Invest or Payoff the Mortgage

[CrimsonChaos]

I'm curious what the "ATOT Community" feels about the debate between investing your money and paying off your mortgage.

Here's the scenario - let's say you have NO debts except a full 30-year mortgage. You have enough monthly income that you could throw extra cash at the mortgage each month and pay it off in about 10 years -- or you could invest that extra money over those same five years. Would you payoff the mortgage, invest, or maybe a little of both?

In this debate, on one side you have those who say you should payoff the mortgage. Obviously you have peace of mind -- if anything were to happen to your job after the mortgage is paid off, you would not lose your house. Secondly, you avoid the enormous interest paid on the loan (often times, dependent on interest rates, you can end up paying 2 to 3 times the initial loan amount). Lastly, once the house is paid off, it frees up a lot of extra monthly cash-flow that can then be used to invest.

Conversely, in the other camp, people feel that investing is the best move. They state that the market has never returned less than 12% over a 30-year time span, and would easily out-perform the interest from your mortgage. Additionally, having too much money tied up in the house is undesireable, because it offers a 0% ROI (return on investment). They feel that the interest paid on the mortgage is not all bad, as it can be used as a deductable. Lastly, the amount of money you throw at your mortgage to pay it off can be risky -- if something catastrophic happens during the process of paying off the mortgage, you may not have enough saved to keep you afloat and you could lose the house.

Sorry about the length -- was trying to give a little background information. Just curious what ATOT thinks about this, if anything! Obviously, I have my own thoughts about the topic, but don't want to bias the survey.

 

[Engineer]

Big previous discussion here.

I'm paying mine off ASAP (still invest in 401k). I hate debt though.

 

[Zenmervolt]

What's the interest rate on the mortgage? Unless it's absurdly high you're better off investing since what you say about the market is accurate. Paying off the mortgage doesn't really give you "extra" money to invest, though it seems like it. You only have X dollars either way, it's just a matter of allocation.

Waiting to start investing is _NEVER_ a good idea.

ZV

 

[vi edit]

What's the interest rate on your mortgage? The smartest thing you can do is take any excess income you have an apply it to high(er), non-deductible interest bearing loans (cars, credit cards, ect)

If you are debt free besides the mortgage, it's really just a crap shoot and a question of comfort.

If you would normally pay $25,000 in interest in 5 years time, and you completely eliminate those interest payments, you just saved yourself $25,000. It's a guaranteed "return" on your money.

You can drop it into lower risk funds and make between 3%-7%, but if your interest on your home is higher than that, you do nothing but break even.

If you go for higher interest earning funds, you stand to make more money, but also risk to lose everything.

There's no correct answer. And everyone has a different level of comfort or philosphy on it.

 

[Engineer]

Originally posted by: Zenmervolt
What's the interest rate on the mortgage? Unless it's absurdly high you're better off investing since what you say about the market is accurate. Paying off the mortgage doesn't really give you "extra" money to invest, though it seems like it. You only have X dollars either way, it's just a matter of allocation.

Waiting to start investing is _NEVER_ a good idea.

ZV

A little luck can help you! (If I would have been investing in mutual funds the last 5 years vs paying off my mortgage, I would have made very little compared to what I have saved in mortgage interest alone).

P.S. A pet peeve of mine is people saying that they "deduct" interest from their taxes. So if you spend 1 dollar and deduct 15% (typical tax rate), you save $0.15 for the dollar you just spent? Doesn't sound good to me.

There's no correct answer. And everyone has a different level of comfort or philosphy on it.

QFT!

 

[Ns1]

if you can earn a higher interest rate than what the mortgage is costing you then invest

 

[CrimsonChaos]

Good point -- let's assume a normal interest rate.. say around 6.25%.

Thanks for the other thread-link -- I did a search before I posted this and somehow did not come across it.

And yes, I know there's no one correct answer -- but I'm curious what the people here think -- for the most part, AT'ers seem relatively intelligent.

 

[Engineer]

Here's a good answer: 37 years old and NO debt!

 

[IHateMyJob2004]

Mortgages are tax deductable. Figure out whath te rate is after that. Or jsut assum 6% or whatever. That's an extra safety factor anyways.

How that 12% annually (matters what you look at S&P mid-cap .. sure, S&P 500 NO).

Oh, and if you idea of ivnesting is to buy Intel, Cisco, AMD, etc ... you might as well pay off the house. most people are clueless when it coems to investing. Unless you understand how to pick, safe long term investments and have a sound understadning of valuation principles , that easily takes 3+ years to truely understand, you probably should pay off your mortgage.

I am shooting for 19% annually. And don't bother bashing me. I am doing it as we speak (after taxes). And no, I don't trade frequently. I invest. Popint is, my 6.5% mortgage rate is soemthign I am willing to live with. I am not paying off my mortgage, but once my net worth is positive (within 5 years), I might consider starting to do so.

 

[Squisher]

Originally posted by: Engineer

Originally posted by: Zenmervolt
What's the interest rate on the mortgage? Unless it's absurdly high you're better off investing since what you say about the market is accurate. Paying off the mortgage doesn't really give you "extra" money to invest, though it seems like it. You only have X dollars either way, it's just a matter of allocation.

Waiting to start investing is _NEVER_ a good idea.

ZV

A little luck can help you! (If I would have been investing in mutual funds the last 5 years vs paying off my mortgage, I would have made very little compared to what I have saved in mortgage interest alone).

P.S. A pet peeve of mine is people saying that they "deduct" interest from their taxes. So if you spend 1 dollar and deduct 15% (typical tax rate), you save $0.15 for the dollar you just spent? Doesn't sound good to me.

There's no correct answer. And everyone has a different level of comfort or philosphy on it.

QFT!

There are some of us getting a much higher tax rate. If I pay 6% on a mortgage, my real costs are less than 4%.

Today's word is: opportunity costs

 

[IHateMyJob2004]

CrimsonChaos,

What is your level of investment knowledge?

EDIT: Anyone who answered the pole ithout knowing this is a bit stoopid.

 

[SagaLore]

Considering how much interest you end up paying by the time you're done with a 30 year mortgage - you're better of paying it off asap. So let's say you had your house for 10 years so far. You can pay it off in another 10 years. That leaves you the last 10 years to invest all the money you otherwise would have paid into the mortgage and it's interest.

 

[Engineer]

Originally posted by: Squisher

Originally posted by: Engineer

Originally posted by: Zenmervolt
What's the interest rate on the mortgage? Unless it's absurdly high you're better off investing since what you say about the market is accurate. Paying off the mortgage doesn't really give you "extra" money to invest, though it seems like it. You only have X dollars either way, it's just a matter of allocation.

Waiting to start investing is _NEVER_ a good idea.

ZV

A little luck can help you! (If I would have been investing in mutual funds the last 5 years vs paying off my mortgage, I would have made very little compared to what I have saved in mortgage interest alone).



P.S. A pet peeve of mine is people saying that they "deduct" interest from their taxes. So if you spend 1 dollar and deduct 15% (typical tax rate), you save $0.15 for the dollar you just spent? Doesn't sound good to me.

There's no correct answer. And everyone has a different level of comfort or philosphy on it.

QFT!

There are some of us getting a much higher tax rate. If I pay 6% on a mortgage, my real costs are less than 4%.

Today's word is: opportunity costs

So you have a 33% tax rate (combined federal and state)? If so, then you're making the "BIG BUCKS", and I would say the "some" is a very small number in the US.

Edit: Well, maybe not the "Big Bucks" as tax brackets seem to not be as high as I thought. Would still need a large "after deduction" income to push your overall tax rate to higher than 33% (Less than 4% over 6% = more than 33% tax bracket overall).

Edit #2: Past results do not guarantee future results - in any market!

 

[lobadobadingdong]

get six months worth of bills in savings and payoff your debt (unless you can earn a return greater than the interest on your debt)

edit: at least that's what I'm trying to do.

 

[IHateMyJob2004]

Originally posted by: SagaLore
Considering how much interest you end up paying by the time you're done with a 30 year mortgage - you're better of paying it off asap. So let's say you had your house for 10 years so far. You can pay it off in another 10 years. That leaves you the last 10 years to invest all the money you otherwise would have paid into the mortgage and it's interest.

Assuming a 6% mortgage rate.....

You should read through the thread. If you take hte money you would use to payoff the principle, and invest it at a return of 10% annually, you'd have more money in 30 years than if you paid off the mortgage ASAP and then started to invest at a 10% rate of return.