How about we page you in 17 years when the wife has left you and you are stuck with monthly child support payments and living in a run down 1bdr apartment?
How about we page you in 17 years when the wife has left you and you are stuck with monthly child support payments and living in a run down 1bdr apartment?
nowadays, it doesn't really make sense to pay off the mortgage early because people rarely stay at the same place long enough. You will almost never see people who invest in Real Estate pay of the mortgages early, in fact, they pay the least amount possible and refi once the property's value goes up. There really is no reason to pay off your mortgage early, unless you are really rich and that sort of income is expendable.
Ever since we bought our house, I've thought about this from every angle I could and came to the realization that there isn't really a right or wrong answer, the best is to do what makes you more comfortable. You might be able to eeek out some better performance by investing which is great or you might be able to live with less stress by paying down quicker, whatever makes you happier.
I am also a pay down the mortgage guy. I'll leave about 3-6 months of living expenses in the bank but everything else goes to the mortgage. We also save a little into education plans but till the house is paid off, we are trying to limit expenses and savings. For me, it's hard to stomach that I would pay 13K of interest just the first year of the mortgage, then the following year, it's like 12.7K, then 12.4K and so on... By the first five years, you've basically paid a huge amount of interest and have little principal equity to show for it. The only way I would be okay with this is if we were sure to live in the home for 20 or 30 years. We are likely to move in 3-4 of years from now so we got a seven year ARM at a low interest rate and want to pay as much of the house off as possible.
Maybe I don't see a bigger picture and am losing something by doing this but I don't care. Once the house is paid off, nobody can take it away from me, and I can go to work at Starbucks to make enough money to pay the property tax if I wanted to.
I am also a pay down the mortgage guy. I'll leave about 3-6 months of living expenses in the bank but everything else goes to the mortgage. We also save a little into education plans but till the house is paid off, we are trying to limit expenses and savings. For me, it's hard to stomach that I would pay 13K of interest just the first year of the mortgage, then the following year, it's like 12.7K, then 12.4K and so on... By the first five years, you've basically paid a huge amount of interest and have little principal equity to show for it. The only way I would be okay with this is if we were sure to live in the home for 20 or 30 years. We are likely to move in 3-4 of years from now so we got a seven year ARM at a low interest rate and want to pay as much of the house off as possible.
Maybe I don't see a bigger picture and am losing something by doing this but I don't care. Once the house is paid off, nobody can take it away from me, and I can go to work at Starbucks to make enough money to pay the property tax if I wanted to.
That's fine, but you are throwing away money and wealth by doing so. If that makes you happy then so be it. My happiness comes from making my money make more money for me. Run the numbers, do the math.
Michael
Elite member
- Nov 19, 1999
- 5,435
- 234
- 106
Darthvoy - The average person with a mortgage is not investing in real estate (where leverage can greatly magnify gains and losses), they're paying for a place to live. Once you no longer have a mortgage payment, you then have that much extra each month to save or invest.
So advice that would apply to an "investor" doesn't really apply to someone that is making a payment to live there.
Most calculations that try and prove that investing the money gives better returns than paying of the mortgage (where the interest is tax subsidized) assumes a certain rate of return in the market vs. the savings you get in interest. For me, the additional savings I get per month (I'm now saving my mortgage payment) plus the reduction in risk in terms of the extra room in my savings I now have because I have no mortgage payment more than compensates for the small "lost" investment income I could have made.
You're also making a fundamental error - that housing prices only go up. That is the foundation for the sub-prime mess we're in today.
Michael
So advice that would apply to an "investor" doesn't really apply to someone that is making a payment to live there.
Most calculations that try and prove that investing the money gives better returns than paying of the mortgage (where the interest is tax subsidized) assumes a certain rate of return in the market vs. the savings you get in interest. For me, the additional savings I get per month (I'm now saving my mortgage payment) plus the reduction in risk in terms of the extra room in my savings I now have because I have no mortgage payment more than compensates for the small "lost" investment income I could have made.
You're also making a fundamental error - that housing prices only go up. That is the foundation for the sub-prime mess we're in today.
Michael
IHateMyJob2004
Lifer
- Sep 29, 2004
- 18,656
- 67
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THE ANSWER IS:
If you can make more after taxes via investments annually than your itnerest rate, you should not pay your mortgage off early.
That is THE ANSWER.
Having said that, there is something to be said for a strong balance sheet and no debt is always a plus. It's really a compromise that everyone must decide for themselves.
If you can make more after taxes via investments annually than your itnerest rate, you should not pay your mortgage off early.
That is THE ANSWER.
Having said that, there is something to be said for a strong balance sheet and no debt is always a plus. It's really a compromise that everyone must decide for themselves.
:thumbsup::thumbsup::thumbsup::thumbsup::thumbsup::thumbsup:
:thumbsup::thumbsup::thumbsup::thumbsup::thumbsup::thumbsup:
:thumbsup::thumbsup::thumbsup::thumbsup::thumbsup::thumbsup:
ponyo
Lifer
- Feb 14, 2002
- 19,688
- 2,811
- 126
Bolded for the truth! Join the 30% of the Americans with paid off mortgage if you have the means. People without the means will tell you paying off the mortgage is a big mistake but they have no clue. They're up to their eyeball in debt so they can't see straight.
As always with these types of questions, the answer is "it depends". I see you have no credit card debt or high-interest loans, so that eliminates one answer.
If you are savvy with investments, then you might consider investing your money and try to outperform the interest on your house.
If you are not good with investments, think about what other expenses you might have in the future. Remember, when you pay off the house, that is a LOT of money tied up that you have no access to (unless you take a HELOC or Home Equity Loan out). For example, how old is your car, your roof, your windows, your furnace, etc. If you foresee any major expenses coming up, you might want to split the money between mortgage and savings.
If you are not good with investments, and have no foreseeable large expenses in your future (or already have a nest-egg set aside for that), then by all means, pay that house off and enjoy mortgage-free existence!
One last thing, I'm not sure if these laws are still in effect, but at one point if your "acquisition indebtedness" goes to zero (which it does when you pay off the mortgage), you were limited to a $100K interest deduction cap. If this is still the case, that's another factor to consider when paying off the mortgage.
If you are savvy with investments, then you might consider investing your money and try to outperform the interest on your house.
If you are not good with investments, think about what other expenses you might have in the future. Remember, when you pay off the house, that is a LOT of money tied up that you have no access to (unless you take a HELOC or Home Equity Loan out). For example, how old is your car, your roof, your windows, your furnace, etc. If you foresee any major expenses coming up, you might want to split the money between mortgage and savings.
If you are not good with investments, and have no foreseeable large expenses in your future (or already have a nest-egg set aside for that), then by all means, pay that house off and enjoy mortgage-free existence!
One last thing, I'm not sure if these laws are still in effect, but at one point if your "acquisition indebtedness" goes to zero (which it does when you pay off the mortgage), you were limited to a $100K interest deduction cap. If this is still the case, that's another factor to consider when paying off the mortgage.
It is this very way of thinking that people throw away hundred of thousands of dollars in wealth by only looking at where they are at today vs. where they will be 10-20 years from now.
wise debt generates wealth. do the math.
Please remember any interest you gain on your investment is taxable, unless you have tax-exempt bonds. Also if you took out a second mortgage for a car, then your interest for that part isn't deductible if you are subject to AMT.
xgsound
Golden Member
- Jan 22, 2002
- 1,374
- 8
- 81
Nice problem. You don't really lose either way.
If you're undecided, I'd say pay it down in an accelerated manner while you are still adding to savings until it gets so low (20,000 or less) compared to savings that it becomes foolish to wait longer.
While you and the wife are both still working you could get a line of credit on the house (should have only a small annual fee, if any) only to insure future credit. It sounds like it would be safe for you because you could have it in place and never use it.
Jim
If you're undecided, I'd say pay it down in an accelerated manner while you are still adding to savings until it gets so low (20,000 or less) compared to savings that it becomes foolish to wait longer.
While you and the wife are both still working you could get a line of credit on the house (should have only a small annual fee, if any) only to insure future credit. It sounds like it would be safe for you because you could have it in place and never use it.
Jim
xgsound
Golden Member
- Jan 22, 2002
- 1,374
- 8
- 81
Originally posted by: Special K
Some people would be saving for decades if they used that strategy
People with that strategy live in a tent if they have to to get it over as soon as possible, otherwise no one would do it.
spidey07: You're forgetting that the OP will have a house payment (? $200 to $2,000) a month now free to invest with no risk to his home whatsoever, even if he loses it all. Repeating that investment monthly will add up fast. He's turning most of his income into discretionary income every month. It's not the only way to invest, but it's an uplifting way to live. Most of the people I know (other than my own sons) are lucky if they get to decide how to spend 5% of their money.
Jim
Of course housing values fluctuate, but 99.9% of the time housing prices always go up in the long run, as supply is limited. That's the nature of the Real Estate game...if you can predict those fluctuations, then you would be rich. Essentially, by paying down the mortgage you are investing your money, though not in the traditional sense that most people think. Personally, I would invest my money in something that would generate enough returns to cover the mortgage payment and maybe a little extra...that way it is win win.
Ultimately, the decision lies with how risky someone is willing to get with their money. I am on the riskier end of the spectrum.
funboy6942
Lifer
- Nov 13, 2001
- 15,362
- 416
- 126
I was in your position when I got my settlement. Buy a house and pay almost all of it off, but still leaving a monthly payment, or just pay it all off.
Never looked back one time that I paid it all off. Granted at that time I didnt have much money left after paying it, BUT, the fact I got NO monthly note at all, puts more money in my pocket every month.
Pay it off, dont let temptation of buying fun toys get in the way. Fun toys can always be had later, and at that time you can get them, you wont want it anymore because something else cooler would of come out, or been invented you really would have over the other.
Never looked back one time that I paid it all off. Granted at that time I didnt have much money left after paying it, BUT, the fact I got NO monthly note at all, puts more money in my pocket every month.
Pay it off, dont let temptation of buying fun toys get in the way. Fun toys can always be had later, and at that time you can get them, you wont want it anymore because something else cooler would of come out, or been invented you really would have over the other.
ponyo
Lifer
- Feb 14, 2002
- 19,688
- 2,811
- 126
So I assume you took out a home equity loan along with your mortgage and investing the home equity loan portion in investments. I mean if we follow your math and logic, it would be wasting hundred of thousands of dollars in wealth if you're not doing this. I mean why not go for max leverage since you're so sure you'll outperform the loan payments.
Debt during expanding economy is not so bad and can actually be beneficial as you leverage. But during times of little economic growth or possible contraction, the wise move is to pay off or down your debt. Leverage during economic downturn is playing with fire.
Don't HEL's and HELOC's typically have higher interest rates than the mortgage itself? Obviously the higher the interest rate of the money you are borrowing, the more difficult it will be to earn a greater rate of return by investing it.
ponyo
Lifer
- Feb 14, 2002
- 19,688
- 2,811
- 126
I'll leave HELOC out of this discussion since the rate is variable. We'll assume he can get HEL since that has a fixed rate. PenFed has HEL rate at 4.99% for 10 years and 5.99% for 20 years with no closing costs. HELOC is lower at 4.5% but that can change since it's floating.
Engineer
Elite Member
- Oct 9, 1999
- 39,230
- 701
- 126
From someone who has done it, pay that mother f#$@# off...if you want to. I don't regret it for one moment. There can be good and bad in both but mine is paid for and I'm not hurting on other investments either. I'm not going to argue the pro's and cons other than to say it's a GREAT feeling to have your home paid for....period. Good luck in your decision and it's great to be in position to do so!!!
the only numbers you can run are the ones from your mortgage. you cant say with absolute certainty what stocks will return over the next 30 years. you can extrapolate from historical data, but as Buffett himself says, past performance does not guarantee future results.
how long has the world existed (financially) as we know it? 50 years maybe? and obviously there's a lot of uncertainty to come. for example, our dependence on oil, the rise of other economies, the global political uncertainty. maybe i'm just more bearish than you, but i dont think we can use the past to assume that stocks will continue to grow 10% annually over the next 30 years anymore.
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