That $250,000 in 2040 money, keep in mind.
There it is. Over the last few years we’ve all seen regular folks reduced to living like teenagers when they’re in their 50’s and 60’s, rather than getting ready for a decent retirement. It may not make sense in the world of finances, but in regular old Joe Schmoe world the idea of being able to work a part time minimum wage gig and still keep your home is very appealing. I’d pay my mortgage off in a heartbeat if I could.
True. All those details to take into consideration.
Whack-a-Mole - it looks like it’s really 5.25% for me through Chase, with no points. I was going by numbers I had from a couple years ago when I was initially looking into buying a home.
An entire industry exists because people think it is a better idea to borrow money, and pay interest, than it is to save money, and pay cash.
If they are all right, where does the money come from to pay the workers, and executives in that industry?
Winning the lottery is a daydream. In my daydream the concept of paying bills is worth eliminating alltogether.
Of course if I win the lottery tomorrow, it’s 97 million dollars, in cash, after taxes and ten percent for charity. Why the fuck would I need investments?
I would never borrow a dime from anyone for the rest of my life. I have a hard time understanding why it would be better. I would buy a new home for cash. I would buy whatever I wanted for cash. I would use a debit card, and two credit cards, and pay every dime in cash every months. Of course, aside from the house, I already do that now.
Yeah, I would have some investments, because five suitcases of hundreds is unwieldy. But my investments would all be on the ultra-conservative high reliability side. Real estate, US treasuries, and established stocks in a very broad portfolio. And at least one of those suitcases I mentioned. (and some physical gold as well.) At 64 years old, I don’t need to worry about the future if I am a millionaire, except that I don’t want to have to pay a mortgage if I manage to lose my entire fortune on treasuries, and stocks and gold.
However, even in my current financial condition, I don’t want debt. Debt costs money. Wait until you have money, and your entire life will cost you less. Being a month ahead on your cost of living means paying less for everything.
Banks stay in business because people borrow money.
Tris
5.6% (not counting PMI which was in there for a bit but I hate the PMI charge and see it as a ripoff so paid up to the 20% as fast as I could…wasn’t too far off to begin with so wasn’t all that long or onerus).
I see lower rates (below 5%) advertised but seems you need to be Warren Buffet to get that rate.
While I agree with your sentiments on this issue the reason you do it is how you get rich (or richer if you win the lottery tomorrow).
Ask the banks. Ask them about leverage.
Borrow from the Fed at some absurdly low rate (say 1% or less). Loan the money to you at 4-8% (or whatever).
Don’t have money? No problem. Borrow more.
You can keep that merry-go-round going for a long time. Obviously they blew up the economy but if they had been less greedy and made responsible loans and rated them appropriately it can go on indefinitely.
That’s where the real money is.
I agree with you on the PMI. The actual rate I got is 5.15% (not 5.25%, as I wrote) through Chase. I should ask my brother to see what rates he was getting. I didn’t realize the rates had gone up that much. I was looking at 4.5-4.75% not too long ago.
I got it years ago. My original rate was over 6% and I refinanced.
I see sub-5% rates all the time. I explored refinancing again but, for me, I couldn’t do a lot better (not enough to be arsed going through the trouble and paying the fees).
I have a good job, pays well but I am not wealthy. I guess their risk tables tell them this is where I should be. Maybe it is not me and the Chicago property market and my neighborhood. Probably all those things.
Over the course of the loan, if we assume a $200,000 loan, I will pay about $20,000 more than you on a 30-year loan. Sounds bad so I prefer to think of it as $56 more per month or less than $2 per day. I don’t drink coffee so your Starbucks probably puts you behind. 
Of course debt costs money, but the flip side is that investments pay money.
Here’s a very simplified version:
You borrow a dollar from your brother. You agree to pay him that dollar back plus a quarter at the end of the week, and he’ll beat you up if you don’t pay him back.
Now let’s say that you find 1.25 on the street. You know that with 1.25, you can buy a newspaper that the old guy on his porch down the street will pay you $1.50 for.
Do you:
A) Take the dollar immediately and pay your brother off out of fear that you may lose it, or the old man’s out of town, etc…
B) Go buy the paper, sell it to the old man for $1.50, and then pay your brother the 1.25 at the end of the week and pocket your quarter?
In a very small nutshell, that’s the situation that’s going on here.
Where the heck do you get a return of 8%???
(I dont believe it)
The stock market. Historic rate of return averages about 10% per year. Buy some books on investing, and they’ll show the data that confirm this. I recommend The Intelligent Asset Allocator. Even after expenses, indexed mutual funds should give you returns of over 9% over the long haul.
I’m with bump and pulykamell on this one. It’s basic math.
If my choices are to
(A) pay off a $200K 5% 20 year mortgage today with $200K cash leaving me with a $200K house and $0 cash 20 years from now, vs.
(B) making 8% compounded anually on $200K over 20 years while continually paying 5% on my mortgage (difference being +3% in my favor) leaving me at the end of 20 years with a $200K house and $125K in cash,
guess which choice I’m going to make.
But investing in paying off your mortgage is the same as investing in the mortgage market. And if no one invested in the mortgage market, there would be no mortgages available. People invest for all sorts of reasons at different points in their life. Are they conservative investors? Looking for dividends? Looking for growth? Looking just to beat inflation? Even with a balanced portfolio, lots of people are going to have mortgages or mortgage backed securities in those portfolios. By paying off your house in addition to other investments, you potentially can be balancing your portfolio.
Yes! I believe the average annual return on any rolling 20-year period for the S&P 500 was always somewhere between 8-12%.
Wrong. Your math is off, and we’ve already been over why.
You’ve eliminated risk in your hypothetical. In a real world situation, you’re taking on 30 years worth of market risk, as well as 30 years worth of risk associated with having to make a monthly mortgage payment.
Originally Posted by Susanann
Where the heck do you get a return of 8%???
That is not true any more, esp in the 21st century. Stocks were nice investments in the 1950’s, and stagecoach lines were good businesses in the 1800’s, but that has nothing to do with the year 2012 and beyond.
Both stocks, and real estate, are not capable any more of producing and 8% return. Furthermore, both stocks and real estate are now both risky places to put money. Anyone who says you cant lose these days by owning stocks and real estate is just plain wrong.
Lastly, stocks have always traditionally done VERY poorly in periods of high inflation, and America is now entering into a period of very high inflation, if not hyperinflation.
On the other hand, paying off the mortgage, paying off all debts, is generally good sense, esp when entering into troubled economic times.
The above statement is nonsense. You are overstating your case.
Not even PhD economists are unamimously going to agree on the proposition “we are (certain) to be entering a period of hyper-inflation”. And while I would be one of the ‘pay off the mortgage types’, hyperinflation would actually seem to make an argument for keeping the 5% mortgage, which becomes incredibly cheap, and investing the money instead in the S&P 500 or some such, which appreciates at a great rate…
Because generally, it is the people who are in debt, that are hurt the most.
My family got thru the Great Depression comparatively nicely even though there was not a lot of cash floating around. We fully owned our own home, we fully owned our ranch, completely , without no mortgage. We had no other debts, we had no debts, we had no credit card debt, we had no car payments, we didnt owe anybody else anything, we did not depend on anybody else.
On the other hand, it was the people who had debts, who had mortgages, that lost their farms and lost their homes in the 1930’s. Likewise, even today, more than 70 years later, people with mortgages and with other debts are STILL!!! losing their homes.
Borrowing money is the root of all troubles. I have never bought anything that I could not pay cash for.