Good point. Also please see my above post. You cannot apply a "30-year-average" to a fifteen year timeframe (i.e. Person 2 paying off the house in 15 years, then investing the next 15 years).
Eug
Lifer
- Mar 11, 2000
- 24,048
- 1,679
- 126
It is in the US, yes. I live in Canada where mortgage interest is not tax deductible.
BTW, I blame mortgage interest deductibility as one of the reasons housing prices are so high in the US.
Anyways, yeah, this guy's article makes too many assumptions to be applicable to the general population even in the US... It does have some merits for a subgroup of the population, but not for everyone else.
Quoted for truth.
However that is $100 you could be putting in a 401k. If you are not putting the max in your 401K and your company offers a match then you are making a really bad investment.
Lets say your company offers 50 cents on the dollar than mean you are paying down a 6% loan instead of taking a 50% instant return on that money. The real question is would you borrow @6% to buy something that gave you an return of 50% right now.
And whle the market is taking a beating right now if you look at the LONG term a dollar you invest today will gain 8% in the market over 30 years. even if you invested it 30 year before the big crash of 30 years before today.
I kept the interest rate the same because I didn't change the loan from a 30 year to a 15 year, it just happened that with this loan amount the loan would have been paid off in around 15 years. However, if you went into your loan knowing that you wanted to pay it off early and didn't want to have any margin of safety if you lost your job, here it is:
Person 3 has a 15 year mortgage with a payment of $790 at 5% but pays a total of $1000 a month.
The loan is paid off in 10.83 years with 19.17 years to invest 1000 a month at 8%. At the end of 30 years he'll have the house and about $537,143.57.
Huh, what?
My spreadsheet isn't a fan of these fractions, which is why the numbers are the same (I round the years up or down) but you get the idea. The difference of .5% less mortgage interest is about 4 months. So you're talking about $4000, or 0.7% of the funds you have for retirement.
What is more important is to compare these numbers to person 1. Basically you stand to lose 15% of your retirement money by paying off your house early with these numbers.
The major problem I have with the situation brought up by CrimsonChaos is that he is using how the market changes to your advantage. With my situation I will ride out any ups or downs, which any sane investor will tell you is the only 'safe' way to invest. In his example, the 20% returns could all happen during the years you are paying more money into your house, and then when you finally pay it off and start investing, the last 15 years of your investing life are only seeing returns of 2% in the market. It works both ways.
No one knows what the future holds, but judging by the fact that the sun rose yesterday, I am confident in saying it will rise tomorrow, even if two weeks ago we had a bad storm and I didn't see the sun at all. The fact is, you can't predict the market, so by spreading your investment out over time, you spread out the risk.
Even knowing the numbers, I'm still not sure what I'll do. I think I'll invest, as being being in the IT field isn't a promise of steady work. If thinkgs turn sour, I can't go back to my mortgage company and ask "can I not pay you for a few months? I paid extra the last 5 years, so pleeeeaase." But I can withdrawl the money I have invested. I'd suck to lose a house that only has 60k left to be paid off.
Even though this turned towards risky investments (I would personally do mutual funds and hope for a 10-12% return over the long haul, with the 8% being conservative), you would still be in a better place if you had a 5% mortgage and were investing in 4% CDs after the whole tax deal in the US with interest. But just as CrimsonChaos mentioned, there is no point in doing any of this if you still have higher interest debt. I just assumed that people wouldn't be paying more into their houses if they had credit card debt, etc.
I hopefully close on the 22nd, pushed back from the 15th, but after checking the place out yesterday, I wouldn't be suprised if it were pushed back to the end of the month.
House pic
Person 3 has a 15 year mortgage with a payment of $790 at 5% but pays a total of $1000 a month.
The loan is paid off in 10.83 years with 19.17 years to invest 1000 a month at 8%. At the end of 30 years he'll have the house and about $537,143.57.
Huh, what?
My spreadsheet isn't a fan of these fractions, which is why the numbers are the same (I round the years up or down) but you get the idea. The difference of .5% less mortgage interest is about 4 months. So you're talking about $4000, or 0.7% of the funds you have for retirement.
What is more important is to compare these numbers to person 1. Basically you stand to lose 15% of your retirement money by paying off your house early with these numbers.
The major problem I have with the situation brought up by CrimsonChaos is that he is using how the market changes to your advantage. With my situation I will ride out any ups or downs, which any sane investor will tell you is the only 'safe' way to invest. In his example, the 20% returns could all happen during the years you are paying more money into your house, and then when you finally pay it off and start investing, the last 15 years of your investing life are only seeing returns of 2% in the market. It works both ways.
No one knows what the future holds, but judging by the fact that the sun rose yesterday, I am confident in saying it will rise tomorrow, even if two weeks ago we had a bad storm and I didn't see the sun at all. The fact is, you can't predict the market, so by spreading your investment out over time, you spread out the risk.
Even knowing the numbers, I'm still not sure what I'll do. I think I'll invest, as being being in the IT field isn't a promise of steady work. If thinkgs turn sour, I can't go back to my mortgage company and ask "can I not pay you for a few months? I paid extra the last 5 years, so pleeeeaase." But I can withdrawl the money I have invested. I'd suck to lose a house that only has 60k left to be paid off.
Even though this turned towards risky investments (I would personally do mutual funds and hope for a 10-12% return over the long haul, with the 8% being conservative), you would still be in a better place if you had a 5% mortgage and were investing in 4% CDs after the whole tax deal in the US with interest. But just as CrimsonChaos mentioned, there is no point in doing any of this if you still have higher interest debt. I just assumed that people wouldn't be paying more into their houses if they had credit card debt, etc.
I hopefully close on the 22nd, pushed back from the 15th, but after checking the place out yesterday, I wouldn't be suprised if it were pushed back to the end of the month.
House pic
well.. there are benefits to owning a home. especially if you are a 1099 employee. home office perhaps. But the biggest thing is that every cent you pay in interest is tax deductible. Everyone's entitled to what they believe.
it really depends on where you buy the property. keep that in mind. gotta do that research...
-california
it really depends on where you buy the property. keep that in mind. gotta do that research...
-california
Oh hell yeah. I give about $100 on top to my principle which isn't much, but I want to pay it off ASAP.
Yes it is true in this case I used the numbers to show how it COULD work out to your benefit to pay off the house first. You could just as easily reverse the numbers, and show how it would be to your diasadvantage.
My point, however, is that when people speak of this "8% average" stock market gain, they make it sound like you will receive 8% every year of your investment. This is not the case, and never will be. The market is in constant fluctuation, and you could definitely win or lose depending on your timing.
I say this because when people do their spreadsheets, they have to realize that they are using a 30-year 8% average on a shorter time frame (if, for example you apply it to someone pays off their house for the first 10 years). A 30 year average should not be applied to any time-frame other than 30 years.
The reason is, there has never been a 30-year period where the stock market returned less than 8%. However, there HAS been 20-year, 10-year, etc... year periods where it HAS returned both more and less than 8%.
EDIT: Nice house! Your siding and shutters look exactly like mine. I'm assuming it's vinyl?
Being 24, I plan on investing for a good 30 years (but want to be able to retire in 15), so I'll take the gamble for a couple extra 100k. It's amazing when you look at investing and your house how much of it is all emotional. What are you comfortable with? That answers where anyone should put their money.
Yep, vinyl. They put the gutters up this week, the one right down the center of the place is so idiotic. They didn't even bother to put one out back, so I'll add that to my list of improvements. I signed the contract back in February for it (maybe it was January, I can't remember anymore) and was told it would be ready by June, but I said July 15th works for me. Well, as time got closer, I guess it didn't work for them. I have half my place packed up, just waiting for a confirmed closing date. All I have to say is if you are buying a house, ebay is your friend. I'll start investing next year I guess
.
Yep, vinyl. They put the gutters up this week, the one right down the center of the place is so idiotic. They didn't even bother to put one out back, so I'll add that to my list of improvements. I signed the contract back in February for it (maybe it was January, I can't remember anymore) and was told it would be ready by June, but I said July 15th works for me. Well, as time got closer, I guess it didn't work for them. I have half my place packed up, just waiting for a confirmed closing date. All I have to say is if you are buying a house, ebay is your friend. I'll start investing next year I guess
.Originally posted by: markgm
Being 24, I plan on investing for a good 30 years (but want to be able to retire in 15), so I'll take the gamble for a couple extra 100k. It's amazing when you look at investing and your house how much of it is all emotional. What are you comfortable with? That answers where anyone should put their money.
Yep, vinyl. They put the gutters up this week, the one right down the center of the place is so idiotic. They didn't even bother to put one out back, so I'll add that to my list of improvements. I signed the contract back in February for it (maybe it was January, I can't remember anymore) and was told it would be ready by June, but I said July 15th works for me. Well, as time got closer, I guess it didn't work for them. I have half my place packed up, just waiting for a confirmed closing date. All I have to say is if you are buying a house, ebay is your friend. I'll start investing next year I guess
Being your age, and getting a brand new mortgage, I definitely agree that I would mostly invest. Maybe just put an extra $100 toward mortgage, then use the rest to build up that portfolio.
In my situation, we could have the house paid off in 1.5 years if we put our extra money toward it. Plus, we have a small nestegg already in the bank. And I'm a "bit" older than you (32), so it probably makes sense for us to pay off the house first.
I guess there is no right answer for this -- like you said, it just depends on your risk-tolerance and your current situation. Regardless, it's great that you're even thinking about this stuff at 24. Most guys your age still have "other priorities" that don't include fiscal responsibility.
Good luck, and enjoy the new house!
Congrats!
Just to throw this out there, here's a quick and dirty formula to figure out how long you have left to pay on your house (given a FIXED interest rate, and static monthly payments) or any other debt.
B = Loan balance that you want to use in the calculation.
P = Monthly Payment Amount (Toward PRINCIPAL ONLY)
I = Interest Rate (be sue to use decimals.. i.e. for 6.25%, use 0.0625... NOT 6.25)
[ -LOG(1 - (B*I / 12*P)) ] / [ LOG(1 + (I / 12)) ] / 12
(gives you years.. omit the last division by 12 for answer in months)
Example:
If someone has $52,000 left on the house with a 7.375% interest rate, and their monthly payments are $1025 ($800 toward principal, $325 toward escrow), and they apply an extra $1,800 per month toward principal, then they would do the following to figure out the years left on the loan.
B = $52,000
P = $2,600 [which is the $800 normal + $1,800 extra]
I = 7.375%
[ -LOG(1 - ((52000 * 0.07375) / (12 * 2600))) ] / [ LOG(1 + (0.07375 / 12)) ] / 12 =
[ -LOG (.877083333) ] / [ LOG (1.00614583333)] / 12 =
- (-0.0569591) / 0.002660933 = 21.41 months / 12 = 1.78 years
Hope this comes in handy for someone!
Mortgage interest is not tax deductible here, but on the upside it can be at least portionally deducted if you have a home based business. For example if you have a home office that uses 20% of your home you can claim 20% of your utilities and mortgage interest.
Also, if you sell your house and make a gain that's tax free in Canada. Not sure how it works in the US.
mugs
Lifer
- Apr 29, 2003
- 48,920
- 46
- 91
What's unfortunate is most people have such a poor understanding of compound interest, inflation, etc. that they can't figure out where there money would be best spent. You're right that past performance is no indication of future performance, and returns do fluctuate, but it's a pretty darn small risk to take.
BlueWeasel
Lifer
- Jun 2, 2000
- 15,944
- 475
- 126
OK, I think I'm in pretty good shape, and I see the pros and cons from both sides. But, here's my situation and I'd appreciate everyone's thoughts.
I just got married in May and we bought a new house in April. We are currently paying $150 extra per month on a 30-year, 5.75% mortgage. At this rate, the house will be paid off in 20-years. As our salaries continue to rise, we plan on increasing the monthly interest so that the house is paid for in 12-15 years or so.
I'm putting down roughly %5 of my salary into my IRA and the company is also matching 3% of that. My wife is contributing 5% of her income into her 401K. The total monthly contributions (my IRA+matching and her 401k) into our retirement funds is about $525 a month.
What, if anything, would you change?
I just got married in May and we bought a new house in April. We are currently paying $150 extra per month on a 30-year, 5.75% mortgage. At this rate, the house will be paid off in 20-years. As our salaries continue to rise, we plan on increasing the monthly interest so that the house is paid for in 12-15 years or so.
I'm putting down roughly %5 of my salary into my IRA and the company is also matching 3% of that. My wife is contributing 5% of her income into her 401K. The total monthly contributions (my IRA+matching and her 401k) into our retirement funds is about $525 a month.
What, if anything, would you change?
I don't try to look at how much I save as percentages, but at $525 a month over 30 years at the magic 8%, you're looking at $713,684.23 after 30 years. If you could increase that $50 a month each year, you'd end up with $1,338,308.31 after 30 years.
If you put the extra $150 into a fund instead of the house, you'd end up with $1,053,533.86.
While all of these number might seem like a lot, I don't think in 30 years (say you'll be 65 then) that money will go to far.
Personally since I think the market is low now, I'd invest, but your plan is solid. If her 401k isn't matching though I'd have her put her money somewhere else. There is no point in investing more than the match in a 401k.
An IRA if you really want to, but why would you want to invest tax free? You either pay the tax now or when you withdraw the money. Tax brackets will probably be higher when we retire (someone has to start paying off this debt) and I don't know about you, but I hope to be making more money when I retire than I am now, which means I would rather pay the tax now when I make less than pay it when I make more. Later in life I won't have as many deductions to take either, such as my mortgage interest or student loan interest. Nor will have expenses for work I can deduct.
Personally, I feel that if your Employer is matching most of your contribution to your retirement plan, you should come as close to maxing it out as you possibly can (obviously without going broke). But when you say they are matching 3%, I assume you mean 3% of your salary, and not 3% of your 5%?
Do you know the max amount you can contribute?Second, you didn't mention if you have any other debts (car loans, credit card, student loans) and what the balance/interest rates of these loans are.
Given you have no other debt, I think you're doing fine with your current setup. However, I will say that the more you continue to increase the extra monthly payments toward your house, the less of a "bang" they will have. What do I mean by this?
Since you gave me no figures, let's say your mortgage was $200,000 at a fixed 6.25% rate. Let's say your mortgage is $1,600 per month with $1,235 of that being for the mortgage (the remainder is for taxes/insurance). By increasing your payment $150, you knock 7.5 years off the term of the mortgage, and save around $69,000 in interest.
However, if you increase your payment another $150 (now paying $300 extra total), you only shave 4 additional years from the mortgage term, and save only an additional $36,450 in interest. Both are about half of what you were saving with the first $150.
Obviously if you have the money to spare, there's nothing wrong with this -- but most of us don't have that kind of money to throw around. Plus, the savings you gain grow less and less as you keep increasing that extra monthly payment. In general, for new mortgages, it's a good idea to keep the extra monthly payments to a maximum of about 0.2% of the original loan amount. This usually cuts the time-frame and interest accrued in half.
Yes, it's true they are both eventually taxed. However, if you are investing with pre-taxed dollars, then you are basically using more money that will compound interest over time.
Example, let's say you can afford to invest $100/mo post-tax. That means you should be able to afford about $125/mo pre-tax (rough estimate). Obviously this gives you more investment power, and will return more interest on a compounding basis.
Originally posted by: Engineer
It's easier to play with the numbers at Bankrate.com's mortgage calculator!
(See Rossman's link)
Very true.
But actually I punch that formula into Excel (where I keep my budget) so I can instantly see how changes effect my overall finances. Besides isn't it interesting to see the formula???
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