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Author: progmtl Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Re: Would you pay off Home loans at 4.75%?? Date: 8/7/2013 12:03 AM
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Hi Dennis, I'll throw my two cents in here if you don't mind..

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.

In general, I agree. It assumes that the mortgage holder/investor is a disciplined person who, if not paying down the mortgage, would invest wisely (and not overspend) and not panic when the market situation looks bleak. Over the long term you would probably do better this way.

One thought: you don't have to choose one or the other approach. If you have $X surplus funds each month, you can choose to allocate some towards mortgage principal, some towards savings/investment, etc.

For my own scenario, I have been using 5/1 and 5/5 ARMs for about 10 years spanning two homes and about 5 mortgages (due to refinances) and have saved 10s of thousands of dollars in interest by doing so (in comparison to 30-year fixed mortgage rates). However, I also realize the risks of interest rate adjustment and I have decided all along to accelerate mortgage paydown a bit to mitigate that risk. At our current income levels, I am probably allocating 15% or so of our surplus take-home income to mortgage principal retirement, while saving and investing the rest.

This seems to be a pretty reasonable middle ground approach for me. If the stock/bond market soars, I will feel good about my investments. If it tanks, I will take some solace in the fact that some of my income went to debt retirement via the mortgage principal payments (at a positive, if low, effective interest rate).

cheers,
-progmtl.
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