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Author: hjg0989 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 756373  
Subject: Payoff house ??? Date: 3/21/2000 11:12 PM
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Hello,

I've been struggling with whether to pay off my mortgage and be totally debt free or whether to keep the money I have invested in the market.

If I cash out 37.5 % of my portfolio I can pay off my mortgage (not counting capital gains).

Logically, I think that my mortgage is cheap money (5% after taxes) and I should be using it as leverage. OTOH, I'm thinking I should take some of the profits off the table and become totally debt free. I would then put what used to be my mortgage payments back into my brokerage account.

If I pay the mortgage off, I will have piece of mind and I will have locked in my profits. However, if the market continues the way it has been going, I will have locked my profits in at a low level.

Has anyone else been pondering this issue ?

Thanks for any opinions,

-helen
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Author: JimmySD One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6664 of 756373
Subject: Re: Payoff house ??? Date: 3/21/2000 11:36 PM
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Logically, I think that my mortgage is cheap money (5% after taxes) and I should be using it as leverage.

I think your logic is right on. I paid off my mortgage years before I knew what a stock was. I could have been retired alot sooner if I knew what stocks were and owned my port ten years earlier. Still having said that I wasn't real smart with my money, but I did save like crazy. Didn't dump alot of money into my house or collect toys. So it worked out fine it just took alittle longer. When I see high school students doing class projects with the valueline I'm jealous that wasn't one of my high school projects.


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Author: SUSIQ One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6667 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 6:10 AM
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JIMMY SAID: Logically, I think that my mortgage is cheap money (5% after taxes) and I should be using it as leverage.



I have thought AT LOT about this, because if I paid off the house I'd have more of a "cushion" for retirement. I just bought a new house, so the payment and interest rate is fairly high and will go on for 15 years. I am not good with spreadsheets, but I can do basic math.

As I see it, what it really comes down to is your CONFIDENCE that you can actually realize higher returns with the dollars that you are NOT using to pay off the house. And your ability to sleep at night with a major debt hanging over your head when times are not so good.

I am using the Safe Withdrawal Rate AND a projected annual return of only 8%, so I am keeping the mortgage.






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Author: KrumBunny Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6668 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 6:39 AM
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Warning, this is an ENFP speaking... :)

We paid off our mortgage in the summer of 1998 and were very glad we did. It really opened up a lot of possibilities in our lives, like working part time to keep our family life more sane.

I should also say that our house is 90 years old and is in a semi-historic area where the houses (and the residents?) have a lot of character. So we have an emotional attachment to the place that may have colored our judegment.

We had everything in stocks at the time, and I was thinking about transfering some of the money into fixed income. But then I realized that owning bonds and using the proceeds to pay for the mortgage was a wash, both return wise and tax wise. Sure there is a mortgage deduction, but your investment proceeds are taxed. Liquidity wise it's a wash too, since the fixed payments of the mortgage offset the bond liquidity. If you think about it from a macro economic point of view it makes sense. The fixed income market is very effecient, so there shouldn't be a free lunch in here.

So we simplified, got rid of some Wise mutual funds and the mortgage. We looked at it as reducing our overall portfolio risk.

One way to think about it: Suppose you already owned the house free & clear. Would you take out a loan on your house to buy stock?

Almost all of the advice out there is to keep the loan, but in my opinion the tax and cash flow arguements are not well thought out. The best rational is essentially "most people should take on more risk to realize a higher return". That wasn't true for us. In hindsight I can say that I am positive we did the right thing by paying it off.

-- KB


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Author: lkfrey Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6669 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 7:37 AM
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I paid off my house (mobile home) before I ever even thought about saving. It may not have been a good financial choice considering the bull market going on, but I still feel good about it and would do the same thing again. I think that the person who said that houses are separate from investments was right. They are security and emotion in a way that stocks aren't or al least shouldn't be.

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Author: bmullens Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6670 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 7:46 AM
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Helen,

In today's real estate market, your mortgage rate is well below what is currently available. I payed off my first home six years ago by selling off some stocks. When I bought my summer home, we got a rate a little below 7% for 30 years. Our money manager reccommended to us that we should drag that one out as long as we can, because the rate was so low, and continue to allow our investments to compound. His advice was correct. Last year we earned more than the value of that home in our account because we left our stocks alone and "invested" in our mortgage.

Just a thought,

Brad

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6673 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 8:40 AM
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We recently paid off our home. It was an EMOTIONAL decision but we're happy with it.

NOT paying off the home is a better financial decision.

You must weigh the two counter-weights, LOGIC vs EMOTION. In my case, my wife's EMOTION weighed in heavier than my LOGIC.

If you pay-off your home NOW, it is very likely that you will work around 5 more years to pay for the emotional peace of mind of having a paid-off home.

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Author: dcoleman87 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6675 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 8:55 AM
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I have looked at the payoff house question from the standpoint of asset allocation. Other posters have referred to the emotional aspect of this, and I agree. I have done the payoff, but I did it by gradually accelerating my payments. You indicated that you would be re allocating about 37% of your portfolio. My tendency would be to avoid such drastic reallocation. My paid off house is now less than 15% of my total net worth. I pretty much maintained this allocation throughout the payoff period. To stimulate patience, I would suggest using some amortization calculators so you can observe the impact of accelerated debt reuction. BTW, I do beleive that there is also a financial rationale for early payoff. I now have a substantially lower break even going forward. I also have a house asset that becomes a basis for funding future housing expense.

Dave

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Author: 4gonefool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6678 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 9:12 AM
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If I pay the mortgage off, I will have piece of mind and I will have locked in my profits. However, if the market continues the way it has been going, I will have locked my profits in at a low level.

Has anyone else been pondering this issue ?


I've looked into this issue and had a number of discussions with The Badger on it. It is a personal choice and depends on your personal risk tolerance. I personally would leave the house mortgaged, but I offer the only alternative that I know of to get the best of both worlds. It's still risky, but you won't lose the house.

You can pay off the mortgage on your house and own it free and clear. Then you can buy stocks on margin and if you have enough income from interest, dividends, royalties and possibly rents, you can write of the margin interest as a tax deduction against that income. This preserves the tax advantage of a home mortgage and eliminates the need to keep adding priciple to the home equity through monthly payments. You essentially transfer your mortgage from your home to your portfolio.

Margin interest rates are higher, but you now have full flexibility on when to reduce or increase debt by selling or buying stocks. The stocks you buy on margin may return more than your house ever would, but if the returns begin to drop off, you can sell the losers first and begin dropping debt. Worst case is that the market drops low enough that you lose your whole portfolio, but if this happens, you still have your house and a source of equity to start over. You can segment your taxable portfolio to eliminate the possibility that a sudden drop will trigger a margin call and wipe out your entire portfolio. This will increase the risk that a sudden smaller drop will wipe out the segmented margined portfolio, but protect your unmargined portfolio.

4goneFool






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Author: Daryll40 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6681 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 9:22 AM
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We recently paid off our home. It was an EMOTIONAL decision but we're happy with it.

NOT paying off the home is a better financial decision.

You must weigh the two counter-weights, LOGIC vs EMOTION. In my case, my wife's EMOTION weighed in heavier than my LOGIC.

If you pay-off your home NOW, it is very likely that you will work around 5 more years to pay for the emotional peace of mind of having a paid-off home.



I don't agree that NOT paying off a house is a better financial situation. It MAY be a better financial decision, but that is not a given.

For those of us not comfortable with the current stock market mania and "crazy" to invest in "low paying" bonds, paying off the mortgage is a better alternative to bonds. You get a better internal rate of return than bonds with the same or less risk.

Plus, there's something to developing an "Accumulation Mentality". Paying off everything either before investing or concurrent with investing is how you develop that, IMHO.


Daryll40















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Author: DrPopcorn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6684 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 9:28 AM
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Here's a thought from an INTP:

I've always been a SAVER, and only in the last few years became an INVESTOR. When we got married, my wife and I were DINKs for 6 years, saved a lot, and upgraded housing twice. Once we had kids on the way, I believed (and still do, for myself and my family at least) that I could do the most for providing security for the family by owning our house free and clear. The thought is that even if fired, I could still work at KMart and pay the bills, plus my foregone mortgage payment could become my new source of savings funds.

Therefore, 3 months before my daughter was born, all our savings went to pay off the mortgage. Untouched, however, were my wife's IRA-rollovers from her job, amounting to less than 20% of the house value. These I blindly dumped into a growth mutual fund.

Fast forward 9 years. Second child arrived 6 years ago. Continued saving at approx 20% of gross income. Started thinking about stocks 2 years ago after long-time gentle nagging from wife. Got into TMF and all to be learned here. Put 1/4 of accumulated savings into individual stocks in 1999. Upped this to approx 85% of investables during Jan 2000. Investables now add up to nearly 3 times more than house value. If childless we could do RE now without selling house. Occasionally look at house value and think "should I have invested it instead?" Say "Nah" to myself and roll over to sleep comfortably, dreaming about RE in 3.5 years.

Postscript: my father paid off his house early in the 1970s and has always second-guessed himself about it. When I informed him about what I had done, he told me about his second-guessing, sort of to warn me. Luckily it has never bothered me. Meanwhile, he and Mom are in the 3rd week of their annual RV-athon driving throughout the southern US and enjoying their own retirement (or so it seems).

Bottom line for ME is that having the house free and clear is an emotional security blanket that I am happy to have wrapped around me. Others will see it differently.



Best wishes,
DrPopcorn

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Author: dcoleman87 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6685 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 9:50 AM
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DrP said:


When we got married, my wife and I were DINKs

Sure beats being a SITKOM.

Single income, two kids, opressive mortgage.


Dave

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Author: bmullens Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6688 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 10:14 AM
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I guess I tend to look at bottom line net worth as the whole rather than breaking it into different pieces. As long as I have liquid assets (including cash)sufficient to pay off my mortgage, that loan is, in effect cancelled because my overall net exceeds the loan balance. Now I know the market can take as well as give. Given that, investments can and will go down, sometimes significantly. I am confident, however, that if we protect our profits and diversify (real estate, annuities, bonds, trusts, etc.), the long term buy and hold strategy outperforms the interest rate on most home loans.

Like anything else we do, when making choices we need to weigh the benefits against the risks.

My $.02

Brad

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Author: NowInMaui One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6689 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 10:20 AM
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hjg0989 said:
I've been struggling with whether to pay off my mortgage and be totally debt free or whether to keep the money I have invested in the market.

Add me to the group that say paying off the house is the preferred course of action. It truly is, though, an emotional decision.

You didn't say what your time to retirement is. Or, the time left to pay off the mortgage. In my view that makes a difference and would impact my decision.

We paid off the mortgage as quickly as we could because we didn't want any debt at all. Not to sound noble, we had the discipline to take what we were making in mortgage payments and put it into the market. Made a hugh difference in where we are now. Good luck. NowInMaui





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Author: dory36 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6694 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 11:11 AM
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We just paid our house off this month. (Well, our house is a boat, but the price is about the same.)

At first blush, paying it off seems to make financial sense, based on safe withdrawal rates discussed here frequently. If I have $12,000 annually in mortgage payments (above and beyond the upkeep etc.) for a $125,000 loan, then I need 12,000 / 4% = $300,000 in additional retirement funds to insure I have enough to guarantee sufficient income for making those payments.

On the other hand, I can just pay OFF that $125,000, and hit my ER sooner -- by however long it would take to accumulate the additional $175,000.

I'm probably missing something there. And anyway, I haven't done a lot of financial calculations on this decision. But having the home taken care of in ANY market conditions sure feels good!

In general, I think of non-discretionary expenses (mortgage payments, car payments, etc.) as my biggest threats to a successful ER. I can always tighten my belt, eat mashed potato sandwiches, and otherwise revert to college days during really bad market conditions, without needing to attack my retirement principal. But if my mortgage payments were eating up 25-30% of my safe-rate withdrawals, then I'd have a lot less room to maneuver!

Hope this helps you think through all this.

Dory36
INTP (can't you tell?)
with 101 weeks to go!



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Author: backslash Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6703 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 12:28 PM
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If I pay the mortgage off, I will have piece of mind and I will have locked in my profits. However, if the market continues the way it has been going, I will have locked my profits in at a low level.

I have sort of done both. I had parked some leftover money from a home inprovement loan in a mutual fund a few years ago, and was withdrawing the monthly payment automatically each month. After learning more I wanted to get my money out of the MF and into my own control, but I didn't want to just pull it out and suffer the taxes. I was making more money than the interest was costing me (sort of a low interest margin account). I was coming out well ahead of the curve. When the loan was paid off, I adjusted the amount and redirected it to pay automatically against my mortgage. This way I'm sort of reverse dollar cost averaging, locking in some profits, decreasing my debt, and slowly killing off my MF position. All new investment money has just gone straight into my Waterhouse account for me to invest. I'm pretty comfortable with it.

Harley

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Author: FoolThatIam Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6738 of 756373
Subject: Re: Payoff house ??? Date: 3/22/2000 6:45 PM
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I have been following this board for quite some time but this is my first post. The replies already submitted have been excellent. But I would like to
add my own 2 cents. I think the key here is "your
peace of mind".
If it's the thought of debt that drives you crazy,
then you probably should just pay it and be done.

If it's concern that the market takes a plunge, economy
goes bad and you might not be able to make payments -
then create a special reserve fund JUST for the mortgage. (You really should have a reserve fund
already for all living expenses for at least 6 months).
Take advantage of the fact that you really don't need the money right immediately .
1.Instead of liquidating 37% of your portfolio
figure out how much you need to liquidate to have 24
-36 months of mortgage payments (a nice stretch to
ease your mind). Say X dollars
2.Determine exactly which investments you want to liquidate. If some of it is stock that you don't
think has any potential to grow - sell that first.
and ladder it in CDs.
3.Then take the stock with some growth potential and
simply put a stop limit of 10% to 15% on it and just
wait. If the limit is reached, take the money and
ladder it.
4.In a month if the stock is at a higher price,
readjust limit so that it is still 10 to 15% lower.
If stock is same price or lower - keep original limit.
5.Once X dollars is reached in your laddered reserve
fund, keep implementing strategy if you still have
any unsold stock. However now, instead of taking
results of limit reached stock sales and laddering them, put them directly to mortgage as a prepayment.
6.Continue until all the investments you already chose
are liquidated.

This way you liquidate some of your profits to give you
piece of mind but over time, allowing for more upside on stock profits and possibly spread out the capital gains taxes .The price difference for me for a regular sell vs a stop limit is only $5 dollars which
is a drop in the bucket vs potential stock increase.

FoolThatIAm

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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6842 of 756373
Subject: Re: Payoff house ??? Date: 3/23/2000 11:43 PM
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There are a lot of good posts on this subject and maybe it doesn't need another. One thing should be plain: there are lots of intangibles (like peace of mind) and whether or not to pay off your house loan early is a highly personal decision. Still, that doesn't mean that you should not try to crunch the numbers first.

One thing I did for years on the numbers side was a pretty simple exercise that made my decision (not to pre-pay the loan, in my case) much easier. Other readers might want to try it as well.

Each year after doing my income taxes, and while all the paperwork was still sitting in front of me, I would quickly re-calculate how my taxes, and my net worth, would be different if I had pre-paid my loan at the beginning of the previous year. Of course, I would loose most of my itemized deduction and my taxes would rise because of that. Then, I would figure how much interest (or capital gains, dividends or whatever) I would have lost from the money I would have had to take from my savings/investments to cover the loan payoff. If the payoff amount would have come from selling stock or mutual funds, I'd also deduct the estimated capital gains tax due as a deduction.

Don't worry about the actual payoff amount--it is still your asset either way. It is just as valuable sitting in your house as in your brokerage account.

Then, I'd add back the plusses like the money I would no longer be sending off to the loan company monthly and rough out what the investment return for that year would have been. Try to remember that, for some investments (after-tax like bonds), I'd be paying taxes on the dividends. For other investments (like a Roth IRA), there would be no reductions in my return. You want to estimate your after-tax return, if you can.

Anyway, each year, I had a figure which was what it would have cost me (or saved me) if had paid off the loan in preceding January. All this took about 20 to 25 minutes to do.

In my case, for most years, my net worth would have fallen by thousands each time I did this 'what if?' calculation; however, when I had my loan nearly paid off and I started taking the standard deduction under this scenario, the numbers reversed and it 'paid' slightly to pay off the loan. Then, that changed again to a slight loss when interest rates rose in the most recent upswing--I have an old low-intest house loan.

For years, when I really wanted to have that peace of mind by paying off that house loan, I was able to tell myself I was saving $ X,XXX's each year and doing the right thing by waiting awhile longer. I felt better for it. You might too.

-- JPKiljan

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Author: Savagegrace Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6848 of 756373
Subject: Re: Payoff house ??? Date: 3/24/2000 10:34 AM
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Of Trees, Forests, Wars, and Risk.

Greetings JPKiljan!

Nice work, I just wish you had recorded the gains for each year!

However, your thread crystalized whats been nagging me about this house business. To pay off early or not.

Oh, I know it's better in terms of money earned not to pay off the house. But in reading your thread I realized I was seeing trees and not the forest...;-)

While it's not nice to think about, what isn't covered by not paying off your house is a situation causing the market to drop like a stone, and stay there for a decade.

What got me thinking about it was this. Yesterday, my coworker and I were doing world plots projecting what country would use a single nuke first. I indicated India, my coworker, said China. (I won't go into the details)

Cataclysms and wars have occured. So in this worse case scenario, depending on how long it took the market to recover...if it did. It would be better to own your home.

Hummmm, things one would prefer not to think about.

Your Humble Servant,
Gracefully Savage





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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6880 of 756373
Subject: Re: Payoff house ??? Date: 3/25/2000 1:29 AM
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Savage wrote:

. . .cataclysms and wars have occured. So in this worse case scenario, depending on how long it took the
market to recover...if it did. It would be better to own your home.

Hummmm, things one would prefer not to think about. . .

Good point, Savage. However, most of the intangibles we have to deal with in paying off a loan early are not nearly as terrifying. Moreover, the misery can go both ways in some more common disasters.

It can also be better not to own before the bad news hits:

I remember in the 80's there was an oil shale boom here in Colorado. The population of the little town that was the center of the new industry (Rifle)swelled with well-paid workers all looking for housing, the cost of which shot up--driven by the new demand. When the oil industry later decided that oil shale production was not economical and shut down their development facilities almost overnight, a huge number houses came on the market and the prices fell to a fraction of what they had been worth. Unable to find work and faced with a move back to California or Texas to find employment, many people lost 10's of thousands of dollars on their home investment. The only ones who were able to keep their shirts were those who decided to pay what, at the time, seemed to be exhorbitant rents instead of buying, or who just walked away from their house loan--they had just made the minimum downpayment and weren't worried about their credit ratings.

I have heard similar stories of slumping house prices in Hawaii when the Japanese stopped buying vacation homes due to their economic slump and when towns that were dependent upon a military base or shipyard finally closed.

On the other hand, if I had bought a house in Silcon Valley at the beginning of the tech boom, things could be very different by now.

At least those poor people on the Atlantic coast who got their housing markets trashed by those big hurricanes were able to keep their jobs and wait till the markets recovered. Retiree's can do that too. For many, that makes owning your own home a little safer an investment the older you get.

In a sense, owning a large house is a lot like owning a large bond that pays a dividend of 'free' rent and has high maintenance fees.

Thinking about all this scary stuff almost makes figuring your taxes seem easier. 8^)

-- John



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Author: Savagegrace Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6881 of 756373
Subject: Re: Payoff house ??? Date: 3/25/2000 1:50 AM
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Greetings John!

Ouch! A most excellent point. I remember that time period. A real estate agent bragged about he and some friends went to Texas and bought a lot of homes for pennies on the dollar. To be sold a few years later for a very nice profit. Hummmm, the pendulum swings both ways. Being a vagabon would appear to have its own advantages as well!

Blast! This board stretches the narrow boundries of a minds perceived perceptions. Almost always a good thing, but unpleasant a feeling as it takes one out of the comfort zone!

Gracefully Savage

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Author: ariechert 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: 6887 of 756373
Subject: Re: Payoff house ??? Date: 3/25/2000 8:35 AM
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In a sense, owning a large house is a lot like owning a large bond that pays a dividend of 'free' rent and has high maintenance fees.

Thinking about all this scary stuff almost makes figuring your taxes seem easier. 8^)

-- John


I've thought about another problem in owning your own home; what if you are a vagabond at heart and would like or enjoy moving every couple of years? I've been told that it is hard to recoup all the costs of buying a home in just a couple of years. And, if you are not going to be living in your house at least 5 years it is better to just rent. - Art



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Author: dory36 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6889 of 756373
Subject: Re: Payoff house ??? Date: 3/25/2000 9:50 AM
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I've thought about another problem in owning your own home; what if you are a vagabond at heart and would like or enjoy moving every couple of years?

Got that one figured out. My house is a boat. When we get tired of the neighborhood, we move the house!

Actually, we plan to travel for years after ER, taking the "house" us with us where ever we go.

One big advantage is that it's really easy to avoid loading up on toys and other possessions. There's no place to PUT them!

I've seen a few posts that suggest there are others who plan to live full time in their boat or RV. It certainly won't appeal to everyone, but for those who like that lifestyle, it can be great to be able to travel all the time, but never pack/unpack/repack a suitcase!

Dory36


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