paying off the mortgage/investing update

[BunsGettingFirm]

I've never understood paying your mortgage as "investing in your house." If you buy a $1,000 television with your credit card, would you consider paying off your credit card as "investing in your tv"? If you borrow money to buy a boat, is paying off that loan considered "investing in your boat"?

You can stop watching TV, but you can't live out on the streets. I looked at Maslow's hierarchy of needs, and flat screen TV definitely is not one of the basic needs. There is a difference.

 

[BunsGettingFirm]

And that's a good example of the problem with paying off the house early. Sure, you can save (some say "earn") 6% or so by paying down the mortgage. But when a gift-horse opportunity in the market comes around, your money in locked into the house and you can't switch it to stocks.

BTW, BAC Preferred V currently is yielding 8.56%. There are currently plenty of good stocks out there with a great yield.

Huh? Why the assumption that people who pay off their houses have no more cash? It may be a fair assumption for some, but it may not be true for everyone.

 

[rayvt]

Why do you bother paying off your credit card with a 5% rate when you buy things?

How is a house different than any other debt?

Well, I am not aware of any credit card with a 5% rate. All mine have rates around 15%+. Even low rate balance transfers come with a huge poison-pill due the the way your payments are allocated,

A house loan is mainly different because you don't really have the option to buy a house for cash. Therefore a mortgage is an inextricable part of buying a house. So, you gotta have a mortgage. Which lasts for essentially all of your working lifetime (30 years).

But you don't have to carry a loan balance on your other purchases. The next biggest thing for people is a car loan, which generally doesn't last for more than 4 or 5 years. Credit cards are different because they cost in the 18% to 25% range.

Also, paying down a mortgage doesn't give you any immediate benefit. Your required payment stays the same. You only get the benefit 10/20/25 years from now, when your payment stops sooner than it otherwise would have.

Believe you me, if I had a 5% credit card I'd take out a cash advance and buy some preferred stocks that were paying 8%.

 

[dm]

And that's a good example of the problem with paying off the house early. Sure, you can save (some say "earn") 6% or so by paying down the mortgage. But when a gift-horse opportunity in the market comes around, your money in locked into the house and you can't switch it to stocks.

BTW, BAC Preferred V currently is yielding 8.56%. There are currently plenty of good stocks out there with a great yield.

That wasn't the case in 2005. My crystal ball was alittle foggy and I didn't know we were headed for a big drop this soon. Also my house is not a big part of my net worth. Its somewhere in the 10 to 15% range. And since as far as I know, I still have a line of credit at the local bank, I could still borrow money and invest it if I wanted to. Or I could go on margin if I felt like it.

I guess the smart money is currently taking out new 30 yr loans in the low 6% range and buying the BAC Preferred. Its just not for me. But I have been reallocating some cash into stocks at this time.

 

[dm]

Well, I am not aware of any credit card with a 5% rate. All mine have rates around 15%+. Even low rate balance transfers come with a huge poison-pill due the the way your payments are allocated,

A house loan is mainly different because you don't really have the option to buy a house for cash. Therefore a mortgage is an inextricable part of buying a house. So, you gotta have a mortgage. Which lasts for essentially all of your working lifetime (30 years).

But you don't have to carry a loan balance on your other purchases. The next biggest thing for people is a car loan, which generally doesn't last for more than 4 or 5 years. Credit cards are different because they cost in the 18% to 25% range.

Also, paying down a mortgage doesn't give you any immediate benefit. Your required payment stays the same. You only get the benefit 10/20/25 years from now, when your payment stops sooner than it otherwise would have.

Believe you me, if I had a 5% credit card I'd take out a cash advance and buy some preferred stocks that were paying 8%.

I just got a offer from Capital One yesterday offering 0% till Jan 2010 with a Credit line of $30,000. No annual fees and No transfer fees. My wife got the same offer. The only problem is we pay off our current cards monthly and don't carry much of a balance. The cash advance APR is 22.9% so that doesn't work. I wonder if my broker will take a credit card?

On no instant gratification on paying extra on my home. You are still building equity. I have always keep a spreadsheet and just seeing the principle being reduced helped me. And when I sold my last home and bought my current one It sure made a difference.

 

[W2R]

On no instant gratification on paying extra on my home. You are still building equity. I have always keep a spreadsheet and just seeing the principle being reduced helped me. And when I sold my last home and bought my current one It sure made a difference.

I can relate to that. Also, when I was still paying off my house I used to love figuring out how many months each of my extra lump sum payments would shorten the mortgage. That was another aspect of my instant gratification. Payments towards the beginning of the mortgage shorten the length by a huge amount. It's easy to get a rough idea of how much, by using the mortgage calculator at bankrate.com . By the time you are nearly paid off, the effect on the length of the mortgage is less but you can see the light at the end of the tunnel.

Of course, this post relates more to the subjective joys of paying down one's mortgage - - not so much the investment aspects. So simmer down, you anti-payoff-the-mortgage folks out there! For me, it was the right decision from a logical, as well as subjective point of view, because of the Private Benjamin/Danielle concerns I spoke about in previous posts on this thread.

Now that my mortgage is completely paid off, my monthly payment is going into Vanguard funds, as is the extra money I would have used for lump sum payments. Also, my plan includes an ER budget that is considerably lower than it otherwise might be.

 

[Rustic23]

I'm A,B,D waiting for C, while enjoying retirement.

A: We paid off 2/3 of the house
B: We have 1/3 invested in market
D: I'm bumbed

C: Waiting for recovery. But as my retirement is structured such that the downturn does not have that much effect, i.e. I have lost about $400 a month income, well within my pad, I still enjoy retirement.

 

[nun]

I was going to post a similarly themed thread until I saw this one. What this downturn has emphasized to me is that saving for retirement isn't necessarily about building wealth, it's about insuring your lifestyle. When the Dow was at 13000 I moved form 75/25 to 60/40 equities to bonds/cash. I'm 47 so the 75/25 ratio was pretty much textbook. At 11000 I went 30/70 as I realized that with my level of saving I didn't need big returns to meet my retirement goal and protection became my prime focus rather than some generic asset allocation advice. I'll adjust and stay at 50/50 in a few months time. As part of this new found emphasis I've also been paying extra mortgage principal each month so that it will be payed off at my planned retirement age of 55. It might be that using the cash to buy stocks at a market low is the thing to do for maximum return, but that's not what I'm interested in. I'm interested in my lifestyle and part of that wanting the warm and fuzzy feeling of no mortgage the day I retire.

 

[rayvt]

Also, when I was still paying off my house I used to love figuring out how many months each of my extra lump sum payments would shorten the mortgage. That was another aspect of my instant gratification. Payments towards the beginning of the mortgage shorten the length by a huge amount.

Best thing to do, and easiest way to get the visual gratification is to print out your amortization schedule----all 360 months of it----and cross out each line as you make each monthly payment.

The key part: when you make an extra principal payment, cross out the next line(s) of the schedule that sum to the amount of principal you are paying. For each line you cross out, you jump ahead in the table by that far, and shorten your mortgage by that many months. And thereby saving (over the lifetime of the mortgage) the sum of the interest amounts for those month(s) that you cross out.

Emotionally, there's noting like seeing that if I pay an extra $339 today that you don't have to give the bank the corresponding $19.50 of interest. 'course, you don't actually see that $19.50 savings cash-in-hand until 28 years (minus 1 month) from now.

OTOH, financially, there's the flip side of putting that $339 into, say, BAC preferred stock and having BAC pay me $29.56/year forever (until they give me back my $339). Over the next 28 years, they will have paid me $828 and then then I still get my $339 back.

 

[W2R]

Best thing to do, and easiest way to get the visual gratification is to print out your amortization schedule----all 360 months of it----and cross out each line as you make each monthly payment.

The key part: when you make an extra principal payment, cross out the next line(s) of the schedule that sum to the amount of principal you are paying.

Or, try this: In 2002 I downloaded an Excel file that does mortgage amortizations, allows irregular and variable extra lump sum payments of whatever you want to send in when you want to send it, and recalculates the amortization schedule accordingly. I checked it every which way from Sunday and determined that it actually does what it is supposed to do.

Each time I made a lump sum payment, I could enter it in the spreadsheet and clear (eliminate) the months below where the house would be paid off if I just sent in my regular payments and no further lump sums. Each month clear up to the end, the spreadsheet computations matched what my mortgage company sent me in my monthly statement.

I loved knocking YEARS off my mortgage by sending in my extra $$, especially the first couple of years.

I keep this as one of the worksheets in my retirement spreadsheet, so I can look back and see exactly when I sent in exactly how much if I am feeling nostalgic.

 

[freebird5825]

Of course, this post relates more to the subjective joys of paying down one's mortgage - - not so much the investment aspects. So simmer down, you anti-payoff-the-mortgage folks out there! For me, it was the right decision from a logical, as well as subjective point of view, because of the Private Benjamin/Danielle concerns I spoke about in previous posts on this thread.
Now that my mortgage is completely paid off, my monthly payment is going into Vanguard funds, as is the extra money I would have used for lump sum payments. Also, my plan includes an ER budget that is considerably lower than it otherwise might be.

we think alike. when paid off, my 10% fixed mortgage loan was no longer a drain on the budget. and i did exactly what you did - turned right around and invested the $ in the market.
oh, and if this wasn't already mentioned, let us not forget the 100% ownership equity that comes with a paid off house, using the "today" dollars at the time it was paid off vs the "tomorrow" dollars if stretched out over the entire term of the mortgage loan. i guess i think in very simple terms...

 

[huskerblue]

But when a gift-horse opportunity in the market comes around, your money in locked into the house and you can't switch it to stocks.

Not true, my paid off house has a $50,000 HELOC with an interest rate 1% BELOW discount or 3.5% right now. I don't use it, it's simply an emergency fund. I love having my house paid off {worth close to $300K--maybe, certainly $280K} while I have half a mil riding on the stock market {with GIC's and bonds on top of that}. I also have an RV that I bought with cash and two cars that I bought with cash.

Debt is the bain of this generation and is the reason everything has gone to hell in a handbasket. If you can afford it and REALLY want/need it, buy it but just don't rack up $25,000 in credit card debt with 18% interest and then sit there wondering how you're going to make it in life. PAY WITH CASH WHEN YOU HAVE ENOUGH SAVED! {remember your parents buying things on layaway?! I do}

 

[rayvt]

I loved knocking YEARS off my mortgage by sending in my extra $$, especially the first couple of years.

I heard some good advice many years ago.
If you really really want to pay off the mortgage quick, get a 30 year FRM, get the amortization schedule, and each month send in the normal payment plus the principal amount of the next month's payment. In the early years of the mortgage the monthly principal is pretty small (in my case, it was 18% principal and 82% interest). And cross out the next two months on the schedule. After 5 years of this, you've knocked 10 years off your mortgage. Eventually the principal amount becomes pretty large and the extra amount gets pretty large, so then just keep the extra amount at a comfortable constant amount.

I never did this, though, because I believe that if it's not worth doing, it's not worth doing well. Instead, I invested in dividend stocks and preferred stocks paying a higher interest rate than my mortgage.

 

[chinaco]

{bump} Pulling this one back up.

How about an A/B approach combined with C/D? Pay off the house and invest in the market!! Hedge the bet.

I am looking into rebalancing my portfolio to target. I could use part of my fixed that would be used to rebalance to payoff the mortgage instead of putting it in the stock market.... and still put money in the market.

That might not be a bad idea. I would save the interest on the mortgage... the income tax savings are not as great since DW ERd (different tax bracket). Then I could DCA my mortgage payment money into the market.

It is a consideration. I was planning to pay the houst off in the next few years anyway (before ER). It might be a safer bet.

 

[OAG]

Sounds good. Nice feeling know you "own" your home. Of course, to be more accurate, you and the County Taxing Agency own it. Funny (well not really) thing is I am paying more for my RE Taxes annually than I ever paid annually on a Mortgage.

Really sad to hear on CNBC (I know) the other morning when they had Governor Corizone (spelling) from, I think, NJ say words to the effect 'we have a shortfall in the State budget and the only thing we have to correct it is Real Estate Taxes'.

 

[chinaco]

Sounds good. Nice feeling know you "own" your home. Of course, to be more accurate, you and the County Taxing Agency own it. Funny (well not really) thing is I am paying more for my RE Taxes annually than I ever paid annually on a Mortgage.

Really sad to hear on CNBC (I know) the other morning when they had Governor Corizone (spelling) from, I think, NJ say words to the effect 'we have a shortfall in the State budget and the only thing we have to correct it is Real Estate Taxes'.

I think this is happening in most states. Our property values are being reassessed and they are going up which of course increase the Tax. I am wonder what data they are looking at... Probably 2006 sales numbers.

 

[catdance62]

We paid off our house and property when we were in our 30's (we are in our 40s now) and will never ever regret it.