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Subject:  Re: Do you have a rational home equity policy? Date:  1/27/2005  1:59 PM
Author:  MurrayS Number:  44222 of 100111

I created a spreadsheet some time ago to answer the question of whether paying off a mortgage was a good idea or not. I used monthly S&P prices back to 1871 to compare the returns of paying off a mortgage. I looked at two cases:

a) Invest an amount (X) in an S&P index fund for the term of the mortgage (15 or 30 years).

b) Apply an extra amount (X) to the mortgage. When the mortgage is paid off, invest the mortgage payment plus X in an S&P index.

I compared total values for every 15 & 30 year period from 1871 to present for both cases. Taxes were not considered since the amounts in case a) could easily be invested through a tax advantaged account and taxes would be owed on gains in both cases if invested in taxable accounts.

In my case ($200k loan, 4.875%, 15 year, $200 extra payment) investing yielded more in 81% of the periods. If you consider deducting interest payments, investing was better 97% of the time.

30 year loans at current interest rates show investing is better more than 95% of the time.

With that in mind, why didn't I max out my loan amount when I refinanced a couple years ago? When asked that question on another board, it occurred to me, I'm always more than willing to delay payment if I can do so at a low or no interest rate. I minimize my withholding and pay tax in April, I use my credit card for nearly all potential purchases, etc. But, I won't take on added debt and responsibility for the sake of making a few points of return. Things can happen such as losing a job, disability, etc. It's simply not worth the risk.

OTOH, the S&P is up 19% since my last refi.


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