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Author: dennisk101 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: Would you pay off Home loans at 4.75%?? Date: 8/6/2013 5:26 PM
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First, your job packs up and moves across the country.

One can always think of scenarios where one approach is better than another. People who believe they may have to sell soon, however, would probably be better advised to keep their assets liquid. If you pay off your mortgage with the money you have saved and then have to move because of a job change, it is true that you can take more time selling the old place. But you have even more flexibility if you have all that value in liquid form, using a small part of it to keep up both mortgages (or rent at the new location) for awhile and selling for a better price later (if you think you can get one).

Second, note I said have an emergency fund.

I do not disagree with the need to keep an emergency fund. We're talking about the money beyond the emergency fund that you would use either to (1) pay off the mortgage or (2) invest somewhere else.

This person could do what I (and I'm sure many others) did, save until you have the lump sum to pay off the mortgage.

If you were saving to pay off the mortgage in full, you were keeping the money somewhere - under the mattress, in an insured bank account, or in a riskier investment. The only reason for keeping the money in the bank (at essentially zero interest) is to remain liquid - otherwise you'd be better off paying down the mortgage as you go along. This would save a lot of payments in interest. So, if you want to be liquid while you're saving to pay off the mortgage, why do the reasons for being liquid change once you have enough to pay it off? I know that investing in equities is very risky, so if you have a very large amount of money, putting it all today into the Vanguard 500 is taking a big chance. But if one had been putting the savings regularly into the fund over the past few years, he would have done OK, if not downright good, depending on the start date. (I know because I've been keeping hypothetical records of what would have happened to our money had I invested in the V500 instead of paying down principal as my wife demanded that I do.)

I understand the satisfaction that can come with owning a fully-paid-for home. When interest rates are this low, however, I believe it is - in general and recognizing the possibility of many individualized exceptions - a far better long-term strategy to put one's extra money into investments that have historically grown at a rate greater than what one is paying in home-loan interest than in paying down, or off, the home mortgage.

Dennis
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