Actually its not always better.
Suppose I got a $100 raise. Among the options I considered was putting the $75 I received after taxes into a house payment or putting the $100 pretax into a 401k in a bond fund paying an interest rate identical to my mortgage or putting the $75 after tax into a Roth 401k. You have to make assumptions about future taxes, but in most situations, the value to your portfolio is about the same. You will still owe on your house a few more years but you have the cash on hand to pay it off early.
The advantage to investing is liquidity. The Roth and the 401k can be pulled out and used for any purpose. To realize the equity in your house, you have to sell it or borrow against it. Added to that is the fact that I keep my small tax deduction for a few more years, so in the end, a safe investment in a tax-smart fund versus putting it into equity really gives a financial advantage toward investing as long as the loan is in place, certainly while the interest payments are deductable.
So given the chance to invest in paying off a 5% mortgage with after tax dollars or investing at 5% with pre-tax dollars (while deducting the mortgage interest), the answer isn't always obvious. In my case, investing works somewhat better, and I can pay the house off today if I need to. Plus I can create cash to use for something else if I need to without going into debt.
Not saying your approach is wrong, because it probably isn't for you. But this approach is better for me. When you have cash on hand to cover it, debt isn't always bad.
Your tax free investments are only tax free until you take it out. Then you pay... And who knows what future tax rates will be.
Your house equity isn’t taxed for up to at least $600,000 (if I remember correctly and it might be $1.2 million).
And debt is debt... If debt (leverage) really is such a great thing to have so you can “invest” your money elsewhere then it would make sense to borrow even more so you can “invest” it... Strange how that doesn’t really work so well long term unless you’re Donald Trump...
Then there’s PMI insurance if there isn’t enough equity in your home verses the mortgage amount. Those costs can be substantial. Paying your principle down enough to get rid of it is only a plus.
And last but not least you say you have more liquidity with investments vs. having it tied up in your home. Most investments that have significant tax advantages also have big tax penalties if you remove it before retirement age. If your house is paid off it is easy to get a line of credit against your paid off home quickly in an emergency which is no worse than having a mortgage so that’s hardly a significant barrier to access your “money”.
Your way is how I have done it over the years, I nave always appreciated the interest deduction which manages to help keep my adjusted gross income at levels around the 15 percent tax bracket. In fact I’m now giving thought to what I’ll do when I don’t have a mortgage, and what that means to taxes.
There’s one other issue. And that’s inflation.
Hard assets retain their value much better than cash in times of high inflation. There’s every indication that inflation has been much higher over the last several years than the government is reporting. The falling dollar is one indication of that.
On the other hand, if enough people can be talked into prepaying on their homes, it might help save the banking industry. Especially when they can see inflation on the horizon... pay now with valuable money - or pay later with devalued money carted around in a wheel barrel. Well, it probably won’t get that bad - but you get the idea.
On the other hand, if enough people can be talked into prepaying on their homes, it might help save the banking industry. Especially when they can see inflation on the horizon... pay now with valuable money - or pay later with devalued money carted around in a wheel barrel. Well, it probably won’t get that bad - but you get the idea. (For disclosure - One of my homes is completely paid off - and the other one so close to being paid off that it’s not an issue - makes it easier to sleep at night.)
I used to think just like you. I cringed when we paid cash for our car instead of financiing it. I thought I wanted the cash in the bank.
Funning thing, now that I don't have that payment, I have the car and cash in the bank. Get off that thinking you have.
I'm out of all debt, have a large amount of equity in the house, and as we come up on the 'socialist uncertainty' of the Dem Administration, I'm worried about losing my job and being cash poor and equity flush.
If I roll out a 'low interest' home equity loan now while I have a job, and keep that cash on hand in some lower risk instrument I can get to, then I can payoff the loan if I lose my job and live off the 'winnings.'
If you lose your job, then you CAN'T get an equity loan after the fact because you're a good credit risk only when you don't need it.
And if the dollar does continue to fall, then I can pay back my loan with cheaper dollars form my paycheck.
This is an excellent point. I'll use a similar example from my own experience with a car loan.
When I bought my first new car I decided that I could afford to pay $450/month for it, but I didn't use the monthly payment as a measure of how much I could actually pay for the vehicle. Also -- I had $10,000 I could have put down on it, but that didn't mean I wanted to use the entire $10,000 as a down payment.
I ended up financing the vehicle for five years with no money down, and my monthly payment was somewhere around $400 (I think the rate was around 5%). I took the $10,000 that I didn't use as a down payment and invested it in several low- to moderate-risk mutual funds, then added $50 to those investments every month (this $50 was based on the $450 I was capable of paying for the vehicle and the $400 I was actually paying for the vehicle). This went on for several (3+) years. At that point the value of my investments exceeded the remaining balance on the loan, and I ended up cashing out some of those mutual funds (bonds and money market, because their rate of return had declined considerably as interest rates declined) and paying off the loan.
When I look back on it I probably didn't come out very far ahead in the long run. But the key was that I had a good rate on the loan, I was getting a decent return on my investments, and (most important of all) it was not a hardship for me to absorb the $450 against my monthly cash flow. This gave me the flexibility to do other things with that money -- or even to just put it aside in the event something else came up unexpectedly.
It's a good feeling knowing that a lender can't take my home if I lose my job.