Exactamundo. Basically what I was getting at is the concept that fiscally, a mortgage at its core, a real estate investment. It’s an investment that you live in, but still an investment, and that it’s worth considering the return on that investment vs. the return on a different investment.
Another thing to consider that I don’t think anyone’s mentioned here yet is that if you pay off your mortgage, you have one long term investment.
If you invest your money somewhere else, and continue to pay your mortgage, you’ll eventually end up with 2 investments- a paid-off house, AND that money that you invested elsewhere plus whatever returns you made on it.
You take a bunch of cash and lock it all in at today’s (historic all time low) rate for the next 30 years, then slowly month by month start investing in something else.
You take a bunch of cash, leave it liquid, invest it diversely over the next 30 years, taking advantage of rates that may climb as well as slowly paying back the mortgage.
It boils down to whether you believe rates will climb at some point over the next 30 years, or you believe rates will remain at today’s (historic all time low) rates for the next 30 years.
Or you can pay off some of your mortgage and use the remaining money to invest elsewhere.
I think the bottom line is that the mortgage needs to be considered as just another investment, not as something horrific that needs to be paid off.
We’re assuming that you have money which can go into your mortgage or other investments, right? Dumping it into an IRA locks it up even more tightly than into the mortgage. If it is in a more liquid investment, you can use some of it to pay your mortgage bills, while maintaining the high interest rate you are getting on the rest.
Even better, if you had put all your money in your house, you might not worry about getting foreclosed on, but you don’t want to sell your house in order to eat, will you? The more liquid investment will let you pay your mortgage, eat and pay your taxes.
Much safer.
No, the sassy thing would be to payoff the house, and use the additional income to invest in your liquid investment. Anything that’s relatively liquid is probably going to cost you any return advantage you may have had, anyway.
The other catch to paying off your mortgage and investing what you would have paid in, is that investment income is more dependent on the time the money’s invested, rather than the total amount invested.
In other words, $1000 invested for 20 years at 5% is actually worth more at the end of that 20 years than starting at 0, and investing $75 per month for the same 20 years. (for a grand total of $1500 invested).
The same thing works with investments- let’s take that $200k mortgage and that $200k windfall from earlier.
If you were to invest it at 5% for 30 years, compounded once annually, you’d end up with $864,388 at the end of the 30 years. (at 8%, you end up with over 2 million)
If you paid your mortgage off immediately and invested say… $1500 per month for that same period, you only make $99,658. And your house is unlikely to go from 200k to 800k over 30 years, much less $2 million.
And, even if you did invest and not pay off the mortgage, it’s not like your money is inaccessible for those intervening 30 years. If things go south, you can always do things like pay it off outright with the money you have invested, or pay off part, refinance and pay a lower note.
Keeping and investing the money is (IMO) a more sound strategy than sinking it into a relatively low yield investment like a mortgage. You have to sell your house to get any of that money back. If you didn’t, then you could use it for medical emergencies, business opportunities, or a million other things that you can’t if it’s tied up in your house.
I just can’t see how people would be so timid- this would really be their chance to get out from that financial insecurity by assuming a little risk.
If the question is “should I spend my savings on luxuries, or pay down my mortgage,” then it’s a subjective choice, dependent on the subjective value (to the individual asking the question) of those luxuries.
That’s a different question than what the OP was asking: “should I invest my savings in stocks/bonds, or pay down my mortgage?”
FWIW, my wife and I have enough savings now (outside of our retirement accounts) to pay off our mortgage completely - but we’re not. Most of that savings is invested in mutual funds, and it’ll stay there.
I wasn’t thinking emergency fund, but I should have been. That is indeed another advantage of not paying off the mortgage. But the real advantage lies in the delta between the return from the non-mortgage and the effective return on the money in your mortgage.
I have plenty of reasonably liquid high return investments. Lots of them are in my retirement account, but I’ve had no trouble moving money around within those accounts when necessary, for instance for rebalancing.
That’s a really excellent point. To put it in other words, if you pay off your mortgage you are betting that the market won’t grow in the future by an amount greater than your effective interest rate. You don’t get any particular upside advantage from growth in house value (if that ever happens again) by paying it off versus not paying it off.
Still another advantage is that if you invest the money you can diversify it, whereas if you pay off the mortgage you more or less have to use it all for one investment at one time. You also don’t have to invest it all at once - you can put the money in something safe (and low interest) and dollar cost average over a span of time.
Well, the original question referenced lotty winnings, and paying off debt.
My point was that however much number crunching you do having a mortgage is a risk, and owning your home without a mortgage is a significantly lesser risk. It may be that it represents a lost opportunity to gain more money, but as a hypothetical multimillionaire I have a lot of trouble understanding the drive to gain more money.
The only investment I can see having real benefit to a lottery winner is purchasing real property, durable goods, and highly secure storage technologies to be sure that the collapse of the economic absurdity that made me a multimillionaire will leave me a secure, and comfortable means to live out my life in a hyperinflated depression economy where money itself has no value. A couple of sacks of gold coins seems to me much better in that regard than a stock portfolio. A local business owned in fee simple seems even more desirable, and several of them even better. Yeah, I know, I won’t get any richer, but I see no particular desirability in getting richer, and a serious spiritual downside in wanting to.
Mathematically, it is easy to make the case that, on the average, one is better off keeping the mortgage and investing the money that would have been used to pay it off.
However, when I was forced to cash out $300k worth of stock options a few years ago because of a company merger, I did use part of that money to pay off the mortgage. It just felt like free money falling into my lap, and I sleep better knowing I have no mortgage bill.
I’m sorry, but I’m not getting the same results you are.
We’ve already done the math. It comes out to about 1.5-2% difference in return.
I just can’t see how people would be so timid- this would really be their chance to get out from that financial insecurity by assuming a little risk.
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You might do better buying a generator and a lot of guns. We’ve seen that owning real property is not risk free. Gold coins may or may not be worth anything after a collapse, and in any case that Beck is pushing them is a sure sign we’re on the top of the market, ready to collapse. I think it is a truism that when Uncle Joe and Aunt Petunia start talking up an investment, it is time to get out. Lots of businesses fail. Running a business, even indirectly, is a lot more work than looking at your mutual fund balance. And lots of small businesses shrivel up during downturns.
Being debt free offers a degree of freedom that having debt does not have. Not only that but by and large I doubt most people can find investments that are much better than their loans. Even the best CDs are offering 2-3% a year for 5+ years. Most loans are far higher than that. I don’t know if everyone can get a safe 8% a year, year after year, esp in this economy.
Plus people are different. Some find more satisfaction from paying off debt than from growing savings.
I think the point of this very interesting thread is that people make economic decisions based on emotional factors which classical economics does not consider. Clearly people are comfortable paying off their mortgages right now, though having enough in a liquid investment both gives them the ability to pay it off whenever they want, higher returns, and more investment flexibility.
When computing the relative returns on the investment, don’t forget the tax benefits of a mortgage which reduces the effective interest rates. CDs are hardly the best you can do - there are plenty of reasonably safe options out there paying better than the effective interest of a mortgage. If it is too high, refi - having a pool of money in a safe and liquid investment will no doubt improve your credit rating and cut your effective interest rate.