Only in the short term, but not the long-term. Sure, over the next year stocks could return 15% or -15%, but over a rolling 20-year period they return 10%.
Well, the question is, where does your 10% figure come from. Up in this thread I linked to a chart, and there are several sub-10% years for your timeframe.
Our money is for what we want to spend it on. If we want to waste it, if that’s what it is, on additional interest for the privilege of living in a nicer home for 5 to 10 years before our income would allow us to live in that home on a 15 year mortgage, then, meh. Could always just blow the money on liquor and women anyways, or vacations, or cars, or dinners out, or whatever.
Plus, with the tax deductible status of interest, it makes this choice a more attractive one. YMMV as it is your life to do as you please.
The length of the mortgage doesn’t really matter. You can pay it off earlier if you want. I got a thirty year mortgage at the beginning of my career. I started paying an extra $50 a month on every payment. After my first promotion, I was paying $125 extra a month. Next promotion, I went to $200 a month.
I had it paid off in 18 years. 
I saved 12 years interest by paying it off early.
If you look at your amortization schedule, nearly all your payment goes towards interest in those early years. Any extra money you pay chops off principal on the loan. Do that every month, year after year, and it’s a big savings. The less principal, the less calculated interest you’re paying.
I couldn’t find a cite for 10% over every rolling 20-year period since 1929, but I’ve read that in multiple places for a long time.
Here’s a cite for 9-10% for ever 25-year period (plus lots of other stuff).
Saving that 12 years of interest cost you the spread between 10% and your mortgage rate for those 12 years. If you are willing to spend that amount for the peace of mind of not having a mortgage, then that’s fine, but you should realize that paying your mortgage off early is not just some automatic net benefit financially.
If you pick the ten years starting January 1999 and ending January 2009 its a negative return though.
The stock market carries risk. Paying of your house is not very risky, and has a positive impact on personal cash flow. For someone making the climb from “getting by” to “being financially secure” paying off the house makes sense. If the stock market crashes and you get laid off (which often happens in succession to folks) you have no house payment, if you leverage your house, the stock market crashes, and you loose your job - the money you need to use to pay bills has been diminished when you need it most. If luck goes against you, you can lose the house.
For someone who has reached “financial security” and is moving to “becoming independent” - leveraging your house might make sense. In those cases you have savings to see you through tough times outside of your home. You already have enough in the market or other places to pay off your house, you are only leveraging it for the greater gain. If luck goes against you, you aren’t really risking your house.
And when you have to look at 20-25 year periods to get good gain, you are talking about a long time in the life of a young family. I wouldn’t play the “risk my house for gain” game with kids if there was any true risk. Things like college funds and keeping a stable environment for them are much more important than building my personal wealth through real risk.
Could I point out the net benefit he has of now only having to scrounge up the taxes and any living expenses he has [like fuel for heat/hot water, electricity for seeing at night, and food] which is inestimable in an economy where you can lose a job at the drop of a hat. Many people rode out the depression without losing their homes and scrounging just enough to make the tax payments … If you can scrounge the tax money, you will not be homeless.
Look, all I’m advocating here is deeper and broader thinking on the subject of debt–there’s a lot of “debt is bad” out there, with people reflexively (and unreflectively) advocating things like paying cash for cars and paying houses off early. Dave Ramsey (a “financial guru”) would most certainly not take me up on the offer of a $1 million 100-year loan at 2 percent even though there is essentially no downside to it.
As for the last two posts–can you eat a house? Can you move it to another part of the country where there may be jobs? Howd you like to be unemployed in Detroit right now having taken your own advice? You’d be in a dying city with a house you sunk a bunch of money into with no way of getting it out. You’d be much better off with the cash so you could abandon the house and start over somewhere else.
Also, life isn’t all about downside scenarios–of course you should plan for them, but you shouldn’t build your life around them. For instance, if the US is hit with nukes and then the classic post-apocalypse scenario unfolds, all the money you spent on books and movies instead of emergency supplies, and all the time you spent on the SDMB instead of learning survival skills, would seem rather foolish. But the likelihood of such a scenario is so small that it can be safely ignored. For a lot of people, long-term unemployment is like that–there are some sensible precautions they should take, but the likelihood is small enough that no great pains need to be taken.
Rand Rover, can you find a cite for your claim about the 20-year period? I’m thinking 1989-1999, feel free to choose your major index.
Also, does that take account of the management fees charged by funds?
I posted all the cite I feel like posting upthread. If that doesn’t float your boat, feel free to believe I am wrong wrong wrong. With mortgage rates as low as they have been lately, it doesn’t matter if the 10% I’m talking about is really only 8%–it’s still higher than mortgage rates you can lock in now for 30 years.
Wow, way to get defensive. All I asked for was a cite.
And many index-tracker funds only return 75% of the market’s gain, according to some things I read recently. If the mortgage is at 5%, that doesn’t look like quite such a sure thing anymore.
pdts
I see that “there’s better ways to spend the money” has been covered. I’m not sure if it’s been said, but saying “you’’ pay X amount in interest over the life of the loan!” doesn’t mean a ton. If you had to pay $1 a year for the rest of eternity, that’s an infinite amount of money, but you wouldn’t care. It’s about the preset value (or future value, just have a common reference.)
Well, if you only need to scrounge up $5k per year to pay taxes and minimal electricity [I checked our diverse bills] you can work at odd jobs, part time McDonalds shifts, any job that is borderline income, scrounge scrap metal and recyclables … and in general the economy settles out in the long run. It takes the pressure of finding a job that makes 20K or greater a year [or whatever minimum wage x 40 hours per week ends up as this time around]
And for some of us, long term unemployment IS happening. I am not gimp enough to be paid disability but I am too gimp to work until I can earn enough time for FMLA to kick in. Sucks ass for me now doesnt it?
I’m not in the US, so our situation is a little bit different. For all that however, we have a mortgage each on two different houses.
One is a 25 year term that is within months of being paid of now (about 10 years early)
The other is a 30 year that I refinanced to 26 a little over a year back.
In the first case, the payments on the 25 year were all that could be afforded on the income at the time, however with graduation and better jobs came more ability to pay - so we topped up. Then came the second house, kids and payment to FIL retirement. So payments dropped back some. The thing about a longer term is that it allows flexibility, and you can still pay off anytime you like. That ability to pay MORE, but not LESS is what makes all the difference for us.
And in anycase, the difference in interest rates is pretty marginal. You are only talking of the order of .1 or .2 of a percentage point, so even one missed payment a year would wipe out your “savings” from the shorter term, not to mention the prospect of losing the house.
For the second house, the payments are made from my personal retirement fund - which returns 4.5% PA (long story, let’s not go there), the mortgage interest rate is a five year deal, each year fixed - then after that floating. I can’t remember the exact figures, but year one is about SIBOR - 2%, year two is SIBOR - 1.5% etc.
So I am actually doing better by keeping the mortgage payments as low as possible. If the unexpected happens (as per now, when I have not been paid my retirement for 4 months due to my company financial problems) can still easily make the payments.
What’s not really been addressed here also is the effect of inflation and naturally rising incomes on the value of the payments.
Having a $2000 monthly mortgage today is a little different to having a $2000 monthly mortgage in 10 years where my income (should) have gone up, and the vlaue of a dollar has gone done. So the strategy for some is to get into as “much house as possible now” with a buffer provided by a longer payment period.
If you take a 15 year mortgage you should be adding in some sort of multiplier margin for the uncertainty of your personal circumstances. In our case, there would a big downside to the higher payments, but not much upside to the interest savings.
Cite please.
I have never heard of this and Googling only comes up with links about index funds beating 75% of actively managed funds.
pdts
And look at the table at the top of this article.
pdts
It sounds like there is a problem with some funds (both articles single out Virgin and HSBC) in the UK, caused largely by excessive fees. I don’t think that justifies saying that “many” index funds return only 75% of the market gain.
The last decade has shown poor returns in general (so people that borrowed against their house to invest the money did not do well), so a 1% expense ratio can knock a big chunk off returns, whether it is an index fund or any other type.
Even the “cheap” ETFs he recommends look expensive to me, by US standards, although the article is from 2007 and maybe things have changed. Certainly fees in the UK are generally higher than the US (I am English, with investments in both the US and UK). The big names in the US offer index funds with about 0.1% annual expenses and they track their indexes closely.
I don’t know about the US/UK issue.
Did you look at the telegraph table I linked to? It’s not just virgin that underperformed quite badly.
pdts