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Author: britboy007 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: invest or pay off the house Date: 2/11/2005 10:39 AM
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I just received $90,000 from an insurance policy. I now have enough to pay off my house which is worth roughly $300,000, but most of my savings would be depleted. I have a 20 year mortgate @ 6.625% with about 17 years remaining. I have been making additional payments of $100 per month towards principle. Although I have been making some good gains the past two years in the market, I wonder if it makes more sense to pay off the house or keep investing? I know my luck won't hold out forever in the market, whereas I will have a certain peace of mind being debt free. I am married with no children, I am 42 and my wife is 39. I am currently contributing to a 401K and a Roth IRA. I fully realize that I will lose the tax benefits if my house is paid off. Any suggestions?
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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44489 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 10:52 AM
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>> I now have enough to pay off my house which is worth roughly $300,000, but most of my savings would be depleted. I have a 20 year mortgate @ 6.625% with about 17 years remaining. I have been making additional payments of $100 per month towards principle. Although I have been making some good gains the past two years in the market, I wonder if it makes more sense to pay off the house or keep investing? I know my luck won't hold out forever in the market, whereas I will have a certain peace of mind being debt free. I am married with no children, I am 42 and my wife is 39. I am currently contributing to a 401K and a Roth IRA. I fully realize that I will lose the tax benefits if my house is paid off. Any suggestions? <<

You talk about "savings," but is this savings invested? If so, you'd have capital gains taxes on the sale. That affects what I would personally do.

In either case, I'd refinance to a 15-year fixed mortgage at around 4.75% to 5.00% these days. If your credit is good there's no reason to still be paying 6 5/8% interest. I'd invest the extra cash flow each month which results from the reduced interest payments. (At 6.625% I can see aggressively paying down the debt; at 4.75% I think it's a little less compelling.)

If the "savings" you talk about is invested, I'd not touch it to pay down the mortgage. Long term you'll do better in the market, and you can keep deferring taxes on the gains. Plus I'd make sure I had several months of living expenses in a liquid savings account, money market fund or similar instrument that protects capital.

If it's merely "savings" (not invested in a way that requires selling securities and triggering a taxable event), I might consider paying down the mortgage balance a bit upon refinance, making sure I have enough in savings for emergencies.

Having said all that, if you really don't want to refinance, at 6.625% I would pay it down more aggressively, yes, consistent with not pulling out investments that incur cap gains taxes and consistent with maintaining an emergency fund.

Finally, as for the tax deduction, just remember that you have to pay a dollar in order to get 25 to 40 cents back (depending on the state and your tax bracket). Why not keep that 60-75 cents in *your* pocket?

#29

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44490 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 10:53 AM
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I just received $90,000 from an insurance policy. I now have enough to pay off my house which is worth roughly $300,000, but most of my savings would be depleted. I have a 20 year mortgate @ 6.625% with about 17 years remaining. I have been making additional payments of $100 per month towards principle. Although I have been making some good gains the past two years in the market, I wonder if it makes more sense to pay off the house or keep investing? I know my luck won't hold out forever in the market, whereas I will have a certain peace of mind being debt free. I am married with no children, I am 42 and my wife is 39. I am currently contributing to a 401K and a Roth IRA. I fully realize that I will lose the tax benefits if my house is paid off. Any suggestions?

I wouldn't deplete your savings to completely pay off the house. You should keep a 6 month emergency fund. After that, it is personal choice. Some people prefer the guaranteed return of paying down the mortgage. Others prefer to invest to try to get a higher return than their mortgage.

Your mortgage rate is higher than current rates. Bankrate is listing the 15 year mortgage at 4.67%. If you prefer the higher risk path, you could refinance your 20 year mortgage to a new 15 year mortgage and then invest in the stock market to try to get higher returns.

Pay off the house, invest, or refinance and invest. Do whatever that allows you to sleep at night.

IF



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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44491 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 11:12 AM
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Given today's historic low mortgage rates and based on the info you provided, I would refi to a 15 year fixed and use part of the 90k to cover the closing costs. If you are planning on retiring before the 15 year mortgage is paid off, I would structure the loan to have it paid off at retire time, ie.. 10 year fixed etc...

(1) Pay off any consumer debt including cars.
(2) Put 1 year of "bare bones" living expenses in an E-fund.
(3) Make sure my available retirement accounts are maxed out (401k, Roth IRA's, 403b's and 457's for gov't workers).
(4) Whatever remained after that from the 90k would go into taxable mutual funds and stocks, whichever you are inclined to invest in normally.

decath

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44493 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 11:21 AM
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Everyone else already gave the advice I was going to give.

Just one more thing to remember, at current mortgage rates, you are very unlikely to do better paying off a mortgage.

-murray

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44494 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 11:31 AM
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britboy007,

That's a nice place to be in. If I were in your shoes, this is what I'd do:

1. Stay with your current mortgage just the way it is. The dark side of refinancing is the closing costs, which could easily be $10,000 - $15,000. I did some research on this and wrote a piece about it. You can read it here:

http://allthingsfinancial.blogspot.com/2004/10/which-is-better-15-year-or-30-year.html

2. Fully fund a 3 to 6 month emergency fund. Put this money in a liquid place so that you can get to it if you need to.

3. Pay off all other debt besides your house and max out your investments. Then, if you still want to do it, pay off your mortgage.

That's what I would do.

JLP

http://AllThingsFinancial.blogspot.com



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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44495 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 11:52 AM
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The dark side of refinancing is the closing costs, which could easily be $10,000 - $15,000.

You've got to be kidding! If there's anyone paying that much in closing costs, I've got some swampland for you!

I refi'd 3 times a couple years ago and never paid more than $1000, less than that when we didn't have to be reappraised. Remember, don't count interest paid on refi's since you'd pay that anyway.

FWIW, the OP would save ~$1300 in the first year by going from 6.625% to 5.125% and should easily be able to find closing costs less than that.

-murray


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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44496 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 11:56 AM
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1. Stay with your current mortgage just the way it is. The dark side of refinancing is the closing costs, which could easily be $10,000 - $15,000. I did some research on this and wrote a piece about it. You can read it here:

If the refinancing is costing $10k to $15k, then the person is getting screwed. It is much lower than that.

IF
refinanced loan on current house twice


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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44497 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 12:01 PM
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You're right, I misspoke. We were going to refi last year and roll in a home equity loan. After it was all said and done, they had us financing about $8000 MORE than we thought. We didn't go for that.

Here's a breakdown of just one portion of the closing cost estimate that this one company gave me:

http://allthingsfinancial.blogspot.com/2005/01/do-math-before-refinancing-mortgage.html

Sorry for the confusion, unfortunately I can't go back and edit that post.

JLP

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44498 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 12:09 PM
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What amount did you originally finance? Have you ever done a side-by-side comparison of the two mortgages?

JLP

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44499 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 12:21 PM
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There is another option to consider; refinancing your house with a dirt-cheap adjustable rate mortgage. You will end up saving a lot in interest and if the rates go up too much then you have enough cash to pay off the loan.

You should also call you lender and ask if they have any special streamline or no-cost refinancing programs There was a recent post about this on another board;

http://boards.fool.com/Message.asp?mid=22033224


Greg


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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44500 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 12:58 PM
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Still lots of information missing:

http://allthingsfinancial.blogspot.com/2005/01/do-math-before-refinancing-mortgage.html

We still owe about $80,000 on our original 30 year mortgage and another $11,800 on a home equity loan.

Grand Total (Fees) $2,353.55

By the time all the fees and reserves were calculated, the amount being financed was $101,300.

80,000 + 11,800 + 2,350 = 94,150

101,300 - 94,150 = 7,150 unaccounted for.

There must be more to this story then we have been told.

Just my $0.02.

Regards, JAFO



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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44501 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 1:05 PM
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The $7,150 was to go for title charges, prepaid interest, and reserves for property taxes and insurance, which is an escrow account. However, this company was rolling them into the mortgage, which meant we were "financing" them for 30 years.

JLP

http://AllThingsFinancial.blogspot.com

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44502 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 1:08 PM
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>>101,300 - 94,150 = 7,150 unaccounted for.

There must be more to this story then we have been told.
<<

Agreed. There could be good explanations for the "unaccounted for." The settlement statement should show where that $7,150 went.

Depending on your timing of the refi, for example, you may have to pay a year's property taxes and/or property insurance at closing. No doubt there can be other things as well.

#29


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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44503 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 1:10 PM
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However, this company was rolling them into the mortgage, which meant we were "financing" them for 30 years.


It seems to me that although the bank may have wanted to roll that into the mortgage, you are the one who gets to decide what the mortgage amount will be. The bank does not get to dictate that. Even at that, I would never consider things like taxes or insurance to be fees associated with the refi because they are not fees to the bank. They are costs associated with the property that are due regardless of whether you refi or pay the house off with cash. What they do represent, though, is cash flow, and so if you didn't have that additonal money available for the prepaid taxes and insurance, then I can see where you might consider rolling it into the mortgage, though that is something I personally would never do. Of course, I also won't take out a mortgage that requires escrow for taxes and insurance, but I do realize that some people prefer those types of programs.

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44504 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 1:18 PM
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I was simply posting a personal experience so that hopefully people would learn from it. You know as well as I know, with the refi market booming, there was lots of shady things going on.

JLP

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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44506 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 3:20 PM
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Pay off the house. This is a certain return, as opposed to investing, which is an uncertain return with a chance of loss.

My vote anyway.

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44508 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 3:41 PM
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Of course it is a personal choice, but my whole problem with paying off a mortgage with a low interest rate is that once it is paid for all you have is a house. Sure, you can sell it or take out a home equity loan if you need cash, but for the most part, it is pretty much illiquid. If times got tough and you lost your job, no bank will give you a home equity loan.

The shortcomings to my plan of investing the money is that...

1. The market will not perform as well as the interest rate on the loan, currently 6.625%. What are the chances of that happening? According to Jeremy Siegel's "Stocks for the Long Run" over a 20 year period, stocks outperform bonds 91.7% of the time. Over a 10 year period, stocks outperform bonds 80.1% of the time. Those are pretty good odds if you ask me.

2. You actually have to invest the money. One huge part of my plan is that you HAVE to invest the money. You can't go out and buy depreciable assets like cars, boats, and stuff like that. If you do that, you are much better off paying off the house.

Some things to think about.

JLP

http://AllThingsFinancial.blogspot.com


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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44509 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 3:53 PM
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I just received $90,000 from an insurance policy. I now have enough to pay off my house which is worth roughly $300,000, but most of my savings would be depleted.

You have gotten lots of good, but sometimes contradictory advice. By coincidence, Suze Ormand has an article about this here:

http://biz.yahoo.com/pfg/e26retire/

She says pay it off. I agree, but keep on making "house payments" into a mutual fund, and do it every month. I like Vanguard or Fidelity, but there are other good ones.

Slightly OT, I am having the same argument with myself. I am still working, and I don't want to take any gains this year. Above all, I don't want to touch an IRA or 401K until I retire, all because of the tax hit involved. For the moment I throw all looose change at the mortgage. When I retire (next year), I will liquidate a variable annuity and use it to knock down the mortgage. Only about half of the annuity will be taxable. I don't want to take the tax hit this year, as it will throw us into a higher bracket.

I will start to liquidate non-tax sheltered assets for living expenses, but on advice of my CPA, I will start to use my IRA accounts, at least liquidate them to convert to Roth IRA's. She says until age 71½ we will be in a "tax holiday" and we should reduce our conventional IRA's and 401K's as much as we can without tilting the tax scale too heavily. I would appreciate the thoughts of this august group, as well.

cliff

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44510 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 4:02 PM
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Cliff,

I have one Suze Orman book (The Road to Wealth). I agree with most of what she says. However, I lost a bit of respect for Suze when she started advertising for General Motors. I mean, here she is talking about getting out of debt and then she's talking about how great GM financing is.

Regarding your problem:

How old are you? How long is this "tax holiday?" By liquidating the VA, are you talking about completely selling it or taking a percentage out each year?

JLP

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44511 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 4:11 PM
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How old are you? How long is this "tax holiday?" By liquidating the VA, are you talking about completely selling it or taking a percentage out each year?

JLP

I am 66, so the tax holiday will be brief.

The annuity will only amount to about $80K, half of which is taxable, so it gets liquidated in a lump. It's been around for a number of years, and it isn't keeping up with my other holdings. The wheat tax is too high. (by which I mean the admistrative and insurance fees.)

Thanks for the response.

cliff

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44512 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 4:30 PM
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cliff666: "Slightly OT, I am having the same argument with myself.

I am still working, and I don't want to take any gains this year. Above all, I don't want to touch an IRA or 401K until I retire, all because of the tax hit involved. For the moment I throw all looose change at the mortgage. When I retire (next year), I will liquidate a variable annuity and use it to knock down the mortgage. Only about half of the annuity will be taxable. I don't want to take the tax hit this year, as it will throw us into a higher bracket.

I will start to liquidate non-tax sheltered assets for living expenses, but on advice of my CPA, I will start to use my IRA accounts, at least liquidate them to convert to Roth IRA's. She says until age 71½ we will be in a "tax holiday" and we should reduce our conventional IRA's and 401K's as much as we can without tilting the tax scale too heavily. I would appreciate the thoughts of this august group, as well."


Many of the invest instead of pay-off the mortgage crowd are in their accumulation years, and those arguments to invest make some sense in that context.

The analysis changes, however, when the accumulation years end and you are withdrawing funds from yoru accounts for living expenses, including mortgage payments. Because "safe withdrawal rates" are generally so much lower than many people realize, one really should consider having the mortgage paid in full at retirement, unless the after-tax cost of the mortgage is less than the applicable SWR.

For example, let us assume a 4% SWR and a 5.5% mortgage that is 4.125% effective rate after tax (25% federal bracket, 0 state income tax, enough other deductions that mortgage interest is fully deductible [i.e., none needed to cover the standard deduction basket]).

Paying off the mortgage makes sense to either (i) increase current spending or (ii) lower withdrawal rate.

The tax holiday must be the time before RMDs start; until then, you can withdraw as much or as little as you see fit, to maximize fully lower tax brackets. Once RMDs start, you can never withdraw less, and if your retierment accounts are large enough, RMDs can push you into higher brackets and make more of SS taxable. To the extent that you can get money out (or converted to Roth IRA, with no RMD) at lower rates before RMDs start, it is good, and it will also likely decrease the RWD amount, too.

I know that intercst has written about this issue on his REHP board, but it is not the most commonly addressed topic, mostly because it is not applicable to many people, because so many are wondering how to make thier money last through retirement.

Regards, JAFO



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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44515 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 4:57 PM
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>> I will start to liquidate non-tax sheltered assets for living expenses, but on advice of my CPA, I will start to use my IRA accounts, at least liquidate them to convert to Roth IRA's. She says until age 71½ we will be in a "tax holiday" and we should reduce our conventional IRA's and 401K's as much as we can without tilting the tax scale too heavily. I would appreciate the thoughts of this august group, as well. <<

Ah. So what are you doing, then -- withdrawing as much as you can from these accounts (or recharacterizing portions into a Roth) as long as you have room in a lower tax bracket to do so? If that's what you're doing, it makes sense to me.

#29

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Author: YancyG Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44516 of 76418
Subject: Re: invest or pay off the house Date: 2/11/2005 5:20 PM
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Pay off the mortage. Your 'emergency fund' won't have to be as large, if you don't have to worry about making a house payment.

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Author: rrosenkoetter One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44522 of 76418
Subject: Re: invest or pay off the house Date: 2/12/2005 12:36 AM
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I would pay off the mortgage as well, and then invest each month the same amount that you were paying each month.

This, of course, is assuming that you still have a 12 month E-fund, and all other debts paid off as well.

This is a bad time to invest a lump sum $90k... Better to pay off the mortgage, and then slowly invest into the market through dollar-cost averaging.

My opinion only.

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Author: britboy007 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44530 of 76418
Subject: Re: invest or pay off the house Date: 2/12/2005 1:01 PM
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My original loan (30 year) was refinanced in 2001 for a 20 year mortage. The loan amount was $135,000 and I have been applying an additional $100 per month towards principle.

I have done some research and do see that 15 year rates are roughly 4.75 in the state of Florida. I am considering refinancing and applying an additional $500 monthly to my principle. By BankRate's amortization calculator, my mortgage will be paid off by 2014 and I will have saved close to $30,000 in interest.

With the appreciation rates of homes in South Florida, it makes you want to put money into real estate, it's almost a no-brainer at this point. I know people that are taking home equity loans so that they can purchase additional property.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44532 of 76418
Subject: Re: invest or pay off the house Date: 2/12/2005 1:49 PM
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With the appreciation rates of homes in South Florida, it makes you want to put money into real estate, it's almost a no-brainer at this point. I know people that are taking home equity loans so that they can purchase additional property.


Even here in North Florida, there is almost a mania. Vacant lots have gone up tenfold in the last eight years off the beadch. I watched a gulf front lot sell for over 80% in slightly over a year.

It's crazy and unsustainable, IMO.

buzman


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Author: rrosenkoetter One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44533 of 76418
Subject: Re: invest or pay off the house Date: 2/12/2005 1:53 PM
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With the appreciation rates of homes in South Florida, it makes you want to put money into real estate, it's almost a no-brainer at this point. I know people that are taking home equity loans so that they can purchase additional property.

Past history is no guarentee of future results...

Heard that before?? Maybe you heard this before.. say around 1999...

"With the way the stock market is appreciating, it makes you want to put lots of money into the stock market, it's almost a no-brainer at this point. I know people that are taking home equity loans so that they can purchase additional stocks"

Real estate is in a bubble... Now, is at stocks circa 1997 bubble (where you could still make some money over the next couple of years) or is at stocks circa March 2000 bubble (where you're about to lose your shirt)?

Use logic. Can prices of homes go up 10% a year EVERY year FOREVER? When wages are increasing at 3%, and interest rates are going up (meaning mortgages will be more expensive in the near future)?

Just because an asset class has increased majorly in value for the last four years, doesn't mean it will continue to do so. In fact, it's most likely NOT to continue...

No asset class can grow at above normal rates forever.

With NO exceptions, all bubbles and markets come back to trend.



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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44534 of 76418
Subject: Re: invest or pay off the house Date: 2/12/2005 5:46 PM
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First of all, success in the market is not a matter of luck, although certain random factors do occur.

Success in the market depends on finding a discipline which will make you successful, and which you are able to follow. When people fail in the market it is because they have the wrong discipline or because they fail to follow it.

I suggest looking at CANSLIM or other methods. Read O'Neil's book on CANSLIM and a few others like Achelis book on Technical Analysis.

There is also Mandelbrot's book, "The Misbehavior of the Markets", which debunks the efficient market theory and random walk nonsense rather well. It will not help you to trade, but it will help you to understand what is going on.

When you have a successful discipline, then you will have no trouble making the decision on what to do with the money.

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