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Posted: 7/25/2005 5:48:44 PM EDT
I am building a home in Florida. Moving out of New York, sold my apartment have enough to payoff the mortgage ($160,000). Should I hold on to that money and invest it conservatively or pay it off. I'm very confused. Thanks in advance for your advice.
Link Posted: 7/25/2005 5:52:26 PM EDT
There are competing ways of thinking about it, but if you pay off your mortgage you will have zero risk of losing your home and should have plenty of investment cash if you invest what you would be paying each month on a mortgage.
Link Posted: 7/25/2005 5:53:06 PM EDT
I say pay the mortgage and invest the money.
Link Posted: 7/25/2005 5:57:47 PM EDT
I would pay the house off and invest with the money you'll have every month.

THis is just my opinion, but I like to have things paid off. Not having the risk of losing your house in a time of financial crisis is a very comforting feeling.
Link Posted: 7/25/2005 5:57:53 PM EDT
I have no idea..

just want to see the replys
Link Posted: 7/25/2005 5:57:56 PM EDT
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.
Link Posted: 7/25/2005 6:02:12 PM EDT
[Last Edit: 7/25/2005 6:03:00 PM EDT by vanilla_gorilla]
I say pay it off. With the way land prices are going down here, you're better off than investing it.

Trust me, I know.


The land my home is on now sold for (I think) $9K an acre, undeveloped. It was formerly the property of the father of an older lady that my wife works with. He won most of the land in a county fair about ~35years ago, about 40 acres worth.
Link Posted: 7/25/2005 6:02:38 PM EDT

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



+1
thats good advice
Link Posted: 7/25/2005 6:03:07 PM EDT

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



The whole idea behind the mortgage interest deduction on your federal tax burden is to encourage home ownership. It would be wise to take Uncle Sam's advice and have the largest mortgage possible.

Use the difference to buy other real estate - say a private cabin in the woods or an apartment building that generates income.

Just a suggestion - you should consult a financial advisor.

G
Link Posted: 7/25/2005 6:05:23 PM EDT
Pay off the mortgage!

My mortgage will be paid off in four years! WHOO HOOO!
Link Posted: 7/25/2005 6:06:59 PM EDT
I've been thinking of doing the same thing. I only owe $33,000 on my house. If I pay it off I instantly save about $12,000 I would have paid in interest to the bank. If I invest it I COULD make more but I COULD also lose it. I'm a sure thing type person so I plan to pay off the house in Sept of this year. Just my thoughts.
Link Posted: 7/25/2005 6:07:44 PM EDT

Originally Posted By glock23carry:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



The whole idea behind the mortgage interest deduction on your federal tax burden is to encourage home ownership. It would be wise to take Uncle Sam's advice and have the largest mortgage possible.

Use the difference to buy other real estate - say a private cabin in the woods or an apartment building that generates income.

Just a suggestion - you should consult a financial advisor.

G



I agree with that. You want to use your money to make more. You have to do it wisely so you dont lose the principle. But land is always a good option and that interest is also deductible to some degree.
Link Posted: 7/25/2005 6:10:45 PM EDT
Link Posted: 7/25/2005 6:11:49 PM EDT
Pay it off. You can always borrow against the house later if you find something else you want to invest in.z
Link Posted: 7/25/2005 6:12:13 PM EDT
[Last Edit: 7/26/2005 4:44:51 PM EDT by ChrisLe]

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



The perfect answer!
Link Posted: 7/25/2005 6:14:49 PM EDT

Originally Posted By ARDOC:

Originally Posted By glock23carry:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



The whole idea behind the mortgage interest deduction on your federal tax burden is to encourage home ownership. It would be wise to take Uncle Sam's advice and have the largest mortgage possible.

Use the difference to buy other real estate - say a private cabin in the woods or an apartment building that generates income.

Just a suggestion - you should consult a financial advisor.

G



I agree with that. You want to use your money to make more. You have to do it wisely so you dont lose the principle. But land is always a good option and that interest is also deductible to some degree.



North until you smell it, left until you step in it.

G - The Ohio State University 1987

PS - I very strongly question the wisdom of paying off a mortgage on your residence. Check with a financial advisor.
Link Posted: 7/25/2005 7:26:58 PM EDT
Oh my God, a bucknut with some brains. When will wonders ever cease!
Link Posted: 7/26/2005 3:04:44 PM EDT
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.

_________________________________________________________

I would second this money strategy. Mortgage loans are at historic lows. When I started my first passbook saving account, my bank was offering interest at ~ 5%. Times have certainly changed.

The question in these matters comes down to opportunity and cost. The two are frequently combined, as with the following example:

Cost to me to borrow money for a 30-yr. conventional loan = 5.3% (cost)
Opportunity to invest in a solid fund or equity = 8.0 % (opportunity)
Money I may gain under this strategy = >8 - 5.3 = 2.7%

This is an example of how you may quite well be better off by investing than by placing less "idle" money into your home.

Link Posted: 7/26/2005 3:09:49 PM EDT
Id pay it off, I hate having debt, think of it as one less thing that you have to worry about, alot easier if you have severe reduced income
Link Posted: 7/26/2005 4:11:11 PM EDT

Originally Posted By Taxman:
Id pay it off, I hate having debt, think of it as one less thing that you have to worry about, alot easier if you have severe reduced income



And this is why you have over 20000 posts and will be poor forever.
Link Posted: 7/26/2005 6:09:53 PM EDT

Originally Posted By Taxman:
Id pay it off, I hate having debt, think of it as one less thing that you have to worry about, alot easier if you have severe reduced income



This isn't France in 1750, Taxman. The US tax code is designed to prevent creating a class of wealthy, idle citizens. It is designed to give people an incentive to work and produce.

Thank you, Ronaldus Maximus! The reduction of "tax shelters" and the reduction of the marginal tax rate changed our stagnant, recession-prone economy to the great wealth engine it is today.

Remember when having a million dollars meant you were set for life? Now most homes on the east coast with 4 bedrooms are worth that alone. We are truly reaping the spoils of the market economy.

G
Link Posted: 7/26/2005 6:57:10 PM EDT

Originally Posted By glock23carry:

Originally Posted By Taxman:
Id pay it off, I hate having debt, think of it as one less thing that you have to worry about, alot easier if you have severe reduced income



This isn't France in 1750, Taxman. The US tax code is designed to prevent creating a class of wealthy, idle citizens. It is designed to give people an incentive to work and produce.

Thank you, Ronaldus Maximus! The reduction of "tax shelters" and the reduction of the marginal tax rate changed our stagnant, recession-prone economy to the great wealth engine it is today.

Remember when having a million dollars meant you were set for life? Now most homes on the east coast with 4 bedrooms are worth that alone. We are truly reaping the spoils of the market economy.

G



The G Bucknut speaketh the truth. Listen young man.
Link Posted: 7/26/2005 7:53:59 PM EDT
Your most likely not going to get a higher rate of return. Pay off the the house, use the money you normally would be using for payments and invest. The cost of owning a home and making payments and all that goes with it out weighs the tax break vs investing that money every month (think compund interest).



Originally Posted By RTOinIraq:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



+1
thats good advice

Link Posted: 7/26/2005 8:19:11 PM EDT

Originally Posted By redleg1one:
Your most likely not going to get a higher rate of return. Pay off the the house, use the money you normally would be using for payments and invest. The cost of owning a home and making payments and all that goes with it out weighs the tax break vs investing that money every month (think compund interest).



Originally Posted By RTOinIraq:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



+1
thats good advice




Not really, unless you have the credit score of a rock, you can still get mortgages in the 5.5-6%. You can find a modest mutual fund and get an annual return of 8% plus without difficulty. My 401k funds this year have given me an annual return of 12%. In fact you could buy a bond and get 8%. I have a $25000 FORD bond that matures in 3 years with a yearly return of 8% at maturity.
Link Posted: 7/26/2005 8:35:57 PM EDT

Originally Posted By ARDOC:

Originally Posted By redleg1one:
Your most likely not going to get a higher rate of return. Pay off the the house, use the money you normally would be using for payments and invest. The cost of owning a home and making payments and all that goes with it out weighs the tax break vs investing that money every month (think compund interest).



Originally Posted By RTOinIraq:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



+1
thats good advice




Not really, unless you have the credit score of a rock, you can still get mortgages in the 5.5-6%. You can find a modest mutual fund and get an annual return of 8% plus without difficulty. My 401k funds this year have given me an annual return of 12%. In fact you could buy a bond and get 8%. I have a $25000 FORD bond that matures in 3 years with a yearly return of 8% at maturity.



ARDOC is right. The historic average rate of return of the stock market since its inception is well above current interest rates. If I recall its somewhere in the neighborhood of 8%+. And the avg rate of return of the better actively managed funds is even higher than that of the market....Knowing that its best to keep the mortgage, take advantage of the deductibility of the mortgage interest, and invest the rest in mutual funds with proven track records.....
Link Posted: 7/27/2005 3:29:22 AM EDT
Factor in the rate of return on the property as well.

G
Link Posted: 7/27/2005 5:50:38 AM EDT
I'm paying mine off , have about 4-5 years left to go. Chances are my house wont be my retirement house but in 4-5 years I'll have some free cash to invest. I can always get an equity loan if I wanted to tap into it but that would kill my 4-5 year goal of paying off the mtg. When I retire I'd rather have a paid off house and no mtg payment than paying rent or mtg and looking at investment statements. Got to figure out what you're investing for? To pay off a house? Well duh! Pay off the house instead
Link Posted: 7/29/2005 7:20:14 AM EDT
Don't even think about paying off your mortgage until you retire. Then it still might not be a good idea? Where else can you leverage $160k for a deductable 5.875% rate?

Even if your investments only make 5.875% you still come out with alot more money in the end. It's called compounding interest.
Link Posted: 7/29/2005 7:36:19 AM EDT
[Last Edit: 7/29/2005 8:57:07 AM EDT by Q3131A]

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



Actually if you get the same rate on your investment you'll have more money.

As you have said, you have a $160k mortgage. You have the money to pay it off. Should you invest the money or pay off the mortgage.

Here is what the mortgage will cost you over the next 30 years:
$160k at 5.875%:
1. Payments of $946.94 per month PITI
2. Total Repaid: $340,725.60
3. Total Interest Paid: $180,725.60 (Deductable)

Here is what you would have if you invested the money and made 5.875%:
Year Start Rate End
1 $160,000 0.05875 $169,400
2 $169,400 0.05875 $179,352
3 $179,352 0.05875 $189,889
4 $189,889 0.05875 $201,045
5 $201,045 0.05875 $212,857
6 $212,857 0.05875 $225,362
7 $225,362 0.05875 $238,602
8 $238,602 0.05875 $252,620
9 $252,620 0.05875 $267,461
10 $267,461 0.05875 $283,175
11 $283,175 0.05875 $299,811
12 $299,811 0.05875 $317,425
13 $317,425 0.05875 $336,074
14 $336,074 0.05875 $355,818
15 $355,818 0.05875 $376,722
16 $376,722 0.05875 $398,855
17 $398,855 0.05875 $422,287
18 $422,287 0.05875 $447,097
19 $447,097 0.05875 $473,364
20 $473,364 0.05875 $501,174
21 $501,174 0.05875 $530,618
22 $530,618 0.05875 $561,792
23 $561,792 0.05875 $594,797
24 $594,797 0.05875 $629,741
25 $629,741 0.05875 $666,739
26 $666,739 0.05875 $705,909
27 $705,909 0.05875 $747,382
28 $747,382 0.05875 $791,290
29 $791,290 0.05875 $837,779
30 $837,779 0.05875 $886,998

So, you would have paid about $181k to the bank (all deductable at your highest tax rate). But you would have $867k in investments.
Link Posted: 7/29/2005 7:38:01 AM EDT
Here is what you would have a 8%:

Year Start Rate End
1 $160,000 0.08 $172,800
2 $172,800 0.08 $186,624
3 $186,624 0.08 $201,554
4 $201,554 0.08 $217,678
5 $217,678 0.08 $235,092
6 $235,092 0.08 $253,900
7 $253,900 0.08 $274,212
8 $274,212 0.08 $296,149
9 $296,149 0.08 $319,841
10 $319,841 0.08 $345,428
11 $345,428 0.08 $373,062
12 $373,062 0.08 $402,907
13 $402,907 0.08 $435,140
14 $435,140 0.08 $469,951
15 $469,951 0.08 $507,547
16 $507,547 0.08 $548,151
17 $548,151 0.08 $592,003
18 $592,003 0.08 $639,363
19 $639,363 0.08 $690,512
20 $690,512 0.08 $745,753
21 $745,753 0.08 $805,413
22 $805,413 0.08 $869,846
23 $869,846 0.08 $939,434
24 $939,434 0.08 $1,014,589
25 $1,014,589 0.08 $1,095,756
26 $1,095,756 0.08 $1,183,417
27 $1,183,417 0.08 $1,278,090
28 $1,278,090 0.08 $1,380,337
29 $1,380,337 0.08 $1,490,764
30 $1,490,764 0.08 $1,610,025
Link Posted: 7/29/2005 7:40:05 AM EDT
At 10%:

Year Start Rate End
1 $160,000 0.1 $176,000
2 $176,000 0.1 $193,600
3 $193,600 0.1 $212,960
4 $212,960 0.1 $234,256
5 $234,256 0.1 $257,682
6 $257,682 0.1 $283,450
7 $283,450 0.1 $311,795
8 $311,795 0.1 $342,974
9 $342,974 0.1 $377,272
10 $377,272 0.1 $414,999
11 $414,999 0.1 $456,499
12 $456,499 0.1 $502,149
13 $502,149 0.1 $552,363
14 $552,363 0.1 $607,600
15 $607,600 0.1 $668,360
16 $668,360 0.1 $735,196
17 $735,196 0.1 $808,715
18 $808,715 0.1 $889,587
19 $889,587 0.1 $978,545
20 $978,545 0.1 $1,076,400
21 $1,076,400 0.1 $1,184,040
22 $1,184,040 0.1 $1,302,444
23 $1,302,444 0.1 $1,432,688
24 $1,432,688 0.1 $1,575,957
25 $1,575,957 0.1 $1,733,553
26 $1,733,553 0.1 $1,906,908
27 $1,906,908 0.1 $2,097,599
28 $2,097,599 0.1 $2,307,359
29 $2,307,359 0.1 $2,538,095
30 $2,538,095 0.1 $2,791,904
Link Posted: 7/29/2005 7:40:42 AM EDT
At 12%:

Year Start Rate End
1 $160,000 0.12 $179,200
2 $179,200 0.12 $200,704
3 $200,704 0.12 $224,788
4 $224,788 0.12 $251,763
5 $251,763 0.12 $281,975
6 $281,975 0.12 $315,812
7 $315,812 0.12 $353,709
8 $353,709 0.12 $396,154
9 $396,154 0.12 $443,693
10 $443,693 0.12 $496,936
11 $496,936 0.12 $556,568
12 $556,568 0.12 $623,356
13 $623,356 0.12 $698,159
14 $698,159 0.12 $781,938
15 $781,938 0.12 $875,771
16 $875,771 0.12 $980,863
17 $980,863 0.12 $1,098,567
18 $1,098,567 0.12 $1,230,395
19 $1,230,395 0.12 $1,378,042
20 $1,378,042 0.12 $1,543,407
21 $1,543,407 0.12 $1,728,616
22 $1,728,616 0.12 $1,936,050
23 $1,936,050 0.12 $2,168,376
24 $2,168,376 0.12 $2,428,581
25 $2,428,581 0.12 $2,720,010
26 $2,720,010 0.12 $3,046,412
27 $3,046,412 0.12 $3,411,981
28 $3,411,981 0.12 $3,821,419
29 $3,821,419 0.12 $4,279,989
30 $4,279,989 0.12 $4,793,588
Link Posted: 7/29/2005 7:41:21 AM EDT
At 15%:

Year Start Rate End
1 $160,000 0.15 $184,000
2 $184,000 0.15 $211,600
3 $211,600 0.15 $243,340
4 $243,340 0.15 $279,841
5 $279,841 0.15 $321,817
6 $321,817 0.15 $370,090
7 $370,090 0.15 $425,603
8 $425,603 0.15 $489,444
9 $489,444 0.15 $562,860
10 $562,860 0.15 $647,289
11 $647,289 0.15 $744,383
12 $744,383 0.15 $856,040
13 $856,040 0.15 $984,446
14 $984,446 0.15 $1,132,113
15 $1,132,113 0.15 $1,301,930
16 $1,301,930 0.15 $1,497,219
17 $1,497,219 0.15 $1,721,802
18 $1,721,802 0.15 $1,980,073
19 $1,980,073 0.15 $2,277,083
20 $2,277,083 0.15 $2,618,646
21 $2,618,646 0.15 $3,011,443
22 $3,011,443 0.15 $3,463,159
23 $3,463,159 0.15 $3,982,633
24 $3,982,633 0.15 $4,580,028
25 $4,580,028 0.15 $5,267,032
26 $5,267,032 0.15 $6,057,087
27 $6,057,087 0.15 $6,965,650
28 $6,965,650 0.15 $8,010,498
29 $8,010,498 0.15 $9,212,073
30 $9,212,073 0.15 $10,593,884
Link Posted: 7/29/2005 9:12:33 AM EDT

Originally Posted By Q3131A:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



Actually if you get the same rate on your investment you'll have more money.

As you have said, you have a $160k mortgage. You have the money to pay it off. Should you invest the money or pay off the mortgage.

Here is what the mortgage will cost you over the next 30 years:
$160k at 5.875%:
1. Payments of $946.94 per month PITI
2. Total Repaid: $340,725.60
3. Total Interest Paid: $180,725.60 (Deductable)

Here is what you would have if you invested the money and made 5.875%:
Year Start Rate End
1 $160,000 0.05875 $169,400
2 $169,400 0.05875 $179,352
3 $179,352 0.05875 $189,889
4 $189,889 0.05875 $201,045
5 $201,045 0.05875 $212,857
6 $212,857 0.05875 $225,362
7 $225,362 0.05875 $238,602
8 $238,602 0.05875 $252,620
9 $252,620 0.05875 $267,461
10 $267,461 0.05875 $283,175
11 $283,175 0.05875 $299,811
12 $299,811 0.05875 $317,425
13 $317,425 0.05875 $336,074
14 $336,074 0.05875 $355,818
15 $355,818 0.05875 $376,722
16 $376,722 0.05875 $398,855
17 $398,855 0.05875 $422,287
18 $422,287 0.05875 $447,097
19 $447,097 0.05875 $473,364
20 $473,364 0.05875 $501,174
21 $501,174 0.05875 $530,618
22 $530,618 0.05875 $561,792
23 $561,792 0.05875 $594,797
24 $594,797 0.05875 $629,741
25 $629,741 0.05875 $666,739
26 $666,739 0.05875 $705,909
27 $705,909 0.05875 $747,382
28 $747,382 0.05875 $791,290
29 $791,290 0.05875 $837,779
30 $837,779 0.05875 $886,998

So, you would have paid about $181k to the bank (all deductable at your highest tax rate). But you would have $867k in investments.



We have a winner!
Link Posted: 7/31/2005 7:02:31 PM EDT
[Last Edit: 7/31/2005 7:11:58 PM EDT by AssaultRifler]

Originally Posted By Q3131A:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



Actually if you get the same rate on your investment you'll have more money.

As you have said, you have a $160k mortgage. You have the money to pay it off. Should you invest the money or pay off the mortgage.

Here is what the mortgage will cost you over the next 30 years:
$160k at 5.875%:
1. Payments of $946.94 per month PITI
2. Total Repaid: $340,725.60
3. Total Interest Paid: $180,725.60 (Deductable)

Here is what you would have if you invested the money and made 5.875%:
Year Start Rate End
1 $160,000 0.05875 $169,400
2 $169,400 0.05875 $179,352
3 $179,352 0.05875 $189,889
4 $189,889 0.05875 $201,045
5 $201,045 0.05875 $212,857
6 $212,857 0.05875 $225,362
7 $225,362 0.05875 $238,602
8 $238,602 0.05875 $252,620
9 $252,620 0.05875 $267,461
10 $267,461 0.05875 $283,175
11 $283,175 0.05875 $299,811
12 $299,811 0.05875 $317,425
13 $317,425 0.05875 $336,074
14 $336,074 0.05875 $355,818
15 $355,818 0.05875 $376,722
16 $376,722 0.05875 $398,855
17 $398,855 0.05875 $422,287
18 $422,287 0.05875 $447,097
19 $447,097 0.05875 $473,364
20 $473,364 0.05875 $501,174
21 $501,174 0.05875 $530,618
22 $530,618 0.05875 $561,792
23 $561,792 0.05875 $594,797
24 $594,797 0.05875 $629,741
25 $629,741 0.05875 $666,739
26 $666,739 0.05875 $705,909
27 $705,909 0.05875 $747,382
28 $747,382 0.05875 $791,290
29 $791,290 0.05875 $837,779
30 $837,779 0.05875 $886,998

So, you would have paid about $181k to the bank (all deductable at your highest tax rate). But you would have $867k in investments.



You're forgetting two factors, biggest one is the income tax due each year for 30 years on the investment gains, figure about 25% of your gains will be eaten up by income taxes each year.

Secondly, what will a 160K house be worth after 30 years, say it appreciates at a modest 4% each year.

So it's not really having $867K vs a $160K house, it's really:
$867K - shitload of income taxes) vs (a super appreciated 160K house + shitload of income tax writeoffs)

A simplistic estimate on taxes is 867K-160K = $707K, 25% of that is $176,750, leaving you with
$530,250.

After 30 years, say the house is worth 160K *1.04 *1.04*1.04...1.04 = $589,000 using calculator at http://www.moneychimp.com/calculator/compound_interest_calculator.htm using 160K, 30 years, 4% interest.

assuming 25% tax bracket, writing off $180,000 is worth about $45,000, so after 30 years you have a $589,000 house + $45000 extra income due to tax write offs or you got $634,000 total out of the deal vs $530, 250


ETA: also, if you dont have a mortgage, you have to add rent for 30 years to your 160K investment scenario. Say your rent is $1000 a month (cause you have no mortgage), now you're left with $530-360K = $170K, or you made $10,000 over 30 years on your 160K investement
Link Posted: 7/31/2005 7:36:50 PM EDT
[Last Edit: 7/31/2005 7:54:50 PM EDT by Q3131A]

Originally Posted By AssaultRifler:

Originally Posted By Q3131A:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



Actually if you get the same rate on your investment you'll have more money.

As you have said, you have a $160k mortgage. You have the money to pay it off. Should you invest the money or pay off the mortgage.

Here is what the mortgage will cost you over the next 30 years:
$160k at 5.875%:
1. Payments of $946.94 per month PITI
2. Total Repaid: $340,725.60
3. Total Interest Paid: $180,725.60 (Deductable)

Here is what you would have if you invested the money and made 5.875%:
Year Start Rate End
1 $160,000 0.05875 $169,400
2 $169,400 0.05875 $179,352
3 $179,352 0.05875 $189,889
4 $189,889 0.05875 $201,045
5 $201,045 0.05875 $212,857
6 $212,857 0.05875 $225,362
7 $225,362 0.05875 $238,602
8 $238,602 0.05875 $252,620
9 $252,620 0.05875 $267,461
10 $267,461 0.05875 $283,175
11 $283,175 0.05875 $299,811
12 $299,811 0.05875 $317,425
13 $317,425 0.05875 $336,074
14 $336,074 0.05875 $355,818
15 $355,818 0.05875 $376,722
16 $376,722 0.05875 $398,855
17 $398,855 0.05875 $422,287
18 $422,287 0.05875 $447,097
19 $447,097 0.05875 $473,364
20 $473,364 0.05875 $501,174
21 $501,174 0.05875 $530,618
22 $530,618 0.05875 $561,792
23 $561,792 0.05875 $594,797
24 $594,797 0.05875 $629,741
25 $629,741 0.05875 $666,739
26 $666,739 0.05875 $705,909
27 $705,909 0.05875 $747,382
28 $747,382 0.05875 $791,290
29 $791,290 0.05875 $837,779
30 $837,779 0.05875 $886,998

So, you would have paid about $181k to the bank (all deductable at your highest tax rate). But you would have $867k in investments.



You're forgetting two factors, biggest one is the income tax due each year for 30 years on the investment gains, figure about 25% of your gains will be eaten up by income taxes each year.



Yep. But as my grandfather told me when you are paying more money in taxes, it means you are making more money. Oh, and you can use that tax deduction from your mortage to offet your gain in wealth from your invetments.

Also, even if you paid 25% on the $867k, that still leaves over $650k.



Secondly, what will a 160K house be worth after 30 years, say it appreciates at a modest 4% each year.



Yep, but it will still be worth the same whether you had a mortgage or not.


So it's not really having $867K vs a $160K house, it's really:
$867K - shitload of income taxes) vs (a super appreciated 160K house + shitload of income tax writeoffs)



Nope, it's having both.



A simplistic estimate on taxes is 867K-160K = $707K, 25% of that is $176,750, leaving you with $530,250.


Not really.

It's $867k - 25% taxes = $650k AND $181k interest with 25% deductability ($45k) AND a $160k house at 4% coumpounding interest = $519k.

Total net worth = 1.214 Million. And that is only if you make 5.875% on your investments.



After 30 years, say the house is worth 160K *1.04 *1.04*1.04...1.04 = $589,000 using calculator at http://www.moneychimp.com/calculator/compound_interest_calculator.htm using 160K, 30 years, 4% interest.

assuming 25% tax bracket, writing off $180,000 is worth about $45,000, so after 30 years you have a $589,000 house + $45000 extra income due to tax write offs or you got $634,000 total out of the deal vs $530, 250



vs $1.21 million if you make 5.875%.
vs $1.9 million if you make 8%
vs $2.7 million if you make 10%
vs $4.2 million if you make 12% (all including taxes paid)



ETA: also, if you dont have a mortgage, you have to add rent for 30 years to your 160K investment scenario. Say your rent is $1000 a month (cause you have no mortgage), now you're left with $530-360K = $170K, or you made $10,000 over 30 years on your 160K investement



Additional: In your ETA, you miss the opportunity of say 7 10 or 15 years of compounding interest that it takes you to pay off your mortgage.

Not only that, once you pay off your mortgage, you probably don't have enough deductions to exceed the standard deduction. So, you miss out on the opportunity to deduct your property taxes, car taxes and other items that become deductable when you have a mortgage.

It feels good to pay off your house, but that good feeling costs you alot of opportunity.
Link Posted: 7/31/2005 7:46:38 PM EDT
Most of the time a home will appreciate in value at a rate higher than a mortgage loan will.

So why not put 20% down and invest the rest conservatively? (spelling?)
Link Posted: 7/31/2005 7:58:54 PM EDT

Originally Posted By txgp17:
Most of the time a home will appreciate in value at a rate higher than a mortgage loan will.

So why not put 20% down and invest the rest conservatively? (spelling?)



Home appreciation has nothing to do with whether you have a mortgage rate or not. The real question is whether it is worth trying to pay off your mortgage early OR taking that "extra" money and investing it.
Link Posted: 8/1/2005 6:52:40 PM EDT
[Last Edit: 8/1/2005 6:54:33 PM EDT by txgp17]

Originally Posted By Q3131A:
Home appreciation has nothing to do with whether you have a mortgage rate or not. The real question is whether it is worth trying to pay off your mortgage early OR taking that "extra" money and investing it.


Q3131A,
I agree with you on the blue sentence because basically reinterated the original question. But I disagree with you about the sentence in red. The rate at which your home is appreciating in value, compared to the rate at which you can borrow $$$ on it is the real question.

I have a mortgage at 5% fixed. Assuming I had the cash on hand to pay it off, I would be a fool to do so if I could find an investment that paid anything greater than 5%, but that only holds true if my home remains at a fixed value. If my home to appreciated at a rate of 3%, then an investment that paid only 2% would be my "indifference point" in the decision making process.

Suppose my home appreciates at a rate of 6%. Now, if I have a mortgage rate of 5%, then I'm making a 1% gain on that loan just buy keeping my "mother load" of cash in a savings account. It's no different than finding a lender who will loan you money at a certain percentage and then finding someone to loan it to at a higher percentage. You make a profit without actually using your own money.
Link Posted: 8/1/2005 6:55:25 PM EDT
Link Posted: 8/2/2005 3:50:47 AM EDT
This is why ARFCOM is so great.

Awesome thread.
Link Posted: 8/2/2005 6:42:29 AM EDT

Originally Posted By txgp17:

Originally Posted By Q3131A:
Home appreciation has nothing to do with whether you have a mortgage rate or not. The real question is whether it is worth trying to pay off your mortgage early OR taking that "extra" money and investing it.


Q3131A,
I agree with you on the blue sentence because basically reinterated the original question. But I disagree with you about the sentence in red. The rate at which your home is appreciating in value, compared to the rate at which you can borrow $$$ on it is the real question.

I have a mortgage at 5% fixed. Assuming I had the cash on hand to pay it off, I would be a fool to do so if I could find an investment that paid anything greater than 5%, but that only holds true if my home remains at a fixed value. If my home to appreciated at a rate of 3%, then an investment that paid only 2% would be my "indifference point" in the decision making process.

Suppose my home appreciates at a rate of 6%. Now, if I have a mortgage rate of 5%, then I'm making a 1% gain on that loan just buy keeping my "mother load" of cash in a savings account. It's no different than finding a lender who will loan you money at a certain percentage and then finding someone to loan it to at a higher percentage. You make a profit without actually using your own money.



I'm sorry, but your post doesn't make sense to me.

Your home is an asset. The asset appreciates at the same rate whether it is paid off or has a mortgage.

House: $100k with no mortgage appreciates at 4%. It is worth $104k at the end of the year.

House: $100k with $80K mortgage appreciates at 4%. It is worth $104k at the end of the year.

A mortgage is a liability, but it does not affect the appreciation rate of your asset.


The real question is should you make prepayments on your mortgage in order to pay it off early. I say "No"; as long as you can afford your payments. Of course if you can't afford your payments, you would not be making pre-payments.

When you make pre-payments, you earn practically nothing on your money. You forstall a small amount of deductable interest. However, if you invested the money, you would be able to take advantage of compounding interest. By the time you pay off your house, you have much more money by investing.


Also, if you make the same percentage as your mortgage, you still come out ahead! See my previous post with example.


In the $160k example above:

If it takes you 10 years to pay off your 30 year mortgage and then you start investing you need to make up:
$107k at 5.875%
$185k at 8%
$254k at 10%
$336k at 12%

The opportunity cost of paying off your mortgage is HIGH! (Provided you invest the money insead of spending it).
Link Posted: 8/2/2005 6:57:23 AM EDT
Q3131A,
What I' saying is that it is unwise to pay off any mortgage if you can invest the $$$ in something that pays at a rate higher than the mortgage interest rate is.

The only exception is if you got less than 20% equity, you should at least pay that amount so you can drop you PMI.
Link Posted: 8/2/2005 9:29:46 AM EDT

Originally Posted By txgp17:
Q3131A,
What I' saying is that it is unwise to pay off any mortgage if you can invest the $$$ in something that pays at a rate higher than the mortgage interest rate is.

The only exception is if you got less than 20% equity, you should at least pay that amount so you can drop you PMI.



I agree, but even if you make the same rate as your mortgage, you still come out ahead. See my 5.875% example above.
Link Posted: 8/3/2005 2:18:20 AM EDT
[Last Edit: 8/3/2005 6:00:59 AM EDT by AssaultRifler]

Originally Posted By Q3131A:

Actually if you get the same rate on your investment you'll have more money.

As you have said, you have a $160k mortgage. You have the money to pay it off. Should you invest the money or pay off the mortgage.

Here is what the mortgage will cost you over the next 30 years:
$160k at 5.875%:
1. Payments of $946.94 per month PITI
2. Total Repaid: $340,725.60
3. Total Interest Paid: $180,725.60 (Deductable)

Here is what you would have if you invested the money and made 5.875%:
Year Start Rate End
1 $160,000 0.05875 $169,400
2 $169,400 0.05875 $179,352
3 $179,352 0.05875 $189,889
4 $189,889 0.05875 $201,045
5 $201,045 0.05875 $212,857
6 $212,857 0.05875 $225,362
7 $225,362 0.05875 $238,602
8 $238,602 0.05875 $252,620
9 $252,620 0.05875 $267,461
10 $267,461 0.05875 $283,175
11 $283,175 0.05875 $299,811
12 $299,811 0.05875 $317,425
13 $317,425 0.05875 $336,074
14 $336,074 0.05875 $355,818
15 $355,818 0.05875 $376,722
16 $376,722 0.05875 $398,855
17 $398,855 0.05875 $422,287
18 $422,287 0.05875 $447,097
19 $447,097 0.05875 $473,364
20 $473,364 0.05875 $501,174
21 $501,174 0.05875 $530,618
22 $530,618 0.05875 $561,792
23 $561,792 0.05875 $594,797
24 $594,797 0.05875 $629,741
25 $629,741 0.05875 $666,739
26 $666,739 0.05875 $705,909
27 $705,909 0.05875 $747,382
28 $747,382 0.05875 $791,290
29 $791,290 0.05875 $837,779
30 $837,779 0.05875 $886,998

So, you would have paid about $181k to the bank (all deductable at your highest tax rate). But you would have $867k in investments.



This isn't a a fair comparison. Here's the scenario as I understand it.

You have $160,000 with the option to either

Option 1. buy the house outright for $160,000

Option 2. put the $160,000 as a lump sum into a savings account that pays 5.875% interest plus take out a $160,000 mortgage at 5.875 a month (payment is $946.94)


This is an invalid comparison. Because if the person in Option 2 can pay out $946.94 a month for 30 yearss, then so can the Option 1 person. So the real scenarios to compare are:

Option 1. buy the house outright for $160,000 and put $946.94 a month into a savings account that pays 5.875% interest.

Option 2. put the $160,000 as a lump sum into a savings account that pays 5.875% interest plus take out a $160,000 mortgage at 5.875 a month (payment is $946.94)


I found a savings calculator at www.dinkytown.net/java/CompoundSavings.html

Lets see what the assets of Option 1 person is after 30 years, assume the house doesn't appreciate, or assume it does, because it doesnt matter, both person in Option 1 and 2 will have the same house in our scenario:

Option 1. buys house at 160,000 + ($0 starting amount + $946 additional contribution a month for 30 years at 5.875% interest compounded monthly) = $160,000 + $933,301 = $1,093,301

Option 2. gets mortgage for house at $160,000 + ($160,000 starting amount + $0 additional contribution a month for 30 years at 5.875% interest compounded monthly) = $160,000 + $929,704 = $1,089,704


So via the calcuator

Option 1: $1,093.301
Option 2. $1,089.704

A mere $4,000 or so difference, I suspect it's really $0.00 difference but the calculator has some rounding errors. But it's no where near the $867K vs $181K difference.

Now the taxes come in.

Option 1 results in taxes on gains of $933,301 - 360*946 = $933,301 - $340,560 = $592,741
Option 2 results in taxes on gains of $929,704 - $160,000 = $769,704 but also gets to write off
$180,725.60 in interest so total taxes are on $769,704 - $180,725.60 = $588,978.75

$592,741 vs $588,978.75 is a draw

Moral of the story is, after 30 years of putting $946.94 either towards a mtg and investing $160,000 or having $0 mortgage and putting $946.94 a month in a savings account at 5.875% or whatever % you want, you'll end up exactly the same!

Link Posted: 8/3/2005 3:00:25 AM EDT

Originally Posted By RTOinIraq:

Originally Posted By ARDOC:
If you can get a higher rate of return on your money then the interest rate on your mortgage then invest it. You also get a tax break on a mortgage loan.



+1
thats good advice



+1 but also keep in mind your age and other deductions (kids). If you are young and don't and won't have kids, you've got nothing to declare on the taxes...and that can hurt.

If you don't already have some sort of retirement plan (IRA/401K) I suggest an IRA: aggressiveness also determined by the age factor.
Link Posted: 8/3/2005 3:05:46 AM EDT

Originally Posted By mjrowley:
I have no idea..

just want to see the replys



me too, my wife does all that crap....
Link Posted: 8/3/2005 7:05:00 AM EDT

Originally Posted By AssaultRifler:
Moral of the story is, after 30 years of putting $946.94 either towards a mtg and investing $160,000 or having $0 mortgage and putting $946.94 a month in a savings account at 5.875% or whatever % you want, you'll end up exactly the same!



5.875% yearly is .004769 monthly; approximately. At these numbers at the end of 30 years, you have $887k by investing the $160k at the start. Most of the taxes are offset by interest paid to the bank.

By investing the $946 per month for 360 months, you have almost the same, but there were no interest deductions to offset the gains. So, you had to pay taxes on the whole gain. Either you pay them out of your pocket or take them from the prinicpal thereby reducing your gain. I simply don't have the time to creat an all encompassing spreadsheet to illistrate.

I tried to illistrate by making the example simple. You have made it more complex, but it is still over simplified. To properly illustrate why you have more by taking a mortgage, a amortization program. Then you need to include taxible gains vs interest paid. Even that is an oversimplfied example. When you have a mortgage, you gain other deductions above the standard deduction. This makes your property taxes and charitable gifts deductable. So, you need to forecast your taxes and income for 30 years.

However, if you invest $160k, you should make a high percentage than 5.875. Even if you make a measly 8%, you far exceed the benefit of paying off your house.

More later.

Link Posted: 8/3/2005 7:16:16 AM EDT
[Last Edit: 8/3/2005 7:35:21 AM EDT by Essayons]
Interesting question. It depends

The primary thing the mortgage gets you is a tax deduction (mortgage interest deduction). The value of the deduction is the amount of your mortgage interest payments for the year times your marginal rate (I'm simplifying a little bit).

Example: If you pay $100 a year in mortgage interest and your marginal tax rate is 20%, the tax benefit is $20. BUT what did the $100 buy you? Nothing (for most of us) - It may as well have been rent. That suggests paying off the mortgage, BUT be sure to save and invest what you would have paid, preferably in a tax advantaged vehicle like a 401k. I'd only keep the mortgage if YOU (not a salesman) are confident YOUR INVESTMENTS will yield more than your mortgage rate.

Another benefit the mortgage payment gets you is a payment history for your credit score. You can maintain that by opening a home equity line of credit (HELOC) on your paid off hous and using a small portion of it for improvements to the property. Among other things, credit scorers like to see (1) that you have access to credit, (2) that you use it conservatively (not maxed) and (3) you consistently pay on time. The HELOC will get you all that.

OTOH, if you want a second home and can afford the interest, then the tax benefit of both mortgages effectively subsidizes the purchase of the second home.

It all depends on your priorities. I have a great rate, so it would not be difficult to make investments that would yield more long-term. However, AFTER I max my 401k, I make extra principal payments on my mortgage because eventually my wife will stay home with the kids and we'll lose her income. At that point, I'll pay $200 to have the note re-amortized based on the new principal amount, which will reduce the payment while maintaining our current rate. That way we can live in the manner to which we have become accustomed on my income alone.
Link Posted: 8/3/2005 7:30:05 AM EDT

Originally Posted By Q3131A:

Originally Posted By AssaultRifler:
Moral of the story is, after 30 years of putting $946.94 either towards a mtg and investing $160,000 or having $0 mortgage and putting $946.94 a month in a savings account at 5.875% or whatever % you want, you'll end up exactly the same!



5.875% yearly is .004769 monthly; approximately. At these numbers at the end of 30 years, you have $887k by investing the $160k at the start. Most of the taxes are offset by interest paid to the bank.

By investing the $946 per month for 360 months, you have almost the same, but there were no interest deductions to offset the gains. So, you had to pay taxes on the whole gain. Either you pay them out of your pocket or take them from the prinicpal thereby reducing your gain. I simply don't have the time to creat an all encompassing spreadsheet to illistrate.

I tried to illistrate by making the example simple. You have made it more complex, but it is still over simplified. To properly illustrate why you have more by taking a mortgage, a amortization program. Then you need to include taxible gains vs interest paid. Even that is an oversimplfied example. When you have a mortgage, you gain other deductions above the standard deduction. This makes your property taxes and charitable gifts deductable. So, you need to forecast your taxes and income for 30 years.

However, if you invest $160k, you should make a high percentage than 5.875. Even if you make a measly 8%, you far exceed the benefit of paying off your house.

More later.




In my example, paying off the house and putting $946.94 in savings I get to take advantage of higher interest rates as well. If y ou're going to use 8% as an interest rate for your lump sum example, the person putting $946.84 away each month gets to use a 8% interest rate as well

I think it boils down to if you can make more interest on investment than your current mtg interest rate, it's a good deal.
Link Posted: 8/3/2005 9:23:34 AM EDT
[Last Edit: 8/3/2005 10:09:34 AM EDT by Q3131A]

Originally Posted By AssaultRifler:
In my example, paying off the house and putting $946.94 in savings I get to take advantage of higher interest rates as well. If y ou're going to use 8% as an interest rate for your lump sum example, the person putting $946.84 away each month gets to use a 8% interest rate as well

I think it boils down to if you can make more interest on investment than your current mtg interest rate, it's a good deal.



Great, let's use 11% since that is a little less than the average stock market return.

But, since most people don't have money to buy their house outright, let's use an example like yours where you are taking your extra money and applying it to your principal.

Parameters: $250k house with a $50k down payment. Interest rate of 6% fo 30 years. All gains taxable by 25%.

Payment of: $1200 - Property Taxes: $250 per month.
Prepayment of: $500 per month then the full $1,700 invested.

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