There is, but my point remains – answering the question posed – if I had a paid off loan, would I still borrow money
I would borrow all I possibly could of money with these conditions:
30 year fixed rate loan at historic all time low interest rate (I got 3.875% a couple months ago – already inching up it seems)
interest is tax deductible!
If I had more home equity, or had previously paid off my mortgage, I would refinance and cash out as much as I possibly could.
I believe/predict/am willing to risk that over the next 30 years, I’ll be able to (with slight risk) make more for my money elsewhere than 3.875%. (A couple years ago I was buying 6% 6-month CDs.)
If you are convinced that today’s interest rate is the highest its ever going to get and the U.S. (or world) economy is all down hill from here, or it helps you sleep better at night to have no debt, then by all means, pay off your mortgage. I respectfully take the other position.
Riddle me this - during the depression, was their hyperinflation - or was there deflation? (In the US). During times of deflation, debts are bad things to have. During times of inflation, they are very good things to have.
I didn’t have a mortgage during the 1980 period of inflation, but I was financing the guy who bought our house, and I got 12.5%, and did very well. At the same time, my relatively trivial college debts, set at preinflation amounts, became trivial to pay off.
And I’m no fan of debt. We have zero credit card debt, and paid cash for my new car. I could pay off my mortgage (which is just over 4%, and is only about 20% the current price of my house) but it would make no economic sense, since my investments are paying a lot more.
Sorry if my comment seemed snarky. And I was not criticizing your investment plan.
I’m sure I took your post out of context but your 30-year figure (dodging 1929-1955) echoed a common ignorant mantra which is a pet peeve of mine. If I agree that your investment plan is fine, will you stipulate that you understand my German counterexample to the mantra?
Didn’t get offered nearly that good a deal. In any case, that kind of deal is often instead of a cut in purchase prices, and you need to calculate which is better in the end. Also, for a relatively small amount of money, there is the pain in the ass factor. The offered interest rate got halved when they saw my credit rating, but it still wasn’t good enough to make me want to deal with it.
I do make an exception for debt. We bought our TV at 0% interest over 2 years. We paid it off a bit early, but that was debt I didn’t mind taking on.
ETA: It was a Prius, bought about 2 weeks before the acceleration disaster broke , so I got a good deal but not a great deal.
I promise I wasn’t trying to cherry pick. The worst 30-year return (which I chose for the 30-year mortgage example) I see was starting with 1928 or 1929, where it appears to be a little bit over 8% (I’m using a graph chart, so it’s hard to see what the exact number is).
If you want to pick a 15-year fixed mortgage, which is around 4%, there are 6 periods where you’ll lose out or just about break even: 1926, 1927, 1928, 1929, 1930, 1960. The worst is 1929, where there was a little less than 1% annualized return over 15 years. There are also 43 15-year periods with over 10% growth, and 14 of those periods had about 16% or more in returns.
Of course, I understand your German counterexample. With the data and the level of risk I believe is involved in the American stock market, I think it’s a minimal risk for a reasonable reward. But I may very well be proven wrong in 30 years. We might enter another depression. We might get involved in a terrible war. Which is why I do keep far more in plain savings accounts (about 2+ years of expenses) than my rational analysis should have me keeping in there.
As Dave Ramsey would explain it – finances are a behavioral issue. People claim that they would return the same amount of money to invest, but they simply don’t.
We had to scrimp very well to pay our mortgage. We wouldn’t be scrimping to put the same amount of money towards the stock market. And, in the process of austerity living, we gained a lot of knowledge on how to be happy and live comfortably without spending money. I would say that, in our case at least, paying off our mortgage did make us wealthier than attempting to invest the money would have… it’s the same psychological reason why Weight Watchers work better than some fad diet, even though the fad diet may result in more calorie deficit/weight loss “on paper.”
And that is the factual answer to the OP. It doesn’t make sense from an unemotional, logical financial analysis position, but due to the interaction with human nature, it can work out better for some people.
The usual recommendation is “pay yourself first”. Work out the budget and plan up front, then have the money come out of your checks right up front – just instead of going to pay down a mortgage, it goes somewhere else.
While I agree that psychological reasons are a huge part of it, if not the primary part, it doesn’t explain the question from the other side: Why are banks willing to loan such huge amounts of money at such low interest rates? A 30 year gap should, theoretically, yield a lot more money in the stock market than giving one of us commoners a few hundred thou with a high probability of defaulting.
If there actually were a gap between mortgage interest rates and realistic investment dividends, then why is the bank wasting its time and money giving me a mortgage, when they could be investing in the stock market or whatever directly? Surely it’s not because of the risk: The bank has a lot more options available to them for managing risk than I do, due to the vast sums of money they deal with. And it’s not for lack of financial knowledge: They’ve got whole departments full of expert financial professionals. If anything, all those supposed investments should be even better for them than they are for me, and yet they’re not jumping on them. If they’re not, why should I?
Besides, even “IF” one could expect an “AVERAGE” rate of return of 8% in the stock market over the next 30 years, why does everyone expect that “they” are in the smarter half? If half the people who invest get more than 8%,then half the people who invest get less than 8%…and I am not sure that even counts all the companies that go bankrupt. The idea that everyone expects to make at least the “average” rate of return is not realistic. Everyone wants to think that they are smarter than Warren Buffet. Everyone thinks they are smarter than the banks. Everyone thinks they are smarter than Soros. Everyone thinks that they are smarter than The Bilderberg Group
Also, most of the people on this message board today sound just like all those overly optimistic investors who lost all their money back in the 1930’s. Most people are unaware or dont care about the huge debts of America, Italy, Ireland, Portugal, Dubai, Spain, England, Japan, etc. The stock market, American companies, and the world economy is in a huge bubble right now, the biggest bubble in world history. Most of the big countries are inflating their currencies and amassing obscenely huge amounts of debt that cannot possibly be paid back. Anyone who thinks that America and Europe can continue to spend and borrow forever is doomed. The excesses of today are much bigger than the 1920’s, and so the future crash will be much bigger than 1929.
Berkshire Hathaway has billions of dollars’ worth of equity put options set to expire in the next decade, which would seem to contradict your implication that the big gurus don’t believe the stock market will rise. Yeah, some of the big gurus don’t think the dollar will do well – but the stock market is an excellent inflation hedge. McDonald’s will be around a lot longer than a lot of nations, IMO.
There may be very well regulatory reasons why banks don’t invest every penny in the stock market; I seem to remember a big fuss a few years back in the middle of the crash, when BRK got really pummeled in the markets rather hard due to the mark-to-market model and their equity put options.
Um, that “average” rate is actually the lowest return for any 30-year period in the S&P 500’s historical return–that has nothing to do with being “smarter” than anybody else. Anybody and everybody who invested in the S&P500, reinvested dividends, and waited 30 years made at least an 8% annualized return, no matter what 30-year period you’re looking at. The average is more like a bit over 10% over any 30 year period.
Now, if you truly believe the economy is going to tank, then I understand your reservations about investing. Take into consideration septimus’s point, too. But the 8% figure has nothing to do with you being “smarter” than anyone else.
Faulty assumption. Not everyone puts all of their eggs into one basket. Supposing I only made 8% last year, I know that I have some eggs in the 20% basket, and other eggs in the -4% basket, and other eggs in other baskets. It’s called carrying a balanced portfolio.
I’ll add that locking yourself into very safe 2% investments is risky also if the rate of inflation goes higher. That’s another reason for diversification.
I think it’s stupid to value money for its own sake. The only reason I want more money is to make my life easier, not because I give a crap about how much I have. $250,000 or whatever may seem like a lot if I don’t have money, but if I have $97,000,000, that’s pocket change. What can I do with $97,250,000 that I can’t do with $97,000,000?
Furthermore, the mortgage on my house is barely in the five digit range. It’s a drop in the bucket to get rid of it. What can I do with $97,000,000 that I can’t do with $96,989,000?
It’s all about how much you value money. If I’m rich, I don’t value money the same way a poor person does. I don’t give a crap about making money I don’t need, or, at that level, even really want.
This is essentially what we are talking about. If you have $200K cash and $200K mortgage at 4% for 30 years, you (essentially, almost) have the option to lock yourself into a very safe 4% for 30 years, or keep the mortgage and diversify the money.
(Or, keep it safe for a couple years to see what happens with the economy, then make your choice).
If long term CD rates hit 7,8,9% in a few years, I’d rather have my money than a paid off house.
, so I got a good deal but not a great deal.