Stock Market

[wartknight]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

[wartknight]

I can tell I'm not going to change your mind about any of this, and I've run the numbers in enough cases to know (minus the emotion of it) that paying off your mortgage is not the most efficient way of doing things, so you're not going to change mine. If you want to carry on the conversation, why don't you PM me.

[balken]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

The return on your investment (paying off the mortgage versus investing) should be computed without consideration for the value of the home. The return from paying off the mortgage is a function of the cost of borrowing money, not the value of the home itself. If the home depreciates in value, your net worth will change, but your mortgage obligation will not. This change in net worth will occur regardless of how you handle your mortgage. However, you do need to consider market risk when investing.

To use the previously posted example, you need a 1.9% annual return to break even with paying off the mortgage. In essence, you have $150,000 earning a negative 1.9% interest if you do nothing. However, if you invest the money in a money market or treasury earning 1.9% interest, you will be breaking even with very little risk, but no advantage over paying off the mortgage. If you choose to invest in the stock market, and anticipate an 8% average annual return, you will receive 6.1% effective return over paying off the mortgage. However, you will have to accept stock market risk to achieve this return.

I am not advocating either approach in these posts, but simply providing the math for people to consider.

[jmb]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

I guess this begs the question what type of investing are you doing that is market oriented that hasn't lost money?

[wartknight]

I guess this begs the question what type of investing are you doing that is market oriented that hasn't lost money?

It doesn't have to be market-oriented to get a market-like rate of return.

[jmb]

It doesn't have to be market-oriented to get a market-like rate of return.

Ahh yes you are discussing non-correlated assets.

If you are using non-correlated assets typically you are going to either have liquidity issues, or volality issues. If you have found a nca that doesn't have liquidity issue, nor volatility please advise-how?

[wartknight]

For a situation like money that would otherwise be going to a mortgage, it needs to be a safe investment, no volatility, give a competitive RoR (I consider that better that 6% when there is no volatility) tax-free, and able to have the check if I need it within the week.

[capitalcityguy]

This is an interesting discussion and I am surprised to find the differing of opinions on both side of this issue to this extent. Some of the comments do give me a sense that we (i.e.…those that advocate that it may not necessarily be a wise financially to pay off your mortgage) are misunderstood. From the tone I get I sense that people assume we have this belief based on some notion that we recklessly spend money we don’t have or carry a lot of debt. Not at all. For me it is years of reading about those that tend be successful financially and how they did it. The vast majority of the time, the most successful businessmen and investors believe and use of leverage to get where they are today. It is called using other people’s (in this case the banks) money to make money for oneself.

Do I sound reckless with my use of debt?

Own two vehicles but haven’t had a car payment in 6 years. Paid cash for most recent purchase.
Zero credit card debt
Zero home equity lines of credit.
Two mortgages – one on my primary home. One on a rental property.

So outside my two mortgages, I have zero debt. Far from reckless (as some want to imply) and actually pretty conservative if you ask me. But for me to start plowing money into my mortgages when I have such an incredible interest rate on both place and tie up that cash, it would not be conservative. IMO it would instead be borderline mismanagement of my funds and an incredible lost opportunity for the future of me and my family.

It is classic Rich Dad, Poor Dad (for those that have read this book).

[Cyclonepride]

I'm pretty much in agreement that, from a broad financial picture, investing rather than paying off your mortgage makes sense, and I think everyone agrees with that as well. The lack of a house payment gives peace of mind, and therefore happiness. I'm not sure what price you can put on that.

[Phaedrus]

Do I sound reckless with my use of debt?

Own two vehicles but haven’t had a car payment in 6 years. Paid cash for most recent purchase.
Zero credit card debt
Zero home equity lines of credit.
Two mortgages – one on my primary home. One on a rental property.

So outside my two mortgages, I have zero debt. Far from reckless (as some want to imply) and actually pretty conservative if you ask me. But for me to start plowing money into my mortgages when I have such an incredible interest rate on both place and tie up that cash, it would not be conservative. IMO it would instead be borderline mismanagement of my funds and an incredible lost opportunity for the future of me and my family.

It is classic Rich Dad, Poor Dad (for those that have read this book).

In general, I agree with the premise of the book, but disagree with the use of debt.

But my central point is that to treat your home as an "investment" is not very wise. It's not an "investment" as much as it is the place you live.

In addition, treating it as an investment can generate emotional dissonance between you and your spouse.

Plus, I would suggest that the returns we are discussing are not worth the additional stress plus risk.

To treat owning one's home outright as "mismanagement" though, is kind of nutty, if you ask me. If it's that much money, relative to your investments, you have too much house, imo.

BTW - I am not talking about owning a home in lieu of investing. In order to own a home cash, you need to be debt-free, own a full emergency fund and already have a hefty investment plan.

And my modest home isn't going to break me, financially, by paying it off. In fact, I will reiterate, that a modest, paid off home beats a house payment (regardless of interest rate) on a McMansion 10 times out of 10, when it comes to investing.

[Irresponsible]

But my central point is that to treat your home as an "investment" is not very wise. It's not an "investment" as much as it is the place you live.

At a minimum one must think of a home in terms of an investment to evaluate purchasing vs. renting.

[Phaedrus]

At a minimum one must think of a home in terms of an investment to evaluate purchasing vs. renting.

And, in that case, you should evaluate ALL the costs of home ownership. The idea that renting is just throwing money away is greatly overstated. Often, you can rent cheaper than you can own.

The value of a home as an investment often conveniently overlooks the total cost of ownership.

[CyInSoonerland]

I really don't understand the "tying up cash" side of the argument. At one time, I thought leverage was wise and even used it to buy a second home for the family. However, my math made me quickly realize that by selling off one home and paying down the mortgage on the other home actually freed up a lot more cash in the long run. After the first home was paid off, I noticed that I had A LOT more cash every month to invest, spend, and bless others.

I know it may sound like very simple math, but it's still math.

[Wesley]

One favtor decding to lock in a big mortgage is the expectd rate of inflation for the next twenty years and impact on investments. Some people might say if you expect high Carter inflation, lock in a big mortgage as inflation will make it dwindle in value. If you expect stable times, investments may not grow much and it is not worth the risk.

For Nebraska, depending on the house, property taxes can be steep and exceed mortgage interest.

The election will sway this discussion also -
a little more to the right - opinions, politics, humor, news ... whatever
One proposal by Obama is to tax houses over 2400 sf at some point because you owned too much house. That would creat a novel trend of downsizing to match our new, smaller cars.

CAPITAL GAINS TAX

MCCAIN
0% on home sales up to $500,000 per home (couples) McCain does not propose any change in existing home sales income tax.

OBAMA
28% on profit from ALL home sales

How does this affect you? If you sell your home and make a profit, you will pay 28% of your gain on taxes. If you are heading toward retirement and would like to down-size your home or move into a retirement community, 28% of the money you make from your home will go to taxes. This proposal will adversely affect the elderly who are counting on the income from their homes as part of their retirement income."

[wartknight]

OBAMA
28% on profit from ALL home sales
"

So if I sell my home at a loss, do I get to write that off?