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Author: EBlakemore Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35339  
Subject: Re: An alternative to fixed income investing Date: 8/13/2000 12:35 AM
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Another consideration is the return you're getting on your investment. If your home is appreciating in value, it makes sense to invest more in it by making extra principal payments. If it's not appreciating, it doesn't make sense, unless you have a mortgage interest rate which exceeds what you could otherwise earn on an investment of similar risk and duration.

Forgive me, but this sounds a lot like chasing performance. The only appreciation that matters on a house is that which exists when I need to sell it. Difficult to predict, and for many I would guess that, unless your employer offers some sort of equity risk protection, and you know for a fact that your job is secure, one is often likely to be forced to sell at a point when the local housing market is at a short-term low, especially if you happen to live in a place where your employer happens to be a major local employer.

Everybody's situation is different. You raise a very interesting point about risk in local housing prices, and for many, paying down a mortgage may not be the very wisest investment, especially if one expects to need to move frequently.

OTOH, if one does need to move, and one has paid off a house entirely, changing houses, even at less than stellar returns, does tend to mean one has a significant asset, likely to be roughly equal to the cost of its replacement elsewhere... anything left can be allocated to cash and cash equivalents, bonds, equities and other securities appropriate to your risk tolerance and needs.

Balance would seem to be the key here. There are many unexpected contingencies that could alter what happens vs. what we expect to happen, and best not to get so overbalanced in one direction that we leave ourselves exposed too heavily to an unanticipated risk. Easier said than done.

Whatever the risks (and costs) of prepayment may turn out to be, one will avoid the constant drain of interest payments, and as long as one is careful to maintain good credit at the same time, building assets is generally a better idea than paying a lot of relatively high interest over a long period.

As mentioned before, the tax offsets do need to be thrown into the mix as well, as do cash flow considerations, to assess the best course for your situation, income and expectations of income stability (or instability).

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