pay off house vs stock market investment

[cute fuzzy bunny]

I'd get about 3.75-3.8% from an annuity. Get me a mortgage at that rate and I'm your man.

Granted if you're in your 60's you'd get a better rate. You also wont be likely to be paying the full 30 years on your mortgage, so factor in the mortality rates per the IRS.

But you're right. No bond pays 6% and returns principal. Which is why mortgages are a lousy choice for an early retiree that is living off their investments. They're currently paying 4.xx% with no principal return.

Again, get me a mortgage at that rate and a return thats similar, risk adjusted, and I'm all ears.

 

[Animorph]

From Immediate Annuities: Highest Annuity Rates on Immediate Annuities and Annuities. Annuities - Annuity Interest Rates (I have no idea who they are, just googled them), I can get $590/month immediate annuity for 30 years period certain for a one time $100k payment. That's $7080/year, which is more than a 6% bond would pay ($6000/year presumably). Of course the payments will only last for 30 years, just like the mortgage payments, but the bond will return $100k after 30 years.

I'll let someone else figure out the implied interest rate for the annuity. I assume it is less than a good mortgage rate. Nonetheless, that annuity is not a simple 7% bond. Your mortgage payments will stop at the end of the mortgage and you will never be able to invest that principal unless you sell or borrow.

Anyway, I'm not arguing either payoff or don't, but paying off a mortgage is self annuitizing at the implied interest rate of the mortgage, not self bonding, and does not have a return like a bond investment at that same interest rate.

 

[skyline]

Just a parenthetical comment: On debates such as these, I think there is a bias towards setting courses of action based on what has worked well in the recent past.
...

I would agree with the above. I'm sure that if you asked the OP's question to a similar community in the late 90's you would have seen many more folks advocating investing in equities rather than paying off the mortage. Folks generally tend to recommend an approch that works for them - until it doesn't.

That's not to say that I think either answer is more 'correct'. I think, in a world where you can afford very long time horizons, the math does point to investing extra funds in equities. But almost no one can afford that luxury, so it's just a question of how much risk you're comfortable with.

To me, this is just like figuring your asset allocation - there's too many variables for each person for there to be a general 'correct' answer.

In my case, I'm middle of the road - I've paid off about 2/3 of my mortgage to get to my comfort zone, then invested everything after that.

BTW, one point that I haven't seen made in this thread: not paying off the mortgage, in most cases, gives you the option to simply walk away if your home suddenly becomes worth less than your mortgage (obviously the current economic situation, but also due to uninsured events like earthquake, hurricane, etc.). I know it's not ethical and should not be a major consideration in a decision like this, but something worth noting as a potential differentiator if you live in a neighborhood where this is a concern.

 

[Mirage]

I live debt free, and all i know is it gives me a tremendously happy and healthy feeling. I'm sure from a financial standpoint i could be working my assets much harder, and see others doing that, but my philosphy is that anything i own to some extent owns me. I like being owned by my interests and passions. Good luck in your decision.

 

[cute fuzzy bunny]

Anyway, I'm not arguing either payoff or don't, but paying off a mortgage is self annuitizing at the implied interest rate of the mortgage, not self bonding, and does not have a return like a bond investment at that same interest rate.

I think you forgot a small item. At the end of the mortgage you've got an asset worth 6 or 7 figures. At the end of a bond you also get the principal. At the end of the annuity you've got nothing.

 

[Canadian Grunt]

Why not do both. Set a minimum monthly contribution rate for investments and begin to pay down the mortgage. Increase your principal payment with a portion of any future raises. Win-Win.

And don't forget to spend some cash. Live a little, life is short.

 

[Animorph]

I think you forgot a small item. At the end of the mortgage you've got an asset worth 6 or 7 figures. At the end of a bond you also get the principal. At the end of the annuity you've got nothing.

I did say before that you have to sell your house to realize that investment. That makes it a little bond-like, if your house is an investment. You'd also have to have an interest only mortgage.

However, the annuity case remains the same. You use the annuity to make the house P&I payments and you still have the same investment in the house. Or you pay off the mortgage and you still have the same investment in the house. If you bought a bond that threw off enough income to pay the house payment you would have the same investment in the house plus the bond principal returned at the end of the period. If you buy a bond with the same interest rate as your mortgage it will pay only some of your house payments (all the interest of the first payment but no principal because it doesn't return any principal, more of the principal for later payments as the interest owed with each payment falls), but will return all your principal at the end.

If you pay off your mortgage you are buying an annuity that costs the payoff amount, returns your mortgage P&I payments each month, and lasts for a "period certain" equal to the remaining length of the mortgage.

 

[dizzy]

The bond and the annuity case are different structures, but the cost of money is still comparable. The payments on a 100k 30 yr loan/annuity at 6% are 600/month. The interest on a 100k bond @ 6% is only 500/month. The payment stream on a bond is less because you get the principal back at the end. As far as future value @ 30 yrs goes, they are identical: the annuity future value is about 600k, and the bond payment stream future value is 500k (FV(annuity) = FV(bond payments) + return of captital). So implied interest rates (aka cost of money) are the best way to compare any two investment vehicles whether its an annuity/loan or a bond.

Again, since we had the cash available to payoff, we decided that a "30 yr. 100% guaranteed 6% return vehicle" was a reasonably good addition to our portfolio.

 

[doxeyweb]

Paying off my mortgage.(hopefully in next two years)

I've been paying a little extra for the past few years and letting additional cash sit in a money market. Until lately, i've been earning just enough to cover the mortgage interest. so its a wash...

I tend to keep more cash on hand than required, only because i still have the mortgage, so recently i decided to get aggressive with the mortgage and pay it off.
I'm 35, cars paid for, college paid for, kids college paid for, we max our 401k/roths'...as soon as i get the mortgage out of the way...we are much closer to achiving FIRE!!

I've gone back and forth about if i should pay off mortgage or invest...
and i simply think i'll sleep a little better at night..without any debt!

 

[SecondCor521]

we max our 401k/roths'...

Sorry if I'm stomping on board etiquette by turning this into "yet another pay off the mortgage" thread, but the above reminded me of another reason I am not paying off my mortgage.

Right now I am paying my regular monthly mortgage payments and am also maxing out many of the typical things: 401(k), Roth IRA, 529, ESA. If I were to divert funding away from those savings vehicles in order to pay off my mortgage, then I could pay it off in about 5 years. But then I would probably be able to max out those savings vehicles again and still have extra cash left over which I would want to save, so I'd probably stick that in a taxable account.

I haven't run the simulations on which is better, but I currently don't like the thought of losing out on the next 5 years of contributions to those savings vehicles because I won't be able to make it up later.

2Cor521

 

[W2R]

SecondCor521, that is a good point. I think that if one is not already maxing out retirement savings such as 401K savings, it probably isn't yet time to pay off one's house.

At least that is my thinking. I suppose different situations are different. In my case I maxed out my TSP and paid off my house at the same time, but at the expense of any excess to put into taxable investments. Well, maybe some, but not as much as I would otherwise have accumulated.

 

[Ultimate Cheapskate]

Sorry if I'm stomping on board etiquette by turning this into "yet another pay off the mortgage" thread, but the above reminded me of another reason I am not paying off my mortgage.

Right now I am paying my regular monthly mortgage payments and am also maxing out many of the typical things: 401(k), Roth IRA, 529, ESA. If I were to divert funding away from those savings vehicles in order to pay off my mortgage, then I could pay it off in about 5 years. But then I would probably be able to max out those savings vehicles again and still have extra cash left over which I would want to save, so I'd probably stick that in a taxable account.

I haven't run the simulations on which is better, but I currently don't like the thought of losing out on the next 5 years of contributions to those savings vehicles because I won't be able to make it up later.

2Cor521

"Could' vs. "probably" - that's the choice, brother.

Stay Cheap!
-Jeff Yeager

 

[Running_Man]

Well, I'm no fanatic, but I'm in Animorph's camp and I have the data to back it up.

http://www.early-retirement.org/forums/showpost.php?p=725747&postcount=80

Short story-- 5.44% after-tax APY on a 5.375% mortgage after four years of payments.

Of course if you have the cash to pay off a mortgage the return of the stock market is not the comparison but the amount of shares the future cash flows a DCA from what will be the mortgage payment versus a lump sum investment plus dividends. $6,719.65 per year investments per 100K mortgage. A prolonged downturn below the original price will result in the mortgage being prepaid being better. A big bull market early that holds will make the lump sum a better investment. It is very easily possible that the DCA instead of mortgage payments will cause a need of much greater than the 5.375 rate of the mortgage. A five year bull market at the end could cause both to exceed nine percent...