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Invest or pay house off early?

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Pay off the house early, then invest.

Though if you have an unstable job where you don't know what's going to happen from one day to the next, then I'd invest into something that will work out short term, and keep that as emergency funds.
 
It is a toss-up. A house is just a money-pit. It always needs to be repaired or upgraded. There is no guarantee that you can sell the house when you need the money. However, if you plan to live there forever, it would make your expenses lower.
 
why have a mortgage debt hanging over your head when you can eliminate it. i say pay off your house.

no debt is a very good thing.
 
OutHouse said:
why have a mortgage debt hanging over your head when you can eliminate it. i say pay off your house.

no debt is a very good thing.
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Because a house isn't a liquid asset. If the crap hits the fan and you don't have the money to deal with it, you're boned. If you remain liquid, you can handle it.

Even when you own your house, you still have to heat it, get water, have your trash collected, have electricity, fix minor and major things that go wrong, insure it, and pay taxes on it. Add in your other normal monthly bills like food, clothing, entertainment, etc. and you can get in a world of hurt pretty quickly if you aren't prepared for it.

This is a complex theoretical problem pretending to be a simple black and white question. It's pretty easy to change factors to say one is better than the other in any theoretical situation. In reality and practice, however, most people who have mortgages would be putting themselves in much greater financial risk by going all out to pay it off early.
 
I was thinking about this the other week. While not having a mortgage sounds great (and would feel great), investing the money makes much more financial sense. Having the money in pretty much any other more liquid investment will CYA if you lose your job or become disabled. Home values aren't exactly great right now and I don't think they'll recover for quite a while, so you have no guarantee of retaining your equity if something happens to you in the next few years and you need to sell for $. You also more than likely lose money in the end, even with interest savings by paying it off early. You lose out on that $10-20k/year tax deduction - obviously shrinking as time goes on, per amortization. You lose out on any investment earnings on that money, which can add up quite a bit over the course of a 15 or 30 year mortgage. I think that as long as you can invest in something with a reasonable return, you will come out ahead in the long run. Either you'll lose your job, but have savings/investments to see you through or you'll make more on investments than you lost through interest.
 
Capt Caveman said:
If you can't tolerate risk then paying off your mortgage is a good move, however, I'd rather invest it, to make money.

Right before buying my current house, I was sitting on a bunch of money from selling my prior house. Instead of rolling it all into my new home(reducing my mortgage), I decided to invest it in the Visa IPO. Bought in at $45. Now, it's $115 and pays a quarterly dividend.

Bought a new vehicle last summer, I could have paid in cash but I'd rather take the 1.9% financing and keep my money in a mutual fund that had provided a 12% return in the last five years.

Instead of paying down my mortgage more quickly, I'd rather max out in my company's ESPP and get a minimum of a 15% return.

I have a home equity line of credit available, so I can borrow more money if I find a good investment opportunity.
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audience.gif


i made $613,723.97 last year and invested it in a high return mutual fund with a 31% return. i also married a supermodel latina this morning who just bought me my first Ferrari. life is great, aint it? :\
 
The point still remains that it's incredibly easy to make your money make more money for you at a greater return than you get by paying down a mortgage at sub 4% for 30 year. They key is make money make more money. I'd rather retire 5/10 years earlier than paying off a mortgage having a lot of my net worth inaccessible in a place I live.

Savings and CDs will give a better return in the future, lock that mortgage in for 30 years. I'm in a similar boat. I took out the biggest mortgage available without being a jumbo. I would haveortgaged much more but the rates weren't as good.
 
joshsquall said:
I was thinking about this the other week. While not having a mortgage sounds great (and would feel great), investing the money makes much more financial sense. Having the money in pretty much any other more liquid investment will CYA if you lose your job or become disabled. Home values aren't exactly great right now and I don't think they'll recover for quite a while, so you have no guarantee of retaining your equity if something happens to you in the next few years and you need to sell for $. You also more than likely lose money in the end, even with interest savings by paying it off early. You lose out on that $10-20k/year tax deduction - obviously shrinking as time goes on, per amortization. You lose out on any investment earnings on that money, which can add up quite a bit over the course of a 15 or 30 year mortgage. I think that as long as you can invest in something with a reasonable return, you will come out ahead in the long run. Either you'll lose your job, but have savings/investments to see you through or you'll make more on investments than you lost through interest.
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While mathematically it probably makes since to invest, but as I mentioned above when you ask the question another way (i.e. would you borrow money on your house to go invest it) it gives you another perspective. I don't think anybody is recommending using every dollar you have to pay off your house, you gotta think though with no mortgage you will be building up cash pretty fast. Sorry, but the tax deduction argument doesn't make sense. Assuming you're in a 25% tax bracket you would be paying $10-20K for a $2500-$5000 tax savings. Sorry but I'll keep my $10-20K. 😉

Edit: Well I guess I should say I'll keep my $7500-$15000 ($10-20K minus the $2500-$5000 I'll have to pay the government)
 
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The only reason being out of debt feels so good is because to be in debt is to be in hell.

That said fuck debt and just pay it off. No need to make things difficult.
 
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Considering that my Roth IRA has stagnated after loosing value, and now is worth just about what I put into it (0% return) and I am paying 5% mortgage. The 30% savings in tax has been more than spent on interest payment to the bank for the mortgage.

In the current investment environment, you would have to be getting at least 2% more growth in investment than you pay in mortgage interest (even with the tax break) to break even. For example, if you have a mortgage at 4.5%, you need to have a guaranteed return of 6.5% to make it viable. If the market was stable you could get that but not today.

That said you if you have the funds keeping some in cash for an emergency fund is recommended.
 
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Why not do a bit of both?

I know right now i put extra towards my house but also take a bit and set it aside to invest/save. Putting more towards the house saves money in the long run but taking aside money helps plan for the long run as well, as well as keeping fund available for emergencies and need it now situations. Kind of a win-win or something in my mind. At since i just bought my house and have 29 years left on the mortgage doesnt make sense ot me to put every penny i can into that mortgage without saving and investing something

Right now though my "emergency" funds are all series EE bonds from the 80's-early 90's and they average out to about 4.5% which for today at a gurenteed 4.5% i cant complain. Though those mature in 5 years or so now.
 
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Pay off the house. But I wouldn't want to sink all of the cash into it without being mortgage free. So I would save for several years and then pay off the balance.
 
at the end of the day, it's your own personal decision. are you more of a risk taker and maximizer? then invest. are you more worried about risk/debt reduction? then buy out.

or do both. invest until you have the scratch to payoff then evaluate. is your job risky? uneven paycheck stream? might be better to payoff. stable and job security at your job? then invest.
 
CPA said:
pay off house early. Most likely, even with the tax benefit, you are not going to get a rate of return, in this economy, as great as the reduction of interest expense by paying off your mortgage.

Additionally, there's nothing like the feeling of no debt.
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++++++++++1

Did this over 6 years ago and never looked back. Far better return than the shitty markets of the last 13 years on average.
 
evident said:
also, what if you pay off your house and its value crashes. which is why i think investment is the better choice.
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Why does it matter if you're not going to move (like some of us)?

What happens when the market goes on a 13 year crash (what it did from 1998 to 2011)?
 
GotIssues said:
Because a house isn't a liquid asset. If the crap hits the fan and you don't have the money to deal with it, you're boned. If you remain liquid, you can handle it.

Even when you own your house, you still have to heat it, get water, have your trash collected, have electricity, fix minor and major things that go wrong, insure it, and pay taxes on it. Add in your other normal monthly bills like food, clothing, entertainment, etc. and you can get in a world of hurt pretty quickly if you aren't prepared for it.

This is a complex theoretical problem pretending to be a simple black and white question. It's pretty easy to change factors to say one is better than the other in any theoretical situation. In reality and practice, however, most people who have mortgages would be putting themselves in much greater financial risk by going all out to pay it off early.
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this makes no sense. you have those things with a mortgage or not.

there is nothing complex at all, the bottom line is pay off the house and having no debt and investing the money that USED to go towards a mortgage is far better than having that monkey on your back and not saving.

I am really surprised how many people are saying do not pay off the house.
 
OutHouse said:
this makes no sense. you have those things with a mortgage or not.

there is nothing complex at all, the bottom line is pay off the house and having no debt and investing the money that USED to go towards a mortgage is far better than having that monkey on your back and not saving.

I am really surprised how many people are saying do not pay off the house.
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I've run the numbers. Paying down a mortgage faster doesn't make sense as compared to putting the extra money into a 401k, at least not with current interest rates.

Here's my simple calculations. Now, these don't take into account the deductions you can take due to mortgage interest so the the difference will actually be bigger than is shown here. Also, I am running my numbers relatively conservatively, everyone knows that all ATOT members are in a higher tax bracket. However, if they show a benefit at this lower tax bracket it will only get bigger at higher tax brackets.

ASSUMPTIONS
Mortgage amount 200000
Mortgage interest rate 4%
Marginal tax rate 10%
Return on investment 7%
Inflation rate 3.4%


RESULTS
All amounts in 2012 dollars

Pay mortgage and invest $500 a month
Mortgage over life of loan (214,203.55)
Value of house 200,000.00
Investment 241,696.63
Total 227,493.08


Pay mortgage and $500 extra then start investing after mortgage is paid off
Mortgage (208,207.06)
Value of house 200,000.00
Investment 176,668.33
Total 168,461.27

Difference 59,031.82



Now, if you get a match on your 401k contribution from your employer the difference gets even bigger. Here's the same results with a 50% match on that $500 monthly contribution.

RESULTS WITH EMPLOYER MATCH
Pay mortgage and invest $500 a month, with match
Mortgage (214,203.55)
Value of house 200,000.00
Investment 362,544.95
Total 348,341.40


Pay mortgage and $500 extra then start investing, with match
Mortgage (208,207.06)
Value of house 200,000.00
Investment 265,002.49
Total 256,795.43


Difference 91,545.97
 
paying the mortgage down never made sense to you. i know a lot of people get a mortgage to deduct taxes to begin with, so why pay it off early?

assume your mortgage is 4%, after tax deduction, let say 30%, it is really 3.2% interest. how to come out ahead of the bank? if your mortgage is 20 years, stock is the way to go. heck, even buy bonds in a too big to fail bank can easily get a 5-6% on that. you are still ahead.

most importantly, the mortgage is the hedge against inflation, i would rather take my time to pay it off.
 
Thanks for the replies. The reason I think it's better to pay off mortgages is first is because I'm one who can't stand a risk. Stocks don't make a whole lot of sense to me because you could lose money.

I personally think Spidey had a pretty good point about mortgages being protected against inflation, the tax deduction, and the low rates, but for people who have low job security (although I'm sure it's hard to know sometimes) or for those who don't have that high of a tax rate (making the deduction worth less), it seems like it's best to pay off a house first. Also, as others pointed out, being out of debt is always good mentally.

My time preference is low for most things and high for others. Mainly high for drinks and food (which isn't good because you just want to consume more later even though you won't have it if you consume it all at once) and for IGA's Castlevania games (I have to have them the first day and I hope there is another one some time soon) and low for most other things. My time preference has become significantly lower since when I was younger, although it could be because I don't play video games like I used to.

It's always good to have low time preference. Everyone with high time preference might go to hell.
 
How much you are actually saving via tax deductions is suspect. Once you dont pay enough interest on your mortgage to get past the standard dedution amounts, you're not seeing any tax benifits. Even then you are only seeing a tax benifit on the amount over the standard deduction amounts, so unless you have other substantial itemized deductions, you aren't really seeing that great of savings from your mortgage.

My mortgage is under 100K now and at 4.5% and I didn't pay enough interest along with other deductions to itemize for more than the standard deduction amount. So I'm not seeing any tax savings by having a mortgage any more. Now considering I would be investing with long term gains (or qualified dividends) at a 15% tax rate I would need a return of 5.3% to break even. If I wasn't investing long term (day trading) and I'm in the 25% tax bracket I'll need a 6% return to break even.

Now after saying all that, I'm currently maxing my 401k, have a seperate investing account and have a sizable rainy day fund. I'm not paying extra on my mortgage at the moment as I'm waiting for my wife to finish school this year and get a job. Once she gets a job the plan is to fast track paying off the mortgage while still investing in her 401k to get the match.

I personally hate being in debt. So once I get the chance I will payoff my mortgage, but I'm not going to pay it off at the expense of my retirement or emergency accounts.
 
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