay the mortgage down an amount equal or greater to what you would have made in prinicpal payments. So in your scenario, if your fired, sell the investments and pay the mortgate off. No difference except you come out ahead if you are disciplined about it.

Now if you can't be disciplined, you wind up 10 years later with the same mortgage (which is still down in adjusted dollars) but no savings to further pay it off.

 

[bsobel]

Originally posted by: Naustica

Originally posted by: puffff
i think there's great value in terms of having a paid off home because of the security it gives you. once you own your home, you wont be as concerned with any life altering events later in life, such as job loss. someone with a mortgage must find a way to make those monthly payments. someone without just has to worry about putting food on the table.

I agree. You can't put a price on peace of mind. I'm putting extra towards my mortgage and have no regrets even though my investments have far outperformed the interest rate. I'm so close to paying off my mortgage I can see the finish line.

From what you've said you're actually costing yourself money. Of course that is your choice, but his statement was invalid if you invest the payments (vs spend them on lifestyle)

 

[Dr. Detroit]

Originally posted by: Engineer

Originally posted by: Fmr12B


*HCE's are not eligible to particpate in a ROTH IRA.

I'm assuming that you mean the HCE limits for a Roth though?

Yes:
Here is the ROTH IRA breakdown on how much you can contribute. http://www.fairmark.com/rothira/contrib.htm