In case you missed my opinion on Paying off your mortgage...http://boards.fool.com/Message.asp?id=1040013005982007&sort=id
I understand your point of view. Also, the mortgage gives you a big credit line. You get it at a time when you are in good health and working. If you retire, you don't have to pay it off faster. If you pay off your mortgage, using your savings up to do so, and then incur some whopping medical bills, it would then be difficult to get another mortgage. My mortgage is at 6 5/8%. I can get good corporate bonds that pay better than that. I can use the interest from the bonds to pay the interest on the mortgage, not even considering the tax-deductibility of the mortgage. However, I want to retire in a few years. If I make only the minimum payment left on my mortgage, I will still be making payments at age 75. At that point I'd like to have reduced my need for cash flow. What I'm doing is paying the required amount and putting additional in bonds with a 5-year maturity, thinking that in 5 years when those bonds mature, I'll pay off the mortgage. In the meantime, I could access the money or borrow on margin against it in the event of a real emergency. The bonds are paying a higher rate than the mortgage is costing me. Of course, when time comes to retire, if I think I can handle the cash flow requirement of a mortgage payment, I could use that stash for something else. I think your advice to take out a large mortgage and NEVER pay it off completely, just make payment you must, is good for young and middle aged people, but as we get close to retirement it may not be as good. Best wishes, Chris
I think your advice to take out a large mortgage and NEVER pay it off completely, just make payment you must, is good for young and middle aged people, but as we get close to retirement it may not be as good. Best wishes, ChrisGood point."Never" is a strong word. Maybe I should have rephrased this.Also, I must add that my calculations were wrong for the ROI for the 2nd example. It should have been 400% over the 10 years (instead of 500% as I mentioned).Finally, Please don't think I am "Slamming" the idea of paying off your Mortgage. I'm sure there are plenty of good reasons to do so. But it's good to see both sides of the fence, and I was just presenting a different perspective.Good luck, allthe hendrys
You make some very compelling arguments in your previous post against paying off a mortgage.HOWEVER, I must disagree that this is the correct option for some of us. Unlike a lot of people who debate this issue, I have actually payed off the mortgage - a couple of decades early. And you can't imagine what the emotional "returns" are unless you've actually done it. I'm not sure I can even express it adequately. But I'll try....Having no house payment completely enlarges your long-term horizon. For example, we consider taking chances that our peers can only dream about because the key rationalization becomes "we'll never miss a house payment" or "so, they shut off our electricity, big deal, we have candles" or "we can grow our own food" (this when we feel particularly spunky). I suppose too much freedom can get you into trouble if you're not careful, but for me, the load is lighter. The liberation from this most basic need - possesing adequate shelter - is intoxicating.This was a huge decision and decidedly contrary to conventional wisdom - but you see, no one told us how wonderful it would feel because we never spoke with anyone who actually paid off ther house. At least no one under the age of 70. Going bank-free gives you the opportunity to pick your dreams. These are the "returns" that can't be meaured with any financial planning calcultor.
If you can outearn your after-tax-deduction mortgage rate, you are crazy to pay off your mortgage NO MATTER WHAT factors you are considering. If you want to create the freedom that you are enjoying, you could create a fund in lieu of paying off the mortgage. Put it in something extremely secure. I don't know your mortgage rate, but it is extremely likely that you can find a money market fund that outearns your after-tax-deduction mortgage rate. Then, on any day you want, you can wake up in the morning, write a check for the remainder of your mortgage, and pay it off. But you'll have earned money on the fund in the meantime.The only circumstance I can see for paying off your mortgage is if you don't trust yourself to maintain an account like that without raiding it.
I suggest you learn about the cost of money. Mortgage companies and banks love your thought process.Its not about returns and lawyers its about net worth.Assets minus liabilities.YOu are not interested in taking the money and placing it into stock market you want the cash flow so you can buy a new car, etc.Debt is not your friend and available jobs don't last forever. You should always pay off debt a quickly as you possible can . You should always save first if possible. Its not possible.But look at this way. If you can make so much money in the stock market why not go invest in it first before you buy that house.UH?? Yea
I don't know your mortgage rate, but it is extremely likely that you can find a money market fund that outearns your after-tax-deduction mortgage rate. Then, on any day you want, you can wake up in the morning, write a check for the remainder of your mortgage, and pay it off. But you'll have earned money on the fund in the meantime.Are you sure of this? If one assumes a current 30-year mortgage of 7.81% (Bloomberg), 28% marginal tax rate, the mortgage would look like 5.62%. The highest tax free money market fund listed by www.bankrate.com is paying 4.63%APY; government MMF (Vanguard federal MM) 5.26% (3.79% after taxes); prime MMF (Fidelity Adv Stable Value) 5.76% (4.15% after taxes). http://www.ibcdata.com/mfs/topper.htm lists highest yielding MMF (Strong Investors Money Fund) at 6.56% (4.72% after taxes).It sure looks to me that with today's mortgage rates and today's top money market fund rates, after considering taxes on both, paying off the mortgage is better. I got my mortgage about a year ago at 7.375% and after federal tax deduction it looks like 5.31%, which is still above the money market fund returns of above, after taxes.No, the argument that one could just put money into a MMF instead of paying down the mortgage looks like a losing proposition (though one would have liquidity).When I ran my calculations through hugh's calculator a year ago, my results with my numbers (which included both state and federal taxes) were consisten with these findings: paying down the mortgage beat "conservative" savings, including money market funds and CDs. (That was before one could find an Internet bank offering a CD above 7%); but less conservative investments like bonds and stocks beat my mortgage over the long run.Of course, there is risk of generalizing this to others--one has to consider one's own mortgage interest rates, tax brackets, and an estimate of what one can reasonably expect from one's portfolio over the long run.
<<<This was a huge decision and decidedly contrary to conventional wisdom - but you see, no one told us how wonderful it would feel because we never spoke with anyone who actually paid off ther house. At least no one under the age of 70.>>>Here, here!!! I paid off our mortgage before my 35th birthday, and the emotional returns for outstrip whatever monetary returns that money could have generated.Since I don't have to worry about making the "house note", I am now at liberty to investigate other investment opportunities. For example, my wife and I are now looking into the possibility of buying a company. Something we wouldn't have considered if we were still making the mortgage.JLC
If you read this under an earlier thread, please excuse the repost but I accidentally stuck it in the wrong place.I would have to come down on the side of paying off the mortgage.I just paid my mortage off first of this year. But I don't view my home as an investment in thesame vein as stocks. Even though the interest is tax deductible, you do have to pay backthe principal, all in fixed inflexible payments come rain or shine. A real anchor in mymind. My goal is to become debt free. And I have run my business that way also, whichgives me the cash to invest in stocks instead of paying off debt.A lot of the companies we follow here..........the ones considered Cash Kings, have nodebt...............and we consider that a good thing.Of course, this is one of those topics that can be debated both ways, and really boils downto personal preference. I can see both arguments, and in fact considered re-mortgagingmy house to invest more in the market, but in the end I decided that I like the debt freeposition better. I'm sure I sleep better.George
My goal is to become debt free.--PokeyBAmen! It is a wonderful feeling. No house note, no car note (we save $50 a week into a dedicated account for our next car), no debt of any kind--not even so-called "good" (i.e., tax-deductible) debt. It not only feels great; it also frees up a whole lot of money each month.
You need to examine the cash flows. rather than trying to figure out what an ROI based on a projected equity amount really means. There are four cash flows, two each for the two options: 1. Financing $90,000 @ 8% for 10 years results in a $1117.00 monthly payment, or $134,040 for the 10 years....$44,040 in interest cost. 2. You have lost the opportunity to invest your downpayment: $10,000 @ 11% for 10 years = $28,394. Total financing cost: $ 72,434 3. By prepaying, you lose the investment income from your $100,000: $100,000 @ 11% for 10 years equals $ 283,940 4. You can invest the monthly payment, since you don't have a mortgage: the future value of $1117 @ 11% (monthly) is $ 218,054 Total prepayment cost= $65,886The actual cost of financing is $6548. This works out to about $55 a month. If you assume there is some risk in the 11% return rate (and there is always risk), then prepaying may not be such a bad option.Let me note that I actually used yearly numbers, rather than monthly, so the totals are off a little bit.Pat
papadoc wrote:You need to examine the cash flows. rather than trying to figure out what an ROI based on a projected equity amount really means Well done ... thank you. Your example really helps to put the pros and cons of prepayment in perspective.jobobb
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