Are you paying extra on your mortgage?

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OS

Lifer
Oct 11, 1999
15,581
1
76
Originally posted by: FreshPrince
I'd much rather pay off my house sooner than to worry about the fact that the bank can take away my house if I ever lose my job...

I have 1 more year to go! woohoo, then I'm a free man :D

I can buy anything I want, invest in anything, or just put it all in a bank and save for 4 years...which will allow me to buy another house and rent that one out. Retire and live off the rent, or save another 4 years and buy/rent out another house....so on and so on....until I get 3 or 4 houses to rent...

that way I can really retire and live off the rent money ;)


If I had 200K in cash, and had to buy a house in the 200K range, I would NOT pay it all off, especially considering how low mortgage rates are these days. With that much cash on hand, even if you lose your job, you can take your sweet ass time paying it off.

Not to mention if you paid it all off and lost your job, you still have to pay property tax, maintenance and insurance, good luck with that if you plowed all your money into the house. Like previously mentioned, if you don't pay your property tax, in a couple of months the city will come take the house from you and put it up for auction.

Also, the interest on the mortgage is tax deductible. With mortgage rates at ~6% today, IMO as interest rates go up, investments in the future will return >6% while you locked in a 30 year loan at 6%.

Of course this all assumes the house was realistically affordable in the first place. People who got into their homes in the bubble today by the skin of their teeth are asking for trouble.
 

Wizkid

Platinum Member
Oct 11, 1999
2,728
0
0
In Canada we can't deduct our mortgage interest, and you can only deduct property tax if you are low-income :(

So say you are paying 6% on your mortgage, you are saving 6% by paying extra. If you invest the money instead, you have to pay taxes on the gains, so you need to make 10% or more to just break even on an investment versus paying off your mortgage.
 

spidey07

No Lifer
Aug 4, 2000
65,469
5
76
Originally posted by: Budmantom
Originally posted by: spidey07
If you pay extra on your mortgage you're a financial idiot.

Seriously. Its been shown time and time again that in the long haul it is a poor financial decision.


So where does a financial guru like yourself put the extra money?

Tom

portfolio.
 

Vic

Elite Member
Jun 12, 2001
50,422
14,333
136
Originally posted by: Budmantom
Originally posted by: Rudee
Originally posted by: 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.
Exactly. Glad to see someone understands this.
My mortgage is not the investment, the amount that I apply over my mortgage is.

Tom
Your property is an asset, your mortgage (including the monthly payments) is a liability. If this is the property you live in, then it is not an investment. But as you pay down more on the mortgage, it begins to become more asset than liability.

Let me refer you to another post:
Originally posted by: huesmann
If you own a single house and you live in it, it is NOT an investment.

If you already live in a house you own, and you buy another house, THAT is an investment.

Even if your single house appreciates in value 1000%, if you sell it you got nowhere to live. You still gotta buy a new house. Unless you move from a city to BFE, you're gonna pay about the same for a new house.

If you get second house as a rental property, then sure, that house is an investment. You can get the renters to basically pay your mortgage for you. Then you own the house that they've paid for.
This is exactly correct. Thinking of your primary residence as an investment and rampant real estate inflation as an run-up on that investment is the most flawed financial thinking in America since, well... the dot-com debacle.

As I already posted months ago in this thread, someday you want your home paid off. Just not while you're still earning.
 

Budmantom

Lifer
Aug 17, 2002
13,103
1
81
Originally posted by: Vic
Originally posted by: Budmantom
Originally posted by: Rudee
Originally posted by: 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.
Exactly. Glad to see someone understands this.
My mortgage is not the investment, the amount that I apply over my mortgage is.

Tom
Your property is an asset, your mortgage (including the monthly payments) is a liability. If this is the property you live in, then it is not an investment. But as you pay down more on the mortgage, it begins to become more asset than liability.

Let me refer you to another post:
Originally posted by: huesmann
If you own a single house and you live in it, it is NOT an investment.

If you already live in a house you own, and you buy another house, THAT is an investment.

Even if your single house appreciates in value 1000%, if you sell it you got nowhere to live. You still gotta buy a new house. Unless you move from a city to BFE, you're gonna pay about the same for a new house.

If you get second house as a rental property, then sure, that house is an investment. You can get the renters to basically pay your mortgage for you. Then you own the house that they've paid for.
This is exactly correct. Thinking of your primary residence as an investment and rampant real estate inflation as an run-up on that investment is the most flawed financial thinking in America since, well... the dot-com debacle.

As I already posted months ago in this thread, someday you want your home paid off. Just not while you're still earning.


in·vest (in-vest')

v., -vest·ed, -vest·ing, -vests.

v.tr.
To commit (money or capital) in order to gain a financial return


When I overpay my mortgage my financial return is my future savings.

When you say that your home is not an investment ... WRONG. If your house appreciates 1000% in 5 years and you have to move(even if you move to a more expensive area) you have that appreciation as opposed to renting you have nothing.

If you don't "invest" in a house your rent will continue to rise(most cases), we bought our house a year ago and we can't rent a house like ours for what our mortgage is and I'm sure rent will continue to go up. In this case my financial gain is that my mortgage is not escalating.


Tom



 

Apathetic

Platinum Member
Dec 23, 2002
2,587
6
81
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.

Assuming both person 1 and person 2 have the same interest rate, it get's even better than that for person 2. Person 2 was only paying interest for 15 years as opposed to 30 years. That adds up VERY quickly.

Dave
 

Vic

Elite Member
Jun 12, 2001
50,422
14,333
136
Originally posted by: Wizkid
In Canada we can't deduct our mortgage interest, and you can only deduct property tax if you are low-income :(

So say you are paying 6% on your mortgage, you are saving 6% by paying extra. If you invest the money instead, you have to pay taxes on the gains, so you need to make 10% or more to just break even on an investment versus paying off your mortgage.
And as a result, roughly half of all residential real estate in Canada is owned free and clear of any mortgage lien, while in the US that figure is under 5%.

Originally posted by: Budmantom
in·vest (in-vest')

v., -vest·ed, -vest·ing, -vests.

v.tr.
To commit (money or capital) in order to gain a financial return


When I overpay my mortgage my financial return is my future savings.

When you say that your home is not an investment ... WRONG. If your house appreciates 1000% in 5 years and you have to move(even if you move to a more expensive area) you have that appreciation as opposed to renting you have nothing.

If you don't "invest" in a house your rent will continue to rise(most cases), we bought our house a year ago and we can't rent a house like ours for what our mortgage is and I'm sure rent will continue to go up. In this case my financial gain is that my mortgage is not escalating.


Tom
I was not comparing buying vs. renting. I was demonstrating basic accounting differences between your owner-occupied residence and owing an actual investment property.
If you do wish to compare renting, then you need to note the differences between market rents and going mortgage payments for comparable properties, maintenance costs of owning, how all that affects cashflow, etc.

The purpose of purchasing your own home to live in is to lock in your housing costs for the long-term, possibly increase your tax deductions, and to slowly build equity. If you have 30 years to go until you retire, then you probably shouldn't pay extra on your mortgage. If you have 15 years and your retirement is underfunded, then you probably should. If you bought your home with the sole hope of value appreciation much greater than the going rate of inflation in a rising interest rate environment, then I got some dot-com stock to sell ya. Got it?
 

Engineer

Elite Member
Oct 9, 1999
39,230
701
126
As I've said earlier...I started paying extra on my home about 5 years ago and will have it paid off in 1.5 years (7.5 years total). The 7% that I've saved (minus a little tax relief) is far better than I would have returned in the market (general funds, etc) over the last 5 years. Once paid off, I can then supplement my already yearly maxed out 401k with maxing out Roth's and then a few other dollars here and there.

I know that it's just the timing of the last 5 years (at least I hope that the market doesn't behave this way for too many more years but with huge trade and budget deficits and inflation pressures especially from energy/oil, who knows).

I'll take that 7% - small tax break and smile knowing that I'm 37 and don't owe anybody anything (except taxes). :)
 

alkemyst

No Lifer
Feb 13, 2001
83,769
19
81
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.

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.

hmmm property in Palm Beach County....check it over the last 6 years even....$75k places that were a stretch are now pulling $200-300k, in 6 years. This is just my time in this market.

My house I sold in 95 with 1700 in taxes per year, has all the houses next to it paying 5-8k in taxes.

the house next door sold for $150k (someone killed their dog, they lived there 10+ years) in 3 days. It's now on the market for $250k less than a month later...with people looking each day.

The place I am living in (renting) is now on the market. I get a steal on rent ($550 a month), but the guy thinks I am dirt poor. Always trying to tell me about money....he has lived in a 200 sq ft apartment in his own building for 10 years. Drives a few year old Corolla....never any chicks at his place and he is always home.

Dude is a retard. He is going to cash in for about $300k though I estimate. I am going to look up his listing, he told me 'I don't have a listing price, they do that now'.

Anyway, I am going to slow his sale routine down a lot, he said he is putting a 'lock box' on all our units. I know someone was in my place today...the fridge was moved.

I feel like leaving tomorrow, driving to the corner store, buying a case and coming home the back door way....when people enter my home work them with my bat.

sorry occifer, I was home, drinking a bit....someone came in my front door. I believed I was going to be killed.




 

RossMAN

Grand Nagus
Feb 24, 2000
78,816
323
136
Originally posted by: Engineer
I'll take that 7% - small tax break and smile knowing that I'm 37 and don't owe anybody anything (except taxes). :)

You're only 37? I always assumed you were older :)
 

Budmantom

Lifer
Aug 17, 2002
13,103
1
81
Originally posted by: Vic
Originally posted by: Wizkid
In Canada we can't deduct our mortgage interest, and you can only deduct property tax if you are low-income :(

So say you are paying 6% on your mortgage, you are saving 6% by paying extra. If you invest the money instead, you have to pay taxes on the gains, so you need to make 10% or more to just break even on an investment versus paying off your mortgage.
And as a result, roughly half of all residential real estate in Canada is owned free and clear of any mortgage lien, while in the US that figure is under 5%.

Originally posted by: Budmantom
in·vest (in-vest')

v., -vest·ed, -vest·ing, -vests.

v.tr.
To commit (money or capital) in order to gain a financial return


When I overpay my mortgage my financial return is my future savings.

When you say that your home is not an investment ... WRONG. If your house appreciates 1000% in 5 years and you have to move(even if you move to a more expensive area) you have that appreciation as opposed to renting you have nothing.

If you don't "invest" in a house your rent will continue to rise(most cases), we bought our house a year ago and we can't rent a house like ours for what our mortgage is and I'm sure rent will continue to go up. In this case my financial gain is that my mortgage is not escalating.


Tom
I was not comparing buying vs. renting. I was demonstrating basic accounting differences between your owner-occupied residence and owing an actual investment property.
If you do wish to compare renting, then you need to note the differences between market rents and going mortgage payments for comparable properties, maintenance costs of owning, how all that affects cashflow, etc.

The purpose of purchasing your own home to live in is to lock in your housing costs for the long-term, possibly increase your tax deductions, and to slowly build equity. If you have 30 years to go until you retire, then you probably shouldn't pay extra on your mortgage. If you have 15 years and your retirement is underfunded, then you probably should. If you bought your home with the sole hope of value appreciation much greater than the going rate of inflation in a rising interest rate environment, then I got some dot-com stock to sell ya. Got it?

Vic,

I don't think you get it. First you say that your primary residence isn't an investment and now your saying that paying interest for 30 years is a good thing(because it's a tax deduction etc), while it can work for a select few it works to the detriment of many others and it makes banks plenty of money.


Tom



 

dud

Diamond Member
Feb 18, 2001
7,635
73
91
No, I am not paying extra on my mortgage because I am one of those idiots who paid their mortgage off and has NO debt.

Go figure?
 

Panakk

Senior member
Jan 17, 2000
913
0
0
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.

what happens if person 1 pays $1000 payment but purchases a more expensive home, having better appreciation leading to a better net worth eventually
 

markgm

Diamond Member
Aug 23, 2001
3,291
2
81
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.

I think your math is wrong, because every time I figure this out I come out with just the opposite. Apples to apples, here is what I figure.

You have 1000 a month. You have a 100k loan at 5.5% for 30 years. You can do 2 things. Pay 567.79 a month on the loan for 30 years and invest the remainder at 8% for 30 years. Doing this at the end of 30 years you'll have a house plus about $634,549.29.

That is your person 1.

Person 2 pays 1000 a month on the loan, and has it paid off 11.25 years. So for 18.75 years he can invest 1000 at 8%. At the end of 30 years he'll have the house and about $537,143.57. As you can see, paying off the house is the worse of the two ways.

I struggle with this though every day. I am in a position that I am buying a house in July and could pay the thing off in 5 years. But as you can see from the numbers above, on paper it doesn't make sense to do it if I could invest that money and get 10 or 12% return over the next 20 years. (I'm 24, so I have plently of time to let the money sit.)

This is all of course best case scenerio. Figuring out my place (it's about 230k loan) an investment could pay my monthly mortgage payments in about 5-7 years if I get a good return.

Edit: $1000 not 1000k ;)
 

Mark R

Diamond Member
Oct 9, 1999
8,513
16
81
Recently, in the UK, it was extremely trendy to get what were called 'endowment' mortgages. Essentially, these were interest only mortgages, with an adittional payment into an investment fund. The idea was that the money in the fund would compound, and the property would gain in equity. Then at the end of 25 or 30 years, you had a huge cash pile in the investment fund which would then pay off the mortgage and give you a nice lump sum.

The problem was that this was an absolute disaster. Typically the lenders predicted a 6-7% return on the investment funds, however, the reality was a much lower return leaving thousands of families with a massive debt at the end of their mortgage term.

Interest-only mortgages are great if the housing market is very active and property prices are rising, but once they stop, or if they fall - especially if there is a general downturn in the economy which could affect outside investments, then they quickly become a liability.

A few years before that (in the early 90s), high interest rates killed the housing market stone dead. Property value deflation of up to 50% in some cases had left tens of thousands of families in 'negative equity', some with debts in excess of 150% of their property value.

The problem as I see it, is that you'd have to be extremely lucky to find a safe investment that could justify paying into it, instead of the mortgage. In the UK, where I'm just buying a property, there is no tax relief on mortgage interest - so with income tax at 40% - I'd need to find an investment that returned 8.4% before it would be worth me investing rather than paying into my mortgage. In today's market, anything over 5% is virtually unheard of. I've had a number of investment products over the last few years, originally sold to me with historical performance of 9% or 10% annual growth. Over the 5 years I've had them, they've 'grown' by approx -3%!

I would be very wary of anyone offering savings or investment rates which are sufficiently high to match your mortgage interest - because the chances are the risks are quite high, possibly unacceptably high.

The way I intend to solve the problem is with a flexible mortgage. I can overpay as much as I want, and can then without notice or approval withdraw any overpayments back as cash should they be needed - avoiding the overpayment trap described in the original article.

 

cKGunslinger

Lifer
Nov 29, 1999
16,408
57
91
Originally posted by: FreewareTownCOM
make sure u check the price u are going be paying each month with a mortgage calculator

Do you have a freeware app for subtlety? I'm thinking not..
 

ElFenix

Elite Member
Super Moderator
Mar 20, 2000
102,357
8,446
126
i was going to say repost, but then i looked at the dates this thread started with
 

cKGunslinger

Lifer
Nov 29, 1999
16,408
57
91
Originally posted by: ElFenix
i was going to say repost, but then i looked at the dates this thread started with

FreewareTownCOM likes to browse through old threads, looking to spam his signature in them. He's one of the more clever douche-bag spammers, but that's not saying a whole lot.
 

markgm

Diamond Member
Aug 23, 2001
3,291
2
81
I was upset that I made the last post which I thought was a good one and then the thread went to die. I hate when I do that!
 

cKGunslinger

Lifer
Nov 29, 1999
16,408
57
91
Originally posted by: markgm
I was upset that I made the last post which I thought was a good one and then the thread went to die. I hate when I do that!
Dude - it's the avatar, I swear. I have a habit of killing every thread I finally get around to participating in.

I think it's because the officeguy with glasses avatar makes us look so smart, people get intimidated. ;)
 

CrimsonChaos

Senior member
Mar 28, 2005
551
0
0
I realize this thread is several months old. However, I have my own thoughts on this!

Many of you are talking about the stock market earning 8% over a 30 year time span. First, and this has been said before (investing 101): past performance is not necessarily indicative of future results. That's great that the market has done so well in the past. It does not guarantee it will continue.

Second, how many people do you know who are savvy investors? There are a LOT of people who lose money in the market because they aren't sure what they are doing. Also, who do you know that has kept their money in the market for a FULL 30 years -- even during downturns? What often happens is people invest, then when things go sour they panic and remove their money. Or they begin to accumulate enough money in stocks, that they begin cashing in to buy other luxuries. Unless you keep all your money "tied-up" in the market for 30 years (as people say it would be in a house), you cannot apply the "8% market average over 30 years".

Third, and maybe most importantly, is fully understanding this "8% average". Anyone who has invested knows the market is in constant flux. One year, you can get a return in the 20%'s, and the very next year you could lose money. Let's say over a 30-year span, the market returns look something like this on an annual basis (numbers in parentheses are negative returns):
(3.2), 4.7%, 1.2%, (5.1%), 3.8%, 5.2%, 6.3%, 8.8%, (1.6%), 7.0%, 18.2%, (2.1%), 12.7%, 8.1%, 14.7%, 12.5%, 9.2%, 22.5%, 6.6%, 10.7%, (5.6%), 15.1%, 13.3%, 9.7%, 17.3%, 5.2%, 10.3%, 4.5%, 14.9%, 15.2%

In this case, over the first 10 years the return averages to just 2.71%, and the next 20 years average to 10.65% -- the whole 30 year average is 8.00%. So what if you paid your mortgage off during these first 10 years, then invested during the next 20?

My point is the market is always in flux -- you do NOT EVER receive 8% every single year. If someone would have paid off their mortgage in the first 10 years above, they would have missed out on just a 2.71% return from the market. (And if they invested the next 20, would have received the 10.65% returns).

Am I advocating everyone run to dump money into their mortgage? Of course not. But I hate reading these articles that ENCOURAGE people to carry mortgages. First, you should obviously focus on any other debts you have. Once you are completely debt-free (aside from the mortgage), then you can analyze whether paying off is right for you.

[*]How much extra money do I have per month?
[*]How quickly will the mortgage be paid off if I put everything extra toward it?
[*]What is my knowledege of investments and the stock market?
[*]How are current market conditions? Bull, bear, sideways?
[*]If I invest my money, am I disciplined enough to keep it there for 30 full years?

With that said, most people probably want to do a mix -- put some extra toward the mortgage, and some into investments. But ignoring the mortgage completely and paying on it for 30 years should definitely not be an option (unless you live paycheck to paycheck and have other debts you can't get rid of). Glad I got that off my chest!