Are you paying extra on your mortgage?

[Drekce]

The one thing that isn't brought up is the fact that the person who pays off his mortgage early will have a large sum of money every month that is available for investing.

Person 1 has a 30 year mortgage with an $800 payment
Person 2 has a 15 year mortgage with a $1000 payment

Person 1 puts that extra $200 into an investment that earns 8% a year. After 30 years he will have $298,071.89
Person 2 puts the entire $1000 into an 8% investment for the 15 years after he pays off the mortgage (same 30 total years as Person 1) and will end up with $346,038.22

Using that logic it is better to pay off the mortgage if you are disciplined enough to invest the money when the mortgage is over.

Also, this doesn't take into account the extra money Person 1 will save from the tax benefits of a mortgage. If you add that in the numbers may even out a little bit more.

 

[conjur]

Originally posted by: 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.

I'll agree with your second statement. 😉

 

[aircooled]

Originally posted by: 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.

plus the thing he didn't really address, in 6 years my house is worth $25,000 more than when I moved in. (YMMV) but that equity can pay off the credit card with much less interest.

 

[DBL]

Originally posted by: 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

Not really. Obviously you can pick certain time frames, where high return investments such as stocks performed poorly. However, unless you put boatloads of your investment capital into relatively few stocks, you really should be doing ok. Certainly not fantastic by historical standards but not too bad either, all things considered. For example, my average annual return on my 401k since 9/2000 is 2.25%. All things considered, that's not too bad and if I factored in the two previous years, it would be quite a bit higher.

 

[Demon-Xanth]

The problem with a large, long, mortgage, is that your income is NOT guarenteed. I'm sure it's easy to find people who have a cost of living that is increasing faster than thier income. Got a job? That can change. Want to retire? It's a whole lot easier without forking over $1500/mo.

 

[Jeraden]

His arguments are the same ones you read lots of places. It really comes down to 1 factor though: would you rather have a guaranteed 6% return on investment by paying toward your mortgage, or would you rather risk it in another investment that may or may not exceed the 6%.

Based on how my IRA investments are performing, some are over 6%, some are way under 6%. Personally, I'd rather go for the sure-bet of doing the 6% mortgage over an unknown rate via investing, which is why I put most my extra income towards my mortgage. I do not see it as either a foolhardy or unwise strategy.

Also, as far as the argument about your mortgage interest being tax deductible, yes thats true. But any income you make via investments is taxable, so its really just a wash. However, a lot of interest income is state taxable, while mortgage interest is not state deductible. Plus if you have high income, your mortgage interest isn't 100% deductible either, but your interest income is always 100% taxable.

 

[isasir]

Originally posted by: Demon-Xanth
The problem with a large, long, mortgage, is that your income is NOT guarenteed. I'm sure it's easy to find people who have a cost of living that is increasing faster than thier income. Got a job? That can change. Want to retire? It's a whole lot easier without forking over $1500/mo.

Good point. My aunt got laid off a few years ago, but didn't have to rush to find a new job since her mortgage was paid off. She's spent that time doing more public service work and taking care of her grandkids, and she's only in her 50's.

 

[DBL]

Originally posted by: isasir

Originally posted by: Demon-Xanth
The problem with a large, long, mortgage, is that your income is NOT guarenteed. I'm sure it's easy to find people who have a cost of living that is increasing faster than thier income. Got a job? That can change. Want to retire? It's a whole lot easier without forking over $1500/mo.

Good point. My aunt got laid off a few years ago, but didn't have to rush to find a new job since her mortgage was paid off. She's spent that time doing more public service work and taking care of her grandkids, and she's only in her 50's.

This point was addressed in the article and is not as clear cut as you make it out to be. With proper investment techniques, the person who holds the 30 yr mortgage may very well be in much better shape if they were to get laid off, especially in the first 15 years of the mortgage.

 

[JeffreyLebowski]

I want to know how they can get off saying that interest is like 6% or whatever, but 3/4th of what you pay is interest. That's 75%. and by running numbers on calculators online, you usually pay 3 times what the house was worth. WTF. I can see paying maybe $20,000 interest on a $100,000 home over 15 years, but not $200,000 interest on the same house over 30 years.

 

[Elbryn]

Originally posted by: DBL

Originally posted by: isasir

Originally posted by: Demon-Xanth
The problem with a large, long, mortgage, is that your income is NOT guarenteed. I'm sure it's easy to find people who have a cost of living that is increasing faster than thier income. Got a job? That can change. Want to retire? It's a whole lot easier without forking over $1500/mo.

Good point. My aunt got laid off a few years ago, but didn't have to rush to find a new job since her mortgage was paid off. She's spent that time doing more public service work and taking care of her grandkids, and she's only in her 50's.

This point was addressed in the article and is not as clear cut as you make it out to be. With proper investment techniques, the person who holds the 30 yr mortgage may very well be in much better shape if they were to get laid off, especially in the first 15 years of the mortgage.

the person holding the 30 year mortgage and is paying extra to get it down can easily regain the flexibility of one who hasnt by opening a HELOC. Actually, theres almost no good reason to not have a HELOC if you're financially reponsible enough to not spend it without cause. You pay extra into your mortgage, have a heloc for some high percentage of your equity before you lose your job, you'll have a line of credit to carry you through your time of need. You could also push the standard 3-6 months of living cost saving into longer term investments, use the heloc to cover should the need arise and not have to take money out of down allocations.

 

[DBL]

Originally posted by: Drekce
The one thing that isn't brought up is the fact that the person who pays off his mortgage early will have a large sum of money every month that is available for investing.

Person 1 has a 30 year mortgage with an $800 payment
Person 2 has a 15 year mortgage with a $1000 payment

Person 1 puts that extra $200 into an investment that earns 8% a year. After 30 years he will have $298,071.89
Person 2 puts the entire $1000 into an 8% investment for the 15 years after he pays off the mortgage (same 30 total years as Person 1) and will end up with $346,038.22

Using that logic it is better to pay off the mortgage if you are disciplined enough to invest the money when the mortgage is over.

Also, this doesn't take into account the extra money Person 1 will save from the tax benefits of a mortgage. If you add that in the numbers may even out a little bit more.

You can just as easily play w/ the numbers and reach the exact opposite conclusion. For example, if we assume a .5% interest difference (this seems about average) between the two loans (6% and 5.5%), the 15yr could be paying $291 more per mortgage payment. In my example, assuming a 10% return on investment, $291 invested at 10% over 30 years is 657,802 while $1094 over 15 years at 10% returns $453,430. It really comes down to how much you believe you can beat your mortgage interest rate by over time. That's why, considering today?s rates, a 30yr fixed is a tremendous deal.

 

[conjur]

Originally posted by: JeffreyLebowski
I want to know how they can get off saying that interest is like 6% or whatever, but 3/4th of what you pay is interest. That's 75%. and by running numbers on calculators online, you usually pay 3 times what the house was worth. WTF. I can see paying maybe $20,000 interest on a $100,000 home over 15 years, but not $200,000 interest on the same house over 30 years.

That's the point I was trying to make. Initial years on a home mortgage mean you're paying out the freakin' wazoo in interest. I know it lowers your taxable income but the tax savings doesn't equal the amount of cash paid out in interest.

 

[jadinolf]

Originally posted by: Modeps
If I could pay off my house tomorrow, I would.

Me too.

April 1992... I had a few CDs which had matured. They had paid 10.10% (anyone remember them?)

Anyway present CDs were paying 3.5% so I decided to pay off my 30 year mortgage in just 14 years.

Regardless of what anyone says, it's a great feeling not to have a house payment.

 

[CPA]

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.

don't forget to factor in the adjustment to taxes due to the fact you can itemize the mortgage interest, but you can't for the cc interest.

 

[conjur]

Originally posted by: CPA

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.

don't forget to factor in the adjustment to taxes due to the fact you can itemize the mortgage interest, but you can't for the cc interest.

See my last post above. 🙂

 

[desy]

His point is
To be invested in other things than singly a house

Your aunt would have had savings to live off while living in her house and wouldn't have to rush out for a job right away either, yes you pay 3X your initial house price but your house will also be worth 3X as much when its time to sell and the investments you made at the start are compounding right away. I find mine double about every 8 yrs so they have quadrupled in value by 30 yrs.
I look at the mortgage as a cheap loan to fund everything else and I build equity.
Don't spend your money on depreciating assets is his point, cars/trips, invest it.

 

[GasX]

While I would not recommend this to most people, I am an example of someone who lives they way this guy describes. I have an interest only mortgage at a very low interest rate. My extra cash is going into home improvements that will add value to the house and investments.

The key is having the discipline to invest the extra money instead of spending it.

 

[DBL]

Originally posted by: Elbryn
the person holding the 30 year mortgage and is paying extra to get it down can easily regain the flexibility of one who hasnt by opening a HELOC. Actually, theres almost no good reason to not have a HELOC if you're financially reponsible enough to not spend it without cause. You pay extra into your mortgage, have a heloc for some high percentage of your equity before you lose your job, you'll have a line of credit to carry you through your time of need. You could also push the standard 3-6 months of living cost saving into longer term investments, use the heloc to cover should the need arise and not have to take money out of down allocations.

Sure but you are forgetting that a HELOC floats w/ prime. It's not a fixed rate.

 

[GasX]

Originally posted by: DBL

Originally posted by: Drekce
The one thing that isn't brought up is the fact that the person who pays off his mortgage early will have a large sum of money every month that is available for investing.

Person 1 has a 30 year mortgage with an $800 payment
Person 2 has a 15 year mortgage with a $1000 payment

Person 1 puts that extra $200 into an investment that earns 8% a year. After 30 years he will have $298,071.89
Person 2 puts the entire $1000 into an 8% investment for the 15 years after he pays off the mortgage (same 30 total years as Person 1) and will end up with $346,038.22

Using that logic it is better to pay off the mortgage if you are disciplined enough to invest the money when the mortgage is over.

Also, this doesn't take into account the extra money Person 1 will save from the tax benefits of a mortgage. If you add that in the numbers may even out a little bit more.

You can just as easily play w/ the numbers and reach the exact opposite conclusion. For example, if we assume a .5% interest difference (this seems about average) between the two loans (6% and 5.5%), the 15yr could be paying $291 more per mortgage payment. In my example, assuming a 10% return on investment, $291 invested at 10% over 30 years is 657,802 while $1094 over 15 years at 10% returns $453,430. It really comes down to how much you believe you can beat your mortgage interest rate by over time. That's why, considering today?s rates, a 30yr fixed is a tremendous deal.

You also have to factor in the fact that person 1 has a great mortgage rate deduction each year allowing him to save more than person 2

 

[Vic]

Originally posted by: Budmantom
The only guaranteed "investment" is my 6% mortgage.


Tom

Your mortgage is not an investment. It is a liability. Please put it in the appropriate accounting column.

The writer has some good points. I see lots of people who have large amounts of equity in the home but tens of thousands in credit card debt, and yet still refuse to refinance. That is simply foolish.
And he is right that people should not pay so much extra on their mortgage that they have no rainy day fund. Even lenders know this: having capital asset reserves (at least 2-6 month's of mortgage payments in the bank) can greatly strengthen a weak loan application. Even your lender would advise you not to make "Pat's" mistake.

However, someday you want your mortgage paid off. Not too soon, preferably not before retirement, but not too long after either, when the tax deduction is going to become less of a benefit while the mortgage payments become more of a burden.

And I disagree strongly when he said that a mortgage is a loan against your income and not against your house. It is possible to obtain a mortgage without an income, one just needs good equity and a high credit score. And when you stop making your mortgage payments, they don't take your income from you, they take your house.

Consider the source here, folks. He has some good points, one I've heard a hundred times before from financial planners (the idea he espouses is generically known as "equity preservation"), but basically what he is selling is for old folks to cash out their home equity and dump it in the market. That's how he gets paid.

 

[DBL]

Originally posted by: Mwilding

Originally posted by: DBL
You can just as easily play w/ the numbers and reach the exact opposite conclusion. For example, if we assume a .5% interest difference (this seems about average) between the two loans (6% and 5.5%), the 15yr could be paying $291 more per mortgage payment. In my example, assuming a 10% return on investment, $291 invested at 10% over 30 years is 657,802 while $1094 over 15 years at 10% returns $453,430. It really comes down to how much you believe you can beat your mortgage interest rate by over time. That's why, considering today?s rates, a 30yr fixed is a tremendous deal.

You also have to factor in the fact that person 1 has a great mortgage rate deduction each year allowing him to save more than person 2

Absolutely. I don't even consider it a deduction, more like a "pay raise".

 

[Vic]

Originally posted by: DBL
Absolutely. I don't even consider it a deduction, more like a "pay raise".

Which is not a good idea. The amount of that "pay raise" is only the percentage of your tax bracket off what you actually paid in mortgage interest and property taxes. It's not free money. Do you think you don't pay taxes at all in years where you get a refund? :roll:


There are 2 ways to pay too much in interest on a finance contract. The first is having a high interest rate, and the second is having too long a term -- the longer you pay, the more you pay, and dramatically so.

 

[DBL]

Originally posted by: Vic

Originally posted by: DBL
Absolutely. I don't even consider it a deduction, more like a "pay raise".

Which is not a good idea. The amount of that "pay raise" is only the percentage of your tax bracket off what you paid in mortgage interest and property taxes. It's not free money. Do you think you don't pay taxes at all in years where you get a refund? :roll:

Huh? Rather that giving the government and interest free loan for 12 months, I would rather receive the money right away. Are you suggesting I overpay my taxes to guarantee a large refund?

There are 2 ways to pay to much in interest on a finance contract. The first is having a high interest rate, and the second is having too long a term -- the longer you pay, the more you pay, and dramatically so.

What does that really mean? The two things balance themselves out. Generally, the longer you pay, the higher your rate and vice-versa. The question is whether there are other factors which make extending your term worthwhile.

 

[Vic]

Originally posted by: DBL
Huh? Rather that giving the government and interest free loan for 12 months, I would rather receive the money right away. Are you suggesting I overpay my taxes to guarantee a large refund?

LOL.. I was using sarcasm to say the opposite. RIF.
My point was that your mortgage interest deduction is not a dollar-for-dollar return, and is not free money.

There are 2 ways to pay to much in interest on a finance contract. The first is having a high interest rate, and the second is having too long a term -- the longer you pay, the more you pay, and dramatically so.

What does that really mean? The two things balance themselves out. Generally, the longer you pay, the higher your rate and vice-versa. The question is whether there are other factors which make extending your term worthwhile.

How do they balance themselves out? Rate is market-driven and (quite frankly) relative. Term is neither. And the longer you pay, the more you pay. Ideally, you want to pay off your morgage at about the time of your retirement. Your taxable income will generally be less, your tax bracket lower, and hence your mortgage interest deduction will be less with even the same mortgage payment. As it takes most people 30 to 40 years to get there, I think that's about a much term extension as you want ideally.

 

[Engineer]

Originally posted by: jadinolf

Originally posted by: Modeps
If I could pay off my house tomorrow, I would.

Me too.

April 1992... I had a few CDs which had matured. They had paid 10.10% (anyone remember them?)

Anyway present CDs were paying 3.5% so I decided to pay off my 30 year mortgage in just 14 years.

Regardless of what anyone says, it's a great feeling not to have a house payment.

Hope to know that feeling in about 2 years.

Also, started paying extra toward the house about 4.5 years ago. Anyone think that the market has returned the 7% (overall for most funds) per year over that last 4.5 years?

Once the debt is gone, more investment can occur (I already maxed out 401k last year anyway, so it's not like I'm not investing, but I would always like to invest more). 🙂