Posted on 02/15/2008 10:48:40 PM PST by RKBA Democrat
Have you ever wondered if you should prepay your mortgage? In today's show I give you the information to make an informed decision based upon your personal situation. We take into account the analytical side of the decision as well as the emotional relief that can come from being DEBT FREE….
The analytical side of the discussion comes from a great article in this month's Consumer Reports titled «Your Mortgage It Rarely Pays to Prepay»
as you can probably see from the title of the article that most people should not prepay and instead use the money to invest. I think that Consumer Reports did a great analysis, but remember paying off your house versus investing in the stock market has many different factors beyond a simple math calculation. Depending on your personal risk threshold there are people that would prefer to be debt-free for the psychological satisfaction rather than maximize the earning potential of their investment portfolio. In today's show I give you my insight to help you determine where you fall in this decision.
A few key facts from the Consumer Reports article…
When comparing paying $100 extra each month towards your mortgage balance or investing in a S&P 500 Index Fund Consumer Reports provided the following results: After 10 years the S&P 500 investment on average produced a gain of $10,058 vs. $4,051 from the added mortgage payment In about a 1/3 of the 10 year periods analyzed, paying down the mortgage produced a better return. However, the difference was pretty meager ranging from $1 to $2,799 of an advantage for prepaying your mortgage. When the S&P 500 investment beat the prepayment, it did so by $70 to $16,763 It should be noted that when you extended the analysis out to a 15 and 20 year period of home ownership, the S&P 500 investment had the advantage 100% of the time. The average dollar gains from the stock investment grew from $10,058 in the 10 year analysis to $19,613 in the 15 year and $41,931 in the 20 year analysis. Please note that this was primarily a mathematical calculation and there is much more that should go into your decision of prepaying your mortgage. You should also take into account:
Your risk profile
Your tax situation (if you make enough money that the Mortgage Interest Deduction is reduced or eliminated by AMT tax then you have more to consider)
How close you are to retirement
Upcoming cash needs (investments are much more liquid then real estate)
Peace of Mind factor…
**Fund Managers are using this time of volatility to welcome new investors**
I also wanted to let you know that with all of the volatility in the financial markets there are some very well know Mutual Funds that have been closed to new investors for a number of years that have reopened to new investors. Below I have provided links, so that you can research each of these options:
Dodge and Cox Stock (DODGX) and Balanced Fund (DODBX) - Large Cap Value Fund First Eagle Global (SGIIX) and Overseas (SGOIX) - Global and International Equities Royce Low-Priced Stock Fund (RYLPX) and Royce Opportunity Fund (RYPNX) - Small Cap Investments Thanks and see you next week!
Bad example for LOSE.....I hope I don’t lose the election
Toledo,oh $68,000 house 1350 sq feet $116 a month in tax, and they wounder why every one is leaving.
10-4.
I haven’t had ANY consumer debt in 15 years. Haven’t paid one Penny of interest on any Credit Card.
“The Fed is in full panic. Their efforts have had no effect to reverse what is rampant DEFLATION of the money supply, ie no new debt (money) is being created. The fiat money machine is now running in reverse and will soon reset to zero.”
Interesting take on it. I think it will be a surprise for the political leadership when this “stimulus” payout is not spent by a lot of the people who receive it. Add to that a continuing contraction in consumer credit and things get down right deflationary.
Gosh..you know it turns out that people who are in hock to their eyeballs are actually credit risks.
I ain’t be got no good book learnin. I losed my bookes.
I like C.R., but they definitely have a consumption bias. How can you consume as much if you aren’t earning a full income to do so?
Survey says, those who have the gold make the rules. If you have the money and hence the ability to do so, I think you should retire when you wish.
And that would be?
KISS method = Keep It Simple, Stupid
I say pay it off! The thing that convinced me was paying $100K in interest on a house in ten years while our principal barely budged.
Last time we refinanced, it was for 15 years and we’re trying to pay it off in nine or ten. You’ll save a ton on interest doing that.
A reader wrote a letter to the editor asking why he. as a taxpayer should subsidize other people converting to digital tv. Their answer, in my opinion was a classic study in liberalism.
Somebody gave me a gift subscription. Some of the things they write has value but it is mixed with a heavy helping of nanny stateism.
Let me guess.
1. Your a insurance salesmen
2. Your a consumer who bought this product
3. Your filthy stinking rich and have run out of ideas on how to tax plan.
Personally my husband and I are doing well.
Did you have something specific to criticize about the approach or a question or are you just trying to wedge in a little personal attack without substance?
And what part of tax planning is it to pay off your home and have no mortgage deduction?
You didn't answer my question.
I would certainly fund a 401K or Roth before prepaying a mortgage. But I can't ever see borrowing for a life insurance policy...
401 ks are tax heavy on the back end when you take the money out. In your program you'd pay off your home and take your 401k while your in a higher tax bracket because you have no mortgage deduction. For some people they pay more in 3-4 years taking the money in retirement than they deferred in 30 years of 401k investing.
RE provides more leverage for the long haul, which of course retirement investment is typically.
I don't know which of the questions I didn't answer. I don't sell insurance and we're well off, but not filthy rich? I just started this at age 50. Had I stared when I could have, say age 27, I might have much more money, but I used the tax deferred plan at work like all of the other lemmings and never shopped around or learned anything else.
The reason to put your extra money into a liquid fund and not a “lack of debt” is that if you lose your job or have a health emergency you can’t spend a “lack of debt.” And without a job, you will be unqualified for the home loan you now need.
Question:
Should we strive for a balence?
In other words, have a large nominal amount, say 5-6x your annual salary in retirement accounts, plus 1x your annual salary in an individual account, THEN start paying off the Mortgage early...?
I want to prepay my property taxes - a lump sum in advance and then no more, ever. Think the government will go for it? ;)
I disagree with your premise. If you had invested your extra cash in alternative investments instead of paying off your mortgage, you would have that cash to live on as well as pay your mortgage each month. With all your money in your "wooden piggy bank" there is no way to release it. You can't borrow against your house if you don't have a job because they know you don't have a means of payment.
I prefer a 30 year mortgage and I would invest the rest in a broad range of mutual funds. Its pretty simple to me. If I borrow money at 6% and earn 10% on my investments, I have netted 4% on the savings versus the mortgage paydown. PLUS, I get a tax deduction on the interest paid. PLUS, I get to invest in things that come due and payable before the house has to be paid off like a college fund for my kids and my ultimate retirement.
One thing to remember - the VALUE of your home is not determined by the size of your mortgage. Once you paydown your mortgage, the value of your home "investment" can only increase as much as the local housing market inflates. That has never been as much as the stock market over an extended period of time.
I like Dave Ramsey and he has some really good advice for people who don't know how to manage what little money they have, but he is wrong on paying off your mortgage. I built a spreadsheet where you can plug in the cost of your home, Interest rate, mortgage term and expected gain in your securities portfolio. It is virtually impossible to beat the long term mortgage unless you think the stock market is going to fold.
Finally, I say this as a partner in a national development company. I have built over a billion dollars of real estate in my career. We build investment value thru informed use of leverage (debt), not wild speculation and "flipping" properties.
It is OK to spend today's money and better to spend yesterday's money. Never spend tomorrow's money.
Two years ago we made a decision to pay off the house. With the first large payment we started saving many interest and now save $700 a month in interest.
We are near paying off the house. Our party will be in October (or sooner if we can manage it). We will definately be throwing a party!
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