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paying off the mortgage/investing update
Old 10-14-2008, 09:57 PM   #1
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paying off the mortgage/investing update

I wanted to bring up the old discussion of paying off the mortgage vs. investing the money. In light of very recent times, what do you think about investing more money in your house vs. more money in investments?
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Old 10-14-2008, 10:24 PM   #2
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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"?
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Old 10-14-2008, 10:26 PM   #3
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Up until last week, DW and I have been putting everything extra towards the mortgage. We changed our fiscal direction late last week and started investing a good portion of our "extra" income.

We are (and will be) primarily investing in dividend paying stocks that have a lengthy history of raising their dividends. The dividends that get paid out will be added to our mortgage payment each month.

If the market rises beyond our comfort level (DW is very conservative), we will stop the stock investments and switch back to hammering the mortgage.
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Old 10-15-2008, 12:18 AM   #4
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Originally Posted by JustCurious View Post
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"?
Not unless the TV or boat was appreciating the way houses often do....
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Old 10-15-2008, 11:56 AM   #5
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Not unless the TV or boat was appreciating the way houses often do....
Have you been watching the news lately?

Ok, let's change the hypothetical. Let's say I buy a gold Rolex watch with my credit card and I expect the watch to hold its value, or maybe increase in value over time. If I pay down my credit card debt, am I "investing in my watch"?

Let's say I get a bank loan to buy a rare piece of art, which is expected to increase in value over time. If I pay down the bank loan, am I "investing in art"?
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Old 10-15-2008, 12:11 PM   #6
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Originally Posted by 52andout View Post
I wanted to bring up the old discussion of paying off the mortgage vs. investing the money. In light of very recent times, what do you think about investing more money in your house vs. more money in investments?

Time to invest in the market is when it is at it's lows, time to invest in the mortgage is when the market is at its highs.

To not take advantage of low market conditions will mean you subject yourself to the full brunt of market vagaries.

Move your investment cost base down so you can break even at a lower market price. You won't be dependant on reaching former market highs.
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Old 10-15-2008, 12:14 PM   #7
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Originally Posted by JustCurious View Post
Have you been watching the news lately?

Ok, let's change the hypothetical. Let's say I buy a gold Rolex watch with my credit card and I expect the watch to hold its value, or maybe increase in value over time. If I pay down my credit card debt, am I "investing in my watch"?

Let's say I get a bank loan to buy a rare piece of art, which is expected to increase in value over time. If I pay down the bank loan, am I "investing in art"?

If you can buy your watch on an installment plan with increasingly lower installments-- would you?

The market is on sale...just because the sale price keeps going lower doesn't negate the fact that the market is on sale.
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Old 10-15-2008, 01:09 PM   #8
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Have you been watching the news lately?
well no, but I do know houses don't always appreciate. That's why I said that they often increase in value rather than a blanket assertion that real estate is an appreciating asset.

Quote:
Ok, let's change the hypothetical. Let's say I buy a gold Rolex watch with my credit card and I expect the watch to hold its value, or maybe increase in value over time. If I pay down my credit card debt, am I "investing in my watch"?

Let's say I get a bank loan to buy a rare piece of art, which is expected to increase in value over time. If I pay down the bank loan, am I "investing in art"?
Assuming you have a valid reason to believe that the watch or the objet d'art is likely to appreciate, I would say yes. Under similar circumstances, I wouldn't be investing, because I don't have any idea whether such a purchase is likely to gain or lose value.

If you borrow to buy a house and rent it out rather than live in it, you consider that "investing in real estate", even before the mortgage is paid off, don't you?
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Market vs Mortgage
Old 10-15-2008, 01:38 PM   #9
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Market vs Mortgage

Investing in the stock market looks like a losing proposition right now, however, if your investment horizon is over five years buying cheap stocks now will payoff later. I will own many more shares when the price gets back to where it was at the peak. If I stop investing and hold what I got it will come back to where it was before.

My house is paid off and it has a value that I believe is declining and will continue to decline over the next few years much like the stock market. So my investment is losing value just like the stock market. Its value will come back eventually just like the stock market, however, I wont have added value unless I remodel, add a pool, etc.

Maybe its apples and oranges. My house is not just an investment--its shelter, its where I live, its my family's home. The stock market is not the same. If I stop investing in the market so what. It will go up and it will go down.

I think it is what you are comfortable with. If you sleep better paying off your house rather than putting it in the market then thats what you need to do.

I dont need to pay off my mortgage so I will put more money in the market because I think it will pay off in the long run. If I was in your shoes I might have a different outlook.
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Old 10-15-2008, 01:49 PM   #10
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If you agree that nobody can really predict what the market will do, then there are four possibilities for using a pot of money sufficient to pay off the house.

Andrew paid off the house with it, and the market tanked (so he was relieved).
Benjamin paid off the house with it, and the market soared (and he missed it).
Charlie didn't pay off the house, invested the money, and the market soared. Boy, was he glad he didn't miss it.
Daniel didn't pay off the house, invested the money, and the market tanked. Ugh.

Which of these, if any, will delay your ER? If you have a large nestegg or a long time horizon, none of them. If you have a smaller nestegg along with a short time horizon, D (Daniel's case) could be a deal breaker and keep you from retiring for a long time, at least until the market recovers.
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Old 10-15-2008, 01:55 PM   #11
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Earlier this year we had the decision to pay off a mortgage or investing in the market. I can only say that I sleep better at night with the decision I made by paying off the mortgage. Time horizon and risk tolerance are key.

Jim
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Old 10-15-2008, 01:56 PM   #12
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Guys, if there's something fresh & different about this thread then I'll add it to the archive, which is celebrating its first anniversary:
http://www.early-retirement.org/foru...ney-30644.html
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Old 10-15-2008, 03:53 PM   #13
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If you borrow to buy a house and rent it out rather than live in it, you consider that "investing in real estate", even before the mortgage is paid off, don't you?
Yes, but I think you are mixing two different concepts together. The initial act of purchasing the house is investing in real estate. But, the act of later paying down the mortgage is not....that is paying off debt, plain and simple. The house will appreciate or depreciate exactly the same regardless of whether you pay down the mortgage, and the mortgage balance will decrease at exactly the same rate as you pay it off regardless of whether the house appreciates. In my opinion, people make a mistake when they mix the two together, and that mistake leads to flawed decisions.

The bottom line is when you pay down a mortgage, you are paying off a debt, not "investing in a house." The investment occured (if at all) when the house was purchased.
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Old 10-15-2008, 03:58 PM   #14
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In times like this, unless you are solidly retired or have a VERY secure job, I'd just as soon just keep putting cash in the bank, and maybe nibbling a little on stocks at these levels. In uncertain times, nothing helps you sleep better than a pile of cash in the bank.

If you have sufficient cash reserves, then yeah, I'd be dollar cost averaging into the market with a vengeance. Speaking of which, I have 401K contributions (and company match) being invested today, so at least this bad hair day was fortunately timed...
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Old 10-15-2008, 09:53 PM   #15
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Thanks for your comments. I read frequently but rarely post and I was interested in seeing if people's views changed at all with the recent market swings. It has been very crazy for those of us who have seen years of market upticks.

I think my view is biased as I live in an area of the country where real estate hasn't been subject to the run up that many here have seen. I try to think how I would feel if I was facing todays market and had to withdraw the mortgage payment every month.
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Old 10-15-2008, 10:07 PM   #16
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I paid off my house in 2005 because at the time I thought that was the best place to put the money. I knew I was planning on ER and could not invest the money to get a guaranteed rate of return equal to my mortgage interest. But if I still had several years to go untill ER I would probably make a different choice.

With stocks currently down considerably from their highs, I may chose today to invest some of the money in what I think are solid companies that are paying a good dividends. But there is still more risk in that companys can still go out of buisness or cut there dividends. As with most things it depends on your risk tolerance and time frame.
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Old 10-15-2008, 10:25 PM   #17
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Andrew paid off the house with it, and the market tanked (so he was relieved).
I'm Andrew. Do I have regrets sure:
- If I waited to buy the house might have been lower (so far I negotiated similar to the lowest prices paid recently)
- If I knew what I knew now I might have bought a smaller house and paid less.
But that is all hindsight.

I don't think I would have been smart enough to get a mortgage and then invest the remainder in a safe investment or an investment that would earned enough to pay off the mortgage.

So, I'm happy - I'm guessing it will take about 8 years to break even on the house after you take selling costs into account. I don't have any plans to move for quite some time.
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Old 10-16-2008, 01:42 AM   #18
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Ok, let's change the hypothetical. Let's say I buy a gold Rolex watch with my credit card and I expect the watch to hold its value, or maybe increase in value over time. If I pay down my credit card debt, am I "investing in my watch"?

Let's say I get a bank loan to buy a rare piece of art, which is expected to increase in value over time. If I pay down the bank loan, am I "investing in art"?
Assuming you have a valid reason to believe that the watch or the objet d'art is likely to appreciate, I would say yes. Under similar circumstances, I wouldn't be investing, because I don't have any idea whether such a purchase is likely to gain or lose value.

If you borrow to buy a house and rent it out rather than live in it, you consider that "investing in real estate", even before the mortgage is paid off, don't you?
Yes, but I think you are mixing two different concepts together. The initial act of purchasing the house is investing in real estate. But, the act of later paying down the mortgage is not....that is paying off debt, plain and simple. The house will appreciate or depreciate exactly the same regardless of whether you pay down the mortgage, and the mortgage balance will decrease at exactly the same rate as you pay it off regardless of whether the house appreciates. In my opinion, people make a mistake when they mix the two together, and that mistake leads to flawed decisions.

The bottom line is when you pay down a mortgage, you are paying off a debt, not "investing in a house." The investment occured (if at all) when the house was purchased.
I think I get it, and I was combining two things. (Actually more than two, because I was thinking of the whole process of borrowing the money, buying the house, renting it out and collecting the income, paying down the loan and possibly later selling the house at a profit, as the "investment". IMO the purchase of the house, watch, or work of art (regardless of whether bought with cash or with borrowed money) is "investment" because to me, it is the purpose of the purchase—the fact that it is supposed to produce a profit—that makes it an investment. One may also buy such items or others, solely for use, or solely for enjoyment, or for more than one purpose. I don't agree that mixing more than one purpose leads to flawed decisions. If you buy the watch expecting it to be worth more later, but you also use it to tell the time and on top of that enjoy the possession of a costly and beautiful timepiece, what's the problem?
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Old 10-16-2008, 08:02 AM   #19
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Yes, but I think you are mixing two different concepts together. The initial act of purchasing the house is investing in real estate. But, the act of later paying down the mortgage is not....that is paying off debt, plain and simple. The house will appreciate or depreciate exactly the same regardless of whether you pay down the mortgage, and the mortgage balance will decrease at exactly the same rate as you pay it off regardless of whether the house appreciates. In my opinion, people make a mistake when they mix the two together, and that mistake leads to flawed decisions.

The bottom line is when you pay down a mortgage, you are paying off a debt, not "investing in a house." The investment occured (if at all) when the house was purchased.
The concepts are mixed because typically a mortgage payment is a mixture of (1) paying off interest expense to finance the purchase price and (2) paying down the principal which represents the "equity investment" of your house. So, unless one has an interest-only mortgage loan, when one pays the mortgage, you are increasing your equity investment in the house. Each installment payment is a renewed investment in your house that already had a fixed investment price. Prepaying the mortgage just accelerates complete recognition of the investment interest.

I think you're right that prepaying the mortgage should be viewed primarily from the interest expense one saves from the acceleration of complete ownership interest in the house. I'm struggling with the idea of prepaying my interest-only loan right now. It's at 6 percent, with ARM reset in 2011, at 1 year treasury plus 275 bp for the first year. If reset now, my interest expense would be under 5 percent. I'm thinking about paying off a sizeable chunk of this loan before 2011, to get it down to manageable size, in case I want to rent out this place later and have the rental income retire this housing debt. Wouldn't my prepayments be an "investment" in that sense?
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Old 10-16-2008, 08:07 AM   #20
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If you agree that nobody can really predict what the market will do, then there are four possibilities for using a pot of money sufficient to pay off the house.

Andrew paid off the house with it, and the market tanked (so he was relieved).
another Andrew (Andretta?) here.
i was saving for a new car, the dot.com frenzy was roaring, but i used the new car savings to pay off the mortgage instead with no prepayment penalty. i was a greenhorn at investing at the time. but the math came out for my situation to pay off the 10% fixed interest mortgage loan and then planned to do some investing after the savings account grew again. it just so happened the market tanked while i was saving up again. so i jumped into the market.
no skill involved, just luck.
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