Let’s say Person A buys a house for $150k, lives there for a while, and puts in about 20k of equity over that amount of time. Prices have dropped 10K in the meantime, and he sells for $140k (let’s include transaction costs in there). He still owes a note of 130k, which he pays off, which means he gets 10k back of his equity, for a loss of 10k of his equity.
Person B bought a house for 150k and paid off the whole note over an amount of time. Time to sell, she gets 140k, which means she lost 10k of her equity.
Seems the same to me, so what am I missing that means you don’t lose equity if your sale price can pay off the remaining note?
The one advantage I see with not having your house paid off is that you can walk away if things go REALLY in the shitter and you owe 200k on a house worth 100k—you can walk away from the equity in your house and leave the bank with the house. You still lose the equity you put in, but you’re not on the hook for the whole difference between your loan and the sale price. Some people have ethical issues with this, though.
Having 100% equity in your home magnifies your risk in an additional way. Person A has 20k in the house and 130k in some other savings. Person B has 150k in the house and no other savings. Who do you think is more flexible in terms of getting out of that house and into a new one? Person B is more likely to have to sell at a loss. If you just plain give person B more money it’s not a fair comparison.
Only if you have no other assets. I don’t know anyone in this thread is saying pay off your mortgage at the expense of other assets.
Fund retirement
Pay off credit cards
Pay off car loans
Have emergency fund of six months of living expenses (or more or less, depending on what you do for a living)
Then when all that is lined up, you can make the decision “do I want to pay off my mortgage, or play in the market.” If you have 130k in the stock market and less than 20% equity in your home you are paying PMI for no reason and have your savings in a risky spot if you need the money. If you don’t have it in the market the “you’ll get more for it somewhere else” is pretty moot - bond funds, CDs, T-bills don’t have a return any higher than your mortgage, generally.
Two words: opportunity costs. You can only make any investment by forgoing the alternative use of the money. Anyone who advocates paying off their mortgage is by definition advocating doing that at the expense of some alternative investments.
Sure, but there is no guarantee those investments will do better or worse than paying off your mortgage. Your mortgage is a guarenteed rate of return. I bet a lot of Enron shareholders wish they would have put money in their mortgage instead of in Enron.
If you want an investment with the same short term risk as paying off your mortgage, you’ll get - not unsurprisingly - a very similar return.
I don’t agree that it’s that simple. I have my money in a diversified portfolio of investments and they are mostly sucking or barely staying even. I am paying $1229.00 a month on my mortgage, and very little of that is going toward principal. If I took my money out of the stock market and paid off my house, I would have a guaranteed extra $1229.00 coming in each month that wouldn’t go toward my mortgage loan that I could invest or use however I choose. And if things really went bad, at least I’d have somewhere to live. Seems like a safe thing to do to me.
If you sell your investments - after taxes (don’t forget taxes!) will you be able to pay off your house and have money left over? Sounds like you want to free up that $1200 a month, but if you only pay off half the mortgage you’ll still have that over your head. And you don’t want to have no liquid assets when you are done. Otherwise, you’ll find yourself simply getting an equity loan the first time you need money.
One of my biggest objections is that for many people paying off the mortgage, or paying it down unbalances your net worth. Let’s imagine you work like the devil to pay down the mortgage and then there is a serious downturn and you lose your job, with no good prospects on the horizon. So your investment plan has built significant equity, but it won’t be easy to access. If you go to a bank to borrow against the home you will pay interest anyway and you may not even be extended the credit, because after all you don’t have a job.
I doubt anyone here would disagree that maxing out your employer matched 401K is the best investment available to anyone. Far better than paying off a mortgage.
Tracking over the past 11 years or so, my investments have done a lot better than I would have done by putting it in my mortgage. Plus, and most importantly, I had them for my kids college. We refinanced a couple of times (and are getting close to doing it again if interest rates continue to drop) and have no other debt, so we’re in similar situations. The first thing you might want to do is to find a financial adviser who knows what he or she is doing. But if for some reason you absolutely know that your investments will be worse than your mortgage, pay it off - or some of it off, keeping some cash for security. You don’t have to pay off nothing or everything, after all. You can even pay on some principle every month instead of putting it in lower yielding investments.
Lots of people move into smaller and cheaper places when they retire, because they don’t need room for the kids any more. California is an exception, because frequently moving into a cheaper house raises your property tax significantly if you’ve been in your previous house a long time.
My fiance and I have prioritised paying off the mortgage. In Australia mortgage interest is only tax-deductible if it’s an investment property. The mortgage has a redraw facility where you can make and withdraw extra repayments without charge. Any extra money goes into that account since the money is essentially offsetting 9% interest on the mortgage (roughly - I don’t know what interest rates are at the moment). He would be taxed on the interest of a savings account, and capital gains on any investments, but the money saved from offsetting the mortgage interest is tax free.
Around 8% of fiance’s income has been going to superannuation (401k? Basically forced retirement savings that are matched to a certain extent by the government or employer, I’m not entirely clear). He could contribute more but he’s maybe 40, 50 years from retiring.
The sensible thing to do would be to rent out the apartment and find a comparable place to rent, since the mortgage interest would then become tax deductible. But we’re pretty attached to this place, and like being owner occupiers.
Am I correct in thinking that the extra money in the mortgage is essentially like getting a 9% return on your investment tax free? And with no penalty for redrawing the extra payments, we can take it out if disaster strikes. Fiance and I are 25, but the goal is to pay off the mortgage as soon as possible, keep the mortgage on the investment property, put as much into our super as can be matched, and then focus on investing.
We probably should see a financial planner but it seems fairly straightforward to me and I’m loathe to pay someone to tell me the exact same thing I figured out on my own. Is there a flaw in my cunning plan?
I’m assuming you do pay taxes on investment income? In which case, unless you can make up the tax hit on the investment income, you are probably better off paying off the mortgage.
In the U.S. home mortgage interest is generally tax deductible. Capital gains are taxed at a pretty low rate. Most people hold mortgages at around 6% or so. And the historical rate of return on the market is 8-12% (depending on which historical period you use). That makes it more emotional than financial to pay down your mortgage.
Don’t underestimate having some liquid cash though. I like having my mortgage paid off…but I still have a lot of cash left. And, if I really need it, a home equity line of credit so I can have a “mortgage” anytime I need one.
With some caveats, of course. If you fall into the 28% tax bracket, for example, and if you sell your stocks before a full year has elapsed, then you’ll have to pay 28% on those stocks. Not what I’d consider to be a low rate.
Sorry, I should have said “long term capital gains” (and probably “currently”) - I consider STCG as ordinary income in my head - they aren’t, but its easier in my head.
For those who don’t know what we’re talking about, the long-term capital gains tax is scheduled to increase after 2010. Needless to say, I’m kinda dreading that.
