Are you paying extra on your mortgage?

[Budmantom]

dcwilbur posted this article in the finance forum @ FW:

Never Own Your Home Outright. Instead, Get a Big 30-year Mortgage, and Never Pay It Off ? Regardless of Your Age and Income

Interesting read but to say that his thinking is flawed would be an understatement.


Tom

 

[Pliablemoose]

My concern with the basic premise is that consumers are leveraged to the hilt with debit already, most people will just take that $ & put it towards a nicer car, and have larger car/auto insurance/registration payments.

Houses last much longer than cars.

But I'm not a millionaire, so that may be the reason.

 

[FoBoT]

.

 

[isasir]

The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

It's funny though how the author automatically assumes that everyone who invests money gets an 8% or more rate of return on their investment. I guess he didn't know anyone from the last few years (or even longer than that) who lost thousands in the stock market.

You show me a guaranteed 8% rate of return investment, and for sure my money will go there. In the meantime, it either goes in to my ING account with it's guaranteed 2%+ or it goes towards things like a mortgage.

 

[Budmantom]

The only guaranteed "investment" is my 6% mortgage.


Tom

 

[desy]

I actually do that
It means I'm diversifying my investement the way I look at it.
Money in the market and money in Real Estate. If all you own is paper you might have a problem someday, If all you own is your house you might have a problem someday, IE his arguments.
So I never double up on payments or dump tax refunds against the mortgage. I'll invest it or buy something material, cause you can always sell things if times are bad.

I chose a mortgage that was something I could pay off comfortably a month in good or bad times

 

[rh71]

We don't pay extra... we're already paying $2000/mo.... and while only 1/4 of that is actually for principle (even with 5.875% rate), we can't afford to throw in any more. Besides, we don't plan on being here for all 30 years.

Now I shall read the article...

EDIT>> Ok I'm done reading...
His 1st point:
I am not investing the extra money (nor would I try), so I would still be better off putting in extra for the mortgage, if I could.

His 2nd point:
The payments get cheaper over time, even though they never actually change. This is possible because the payments are fixed, while your income grows with inflation.

SWEET.

 

[no0b]

Where's MySOS to give great financial advice?

 

[conjur]

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

 

[Modeps]

If I could pay off my house tomorrow, I would.

 

[FoBoT]

Originally posted by: no0b
Where's MySOS to give great financial advice?

is he that idiot that was telling hevnst to commit income tax evasion?

 

[Pliablemoose]

The author is also assuming that if you do this, you'll invest the extra $ or pay off high interest CC debit.

Most consumers do neither and wouldn't.

 

[ElFenix]

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

 

[conjur]

Originally posted by: ElFenix

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

So, paying off that mortgage earlier will save a sh*tload more in interest.

 

[rh71]

Originally posted by: Pliablemoose
The author is also assuming that if you do this, you'll invest the extra $ or pay off high interest CC debit.

Most consumers do neither and wouldn't.

You missed his point about rising salaries while your interest remains the same.

 

[Torghn]

Originally posted by: conjur

Originally posted by: ElFenix

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

So, paying off that mortgage earlier will save a sh*tload more in interest.

True, but paying down $100 of a 12% interest debt will save you more than paying down $100 of a 6% interest debt.

His arctical only makes sense if you have a higher interest debt or a gerunteed way to make more interest than you pay on your house.

 

[isasir]

Originally posted by: conjur

Originally posted by: ElFenix

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

So, paying off that mortgage earlier will save a sh*tload more in interest.

Some factors you're overlooking are:
1. Mortgage interest is tax deductible
2. Your credit card interest rate changes. A fixed mortgage rate doesn't.
3. You can much easier (meaning quicker) pay off a credit card with a $10,000 balance at 12% interest, than you could a $150,000 mortgage at 6% interest. So, instead of having two items carrying interest (paying more on house), you're better off paying off the credit card first (higher interest rate, lower balance), so you only have 1 item left (house), so the extra money you now have from not paying the credit card can go towards your house.

 

[aircooled]

Originally posted by: conjur

Originally posted by: ElFenix

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

So, paying off that mortgage earlier will save a sh*tload more in interest.

Not when you account for the tax write-off of martgage interest. you can't do that with a cc

 

[DBL]

I'd say his reasoning is pretty solid. If I had a lot of extra money every month, I'd be investing it rather than trying to pay off my 5.75% 30yr fixed mortgage. Historically, it would be hard not to beat that rate over the long run w/ sound investments.

People who only consider a 15yr mortgage are usually not taking into account the time value of money.

 

[Budmantom]

Originally posted by: rh71

Originally posted by: Pliablemoose
The author is also assuming that if you do this, you'll invest the extra $ or pay off high interest CC debit.

Most consumers do neither and wouldn't.

You missed his point about rising salaries while your interest remains the same.

The author assumes your salary will always rise, it's easy to get 8% on your investments and that your house is a great tax shelter.

My income increased much in the last 5 years, my investments have taken a beating(not real estate) and even when I owned 3 houses the tax benefit was not substantial (even if you include depreciation).


Tom

 

[rh71]

Originally posted by: Budmantom

Originally posted by: rh71

Originally posted by: Pliablemoose
The author is also assuming that if you do this, you'll invest the extra $ or pay off high interest CC debit.

Most consumers do neither and wouldn't.

You missed his point about rising salaries while your interest remains the same.

The author assumes your salary will always rise, it's easy to get 8% on your investments and that your house is a great tax shelter.

My income increased much in the last 5 years, my investments have taken a beating(not real estate) and even when I owned 3 houses the tax benefit was not substantial (even if you include depreciation).


Tom

The author used his uncle's example over a 20 year period. I'm sure you will see a difference in your salary (vs. inflation) over that amount of time.

 

[Budmantom]

Originally posted by: DBL
I'd say his reasoning is pretty solid. If I had a lot of extra money every month, I'd be investing it rather than trying to pay off my 5.75% 30yr fixed mortgage. Historically, it would be hard not to beat that rate over the long run w/ sound investments.

People who only consider a 15yr mortgage are usually not taking into account the time value of money.

Historically... except the last 5 years.


Tom

 

[Jzero]

Here is the crux of the concept, and this is exactly why this idea is great on paper, but disastrous for many, if not most people:

2. Invest the proceeds of your refinancing carefully. Do not spend the money on vacations, furniture, cars or college. This is your home we're talking about, so you must invest these assets prudently. If you don't know how to do that, hire a professional advisor to do it for you.

How many people have the self-discipline to carry this out? I don't even know if I do, and I like to think of myself as being pretty financially prudent.

 

[Wizkid]

Regardless of the dollar amounts, if you are borrowing, borrow at the least interest %. So borrowing $2000 extra from your mortgage at 6% is better than having $2000 on a 12% credit card.

If you can make more money on your investments then you should invest instead of pay off the mortgage. However, you do have to pay tax on interest that you earn,, so this would cancel out the tax credit that you get for paying mortgage interest. So, unless you can get an investment that pays more than your mortgage (such things don't exist unless you are willing to take a risk), you should just pay off your mortgage. However, lets say you have a 30-yr mortgage at 6%, and then in 5 years interest rates jump up to 10%. You are still paying only 6% on your mortgage, but now you can earn 10% with GICs or gov't bonds, this is when you should invest instead of paying off the mortgage.

Just like any investment, it all has to do with your risk tolerance. The more you are willing to risk (stocks, etc) to more you should be investing instead of paying off your mortgage.

 

[conjur]

Originally posted by: aircooled

Originally posted by: conjur

Originally posted by: ElFenix

Originally posted by: conjur

Originally posted by: isasir
The author does make some good points. If you're putting extra money towards your mortgage, while carrying a balance on a 12% interest rate credit card, then you're wasting money.

But 12% of, say, a $2000 credit card is helluva lot less interest than 6% of a $250,000 loan.

yeah, so?

So, paying off that mortgage earlier will save a sh*tload more in interest.

Not when you account for the tax write-off of martgage interest. you can't do that with a cc

You going to save, say, $100k in taxes from that deduction? I don't think so.