I get so sick and tired of “doom and gloom” talk.
When you look at past market performance, you can just about be assured that you’ll make better than 8% over 15 years.
And that‘s what you must look at – past performance.
Of course, people like you will claim that the present situation is somehow “different” or “unique.”
People like you should be ignored…
Mortgages are interest-heavy early on. Make all the extra payments you can, because they come straight off of principle and will reduce the amount you owe. Whatever you do, don’t let the mortgage go the full term. I’ve done the math on this, and you will end up paying about double the amount of the original mortgage if you let it go that long. You will end up paying much, much less interest if you pay it off early. You suppose maybe the banks have done the calculations and know this?
I also consider a paid-off house as part of my retirement planning, especially if you plan to stay in that house. A large percentage of most people’s money goes to rent/mortgages; reducing your outgo is as sound a retirement stategy as increasing your income.
Most renters do not know this fact.
On an average 30 year mortgage, the first 11 years you are paying almost ONLY interest. Interest is fully tax deductable!
For example, lets say you are paying $1,000 a month for your mortgage. At the end of the year you paid $12,000 of which probably $11,000 was only interest payments.
That entire $11,000 is deductable. So if you earn $40,000 a year, you are entitled to lop off $11,000 making your adjusted gross income only $29,000 for the year. I think you can see how this will drastically lower your taxes.
For this reason, many people sell their home after 11 years when they are actually starting to pay the principle and the tax deductions disappear. By then, most homes have grown in equity, so using the new selling price, they can take cash out, put a downpayment on a larger, or smaller, home and get back on another 11 years of interest payments and lower their tax bracket.
But there certainly is a lot to be said about having a house owned free and clear.
What about doing a bit of both? Pay off some extra on your home and invest some money somewhere else. My financial advisor recommends trying to pay your home loan off in 10 years and then investing an extra money in something else. This is supposed to minimise interest on the home loan. Supposedly if you pay it off any faster you will get better returns by investing elsewhere. I haven’t tried doing the maths so he could be wrong. This is also based on Australia so taxes etc might make a difference.
Jockstrap
PS I hope this makes some sense.
Two points here:
I assume you live in a state where a Home Equity is readily available. I live in Texas, where the state government has decided to protect us from ourselves, and has such strict rules and guidelines on HE loans, it’s hard to get. Also, your title is “branded” as a Cash-out property, rendering it near impossible to get a regular loan, even after said HE loan is paid off.
You have children, which the deduction for will make up for the loss of your mortgage interest deduction.
I would go ahead and payoff the home early. OR, have you refinanced lately? Current rates are below 5% for a 15 yr term.
Take the extra money and plug it first into IRAs then the kid’s education funds. Don’t jeopardize your retirement to fully fund their education.
OK, I am aware that a mortgage is mostly interest in the early years. I wondered whether there was some tax rule about interest only being deductible in the first 11 years. Even in terms of the amount of the mortgage that is interest, there is nothing magical about 11 years. I just did some calculations and 11 years is the point at which one third of your payment is principal. So a full two thirds of your payment is still tax deductible. At 12 years it becomes 65%, so each extra year doesn’t make a big difference at this point.
(I did some simplifications in my calculations, e.g. calculated interst only annually, not monthly or even daily, so please don’t inundate me minor corrections to my numbers - I can be 10% out without it affecting my point much.)
With respect to the OP, it depends on what is important to you. Yes, historically you would do better by having a big mortgage and investing it all in the stock market. The last three years shows that that can be very painful over shorter terms. I have no mortgage - for me, being debt free and knowing that all subsequent saving can go to planning an enjoyable retirement is of great value.
Alas, every investment opportunity comes with the caveat: “Past performance should not be taken as an indication of future performance.” That warning is there for a reason.
True, over the long haul, the market’s done pretty well (though I’m still waiting for someone to steer me to that safe 10% return!). On the other hand, if you’d invested in an all-NASDAQ index fund two years ago, you’d now be sitting at a position in which it will take over 16 years of 8% growth just to get back to “even,” assuming zero inflation. There are, in fact, a few long stretches where the broad market offered only piss-poor returns.
In short, there’s no guarantee that the 15 years you happen to be invested in the market will produce returns that match the average of any particular 15-year period in the past.
And BTW, I certainly have some of my money in the stock market (some large cap, some small cap, some international, and some in the bond markets, for good measure). But claiming that the markets are always a better investment than real estate calls for one to ignore a goodly chunk of history on the dirt, bricks, and mortar side of the equation, too!
(And this is not the right forum for comments like “People like you should be ignored.” If you want to engage in ad hominem attacks, take it to The Pit.)
A VERY SMALL increase in payments VERY EARLY in a long mortgage will produce a VERY DRAMATIC decrease in later interest accrued.
Without showing this mathematically, I think you can see intuitively that a $50 payment early in a 30-year mortgage will cancel the interest that would otherwise have to be paid again and again.
It’s a lot like reverse-compounding.
And having a mostly paid-off mortgage doesn’t totally lock up your funds. It just makes the equity in your property greater and you can always borrow on it if need be. There are even plans where you can sign up for a secured loan of max $, and pay nothing until you write a check on that special account. A good emergency fund.
Where does the interest saved by paying off the mortgage early figure into the grand scheme? By my calculations, we would save $61,367 by paying this mortgage off in 3 years as opposed to staying with the full length of 27 more years.
That’s $61,367 AND peace of mind that I could support our family if something happened to Mr. Adoptamom which prevented him from working. (Today is the 1 year anniversary of his brothers death from colon cancer. Mr. Adoptamom checks out fine)
We are not risk takers with investments. Our meagers pennies are locked up tightly into CDs which we can borrow against cheaply in case of an emergency.
We have excellent credit and I’m positive we could establish a line of credit against our home after paying it off if we needed to.
Please keep your input coming.
My gut says that you would be doing the best things for yourselves by paying off early with a possibility of some low-risk investing, probably with a financial advisor - especially since you’re not risk takers. I’m coming from the same place - I would be happy with a paid off home and a modest income for my retirement, rather than risking my hard-earned cash on investments. I’m already watching my small RRSP - 401K to you 'Murkans, I guess - get smaller with each report as the stocks and markets plummet.
(You guys get to declare your mortgage interest as a deduction on your income tax?!? Holy flurkin’ snit! I want that!)
Then you better move your feathery ass to the U.S.A., Baby! It’s deduction heaven, no snit! 
And it’s one of the driving forces behind the ‘American Dream’ of home-ownership.
I betcha at least 25% of home buyers would be living in apartments without it.
My “feathery ass”? Humph - the class of people they let into the Straight Dope these days. (Checks registration date.) Humph - the class of people they don’t kick off the boards these days.
In the UK there are mortgage schemes that give the best of both worlds. You open an account that has chequing, saving, borrowing and mortgage facilities. You have to pay off the minimum monthly payment in the usual way and you have to pay interest on your net borrowing.
The interest is calculated by adding how much you still owe on your mortgage to how much taken from your borrowing facility. Frm this amount is subtracted the sum you have in chequing and saving facility. The interest is calculated every day and paid every month.
So, you could have a 100,000 mortgage, but if you also have 100,000 of savings, you pay no interest at all. Your savings are there for you to use when you want.
The tax rules in the UK mean that you only pay tax on income from net savings. Where savings are offset against a debit in this way, there are no taxes to pay.
Another advantage is that it is possible to borrow more money (within limits of course) at the mortgage rate - this will generally be the best available deal.
Arrangements of this sort are becomming very popular in the UK. I am not a financial adviser, but I for one would reccomend accounts of this sort.
Are these arrangements available elsewhere.
Then there is the ol’ deflationary scare which would make your cash all that more important in the months/years to come. But that is another story.
I think I’d have to jump on the investment bandwagon…You are basically asking where your extra cash would be best invested. In your house or in something else? Right now, ‘something else’ could be straight stocks. JP Morgan said “The best time to buy is when blood is running in the streets.” If you are looking at a 20+ year view on the money, then start putting the extra money into stocks. You’ll be buying bits and pieces over the next few months while the market keeps crashing, and when it rebounds, you will be sitting pretty. There are cheap ways to put a little in at a time, like Sharebuilder (a few bucks to buy a stock, and can be put on a repeating schedule, i.e. $150/month into Disney until you stop it). After the market races up again, sell some of your stock and make a lump payment against the loan.
Which will earn more in 20 years? Your house’s appreciation minus interest, or the stock market? History says stocks, especially after a spanking. BUT I know the warm feeling of living debt free and it is worth its weight in gold. Everyone told me I was crazy for paying off my student loans ($43k) in only a few years (97-02). But it turned out to be the best idea in the end. I made 8% a year for that whole period, basically, which is better then most people ended up with. Every day I go to work now, I am working FOR myself, not for my debt, and that makes me sleep easier at night.
And those looking for 10% returns, I wish you had offshore money! My fund is +3.05% YTD (Friday’s close) with a Std. Dev. of 10%…(no, this was not a solicitation, just an observation).
-Tcat
For that matter that ‘feeling of security’ is why I chose to buy into the Virginia College Prepay System. The investment rate bites but I know that Baby Kate gets 5 years at any Virginia State College (provided she has the grades) regardless of whether I lose my job, sanity or life.
Don’t knock that feeling.
In Adoptamom’s case, DH is 49 - with no retirement plan and self employed. I don’t know what he is self employed doing, but her second post says “if something happens to DHs self employment income” - implying a business that could fall off. All jobs are risky, but being self employed generally has a little higher risk. She also has kids at home still.
So, if it were me, I’d go for the sure thing - the mortgage. With the mortgage paid off, no one will forclose on the house if DH’s business goes south. The freed cash of not having to pay a mortgage in two years can be put towards retirement. Yes, its possible that in two years the stock market will have rebounded and she will be saying “If only I’d stuck all that money in Lucent back when it was $1.20.” But she has protected herself from the possibility that in two years she will be looking at the stock market still depressed, the collaspe of DH’s business, two kids in high school, and house payments.
The risk in the risk reward equation here needs to be taken into account. If hubby was 30 instead of almost 50 and there were no kids involved - investing it makes more sense.
" For example, lets say you are paying $1,000 a month for your mortgage. At the end of the year you paid $12,000 of which probably $11,000 was only interest payments. "
Is that just for the garage? Around here a house is about $600,000 & so your montly payment is around $5,000 per month with insurances (you need a few)…
If you need to compare US & UK taxes, just search the archives on the main page as Cec has done a fine job of that. Search for ‘england’ or ‘taxes’