In my research it is always a better option to pay it off as fast as possible; even with a mortgage your best bet is to pay the house off as soon as you can. Just like in your previous house purchases the interest would still be making you pay more than just paying what ever you can when you can to get it paid of faster.
Everything you need to know before for your mortgage
With that said. . . . . Should one then pay down the mortgage as quick as possible or sink that extra money into a tax deferred supplemental retirement fund? I suppose it depends on the interest rate that you have on your home loan. Comments?
The best investment is to be debt free. Always.
It depends.
You need to do some net present value calculations to compare the cost of paying down to not paying down versus other opportunities for placing your money. When home mortages were much higher rate it was tough to find safe investments to compete with buying down your mortgage. Folks who consistently did better than buying down a mortage were either psychic, very lucky, or maybe were into insider trading (sorry Martha.)
With lower mortgage rates and the current investment climate, I'm not sure buying down your mortgage will compete well with say a decent REIT (Real Estate Investment Trust) as an alternative investment but the mortgage is essentially backed by your real estate value. When you get 'er payed off it needs to have enough intrinsic value to have made it a good investment. A REIT won't have a guaranteed income but you should be able to get your money back as a typical worst case. What little experiences I have had over the past decades with REIT is very positive.
[img]/forums/images/icons/smile.gif[/img] Pat [img]/forums/images/icons/smile.gif[/img]
"I'm not from your planet, monkey boy!"
There a scenario that you might be able to take advange of a mortgage to save a few $$ and still be relatively risk free. This probably the only situation where a mortgage actually have an advantage.
If you are in a high income tax bracket (for example: 35% Fed & 10% state):
You take a $100,000 mortgage and pay 6% interest. Your annual interest cost is $6,000 (simple interest for the sake of this illustration) It costs you $6,000 per year.
You can recover that cost and a little extra by the following:
Take the deduction and save $6,000 * 45% = $2,700.
Invest the $100,000 in a tax free "insured" municipal bond that pays say 4% interest. $100,000 * 4% = 4,000
You will be $700 ahead. Of course, this assumes your tax rate doesn't change and you hold on to the bond for the next 30 years.
I'm not going to delve into much of the book but I'm in the middle of reading "Missed Fortune" by Douglas R. Andrew Missed Fortune website
I'm not affiliated with them.
A quick lowdown of what I've read so far...
Maximize !!! your mortgage, take the deduction. If you have built up equity, take it OUT
Put your equity into a Equity Indexed whole life policy. You can get immediate coverage that will exceed your mortgage (so immediate payoff if you pass away), you can get cash build up that later in life you can access tax free...
(again, I'm not pimping the idea, I'm just reading the book to better understand it)
He contends that (for example), he who OWNS his home free & clear is at more risk than he who has an 80% mortgage on it.
Example: Katrina. Take 2 $300K houses. Katrina blew them away. The guy who had his house fully paid for has lost everything. Yes we have insurance yada yada... BUT he's still fighting that fight probably.
Now the other guy who owned the house next door, also valued at $300K BUT had drawn 200K of his equity OUT and placed into an investment grade vehicle, not only still has access to that cash via equity value (unlike the first guy), he also probably also has insurance.
My (butchered) point that he's trying to say is by keeping the equity OUT of your house and under YOUR control, you can over time, substantially increase your liquidy AND net worth.
Example 2 and then I'm done (cause again, I'm not preaching FOR him, just trying to shake the thinking a bit)
#2 You own your house free & clear. It's worth $200,000. Markets go up 5% over next year. Your new net worth is now $210,000 fair?
Ok, what if you took $100K of that equity out and put it into an investment grade vehicle (which I'm now finding out is a equity indexed whole life policy).
Market goes up, your house STILL appraises for $210,000 right? so no change there. The house has no idea if you hav a mortgage on it, nor how much.
The $100K you withdrew & reinvested however, is now worth $105K.
So you add these back and your net GAIN, is $15,000 and not $10,000.
Before someone points out what might be obvious... he does clearly indicate you want to put your money into something that has ZERO downside risk so if the market DOES tank out, you won't be damaged.
Ok, disclaimer again, I'm not pimping the idea, nor them. I'm not affilated in any way.
I am simply reading the book and I must admit, it is really shaking some of the traditional concepts I'd had (ie, pay house off early)
It's FULL of examples and frankly, is easy/interesting reading.
I'm suggesting that if anyone cares about their financial future, go ahead & spend the $25 on the book and read it. Make up your own mind if some of the examples make sense. I didn't think I'd be swayed and I'm STILL going to look for some numbers to back the logic.
I'm about 1/2 way through the book and as boring as the book might sound, I can't wait to get back into reading it to see the rest of the ideas.
It's a VERY interesting book. Get it!
I am trying to think of anything that has zero risk but produces a 5 percent return per year....
The other side of his equation is, mortgate that 100,00 house fully, then the real estate market drops 25 percent for that property, then you owe $100,000 on a property worth $75,000.
If you invested that 100,000 in something that turns out to have a bit more than zero risk, and that turns south, you now are out that 100,000 and still owe 100,000 on a property worth 75,000.
Where as the guy next door who paid off his propery now sits in a mortgage free house riding out he current fall in real estate values ( and apparently a recession as your investment tanked as well ).
Personally, debt free is my goal in life, I am slowly working my way there. The less you owe on your house, car, whatever, the less chance of losing it if you have a shortfall in income due to illness, job loss, whatever.
ingdirect.com has some interesting CD rates, 4.4% for a 12 mo, 4.8% for a 60mo. In my estimation, you'd be better off with a 12mo deal as rates are going up.
Here's my 2 cents....
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >>>>
Example: Katrina. Take 2 $300K houses. Katrina blew them away. The guy who had his house fully paid for has lost everything. Yes we have insurance yada yada... BUT he's still fighting that fight probably.
Now the other guy who owned the house next door, also valued at $300K BUT had drawn 200K of his equity OUT and placed into an investment grade vehicle, not only still has access to that cash via equity value (unlike the first guy), he also probably also has insurance.
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >>>>
Taking equity OUT of your house does not eliminate or reduce your risk of Katrina. YOU still own the bank $200k and have to continue making payments even the house is no longer there. If your payment is greater than the return of your investment (which always the case unless you are taking greater risk and the market condition is in your favor).
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >>>
My (butchered) point that he's trying to say is by keeping the equity OUT of your house and under YOUR control, you can over time, substantially increase your liquidy AND net worth.
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >>>
It may increase your liquidity but NOT neccessary net worth. You are taking additional risk. It could increase or decrease depending on your luck. For zero risk, you are garantee to decrease your net worth.
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >>>>>>>
#2 You own your house free & clear. It's worth $200,000. Markets go up 5% over next year. Your new net worth is now $210,000 fair?
Ok, what if you took $100K of that equity out and put it into an investment grade vehicle (which I'm now finding out is a equity indexed whole life policy).
Market goes up, your house STILL appraises for $210,000 right? so no change there. The house has no idea if you hav a mortgage on it, nor how much.
The $100K you withdrew & reinvested however, is now worth $105K.
So you add these back and your net GAIN, is $15,000 and not $10,000.
>>>>>>>>>>>>&g t;>>>>>>>>>>>> >
You are making a BIG assumption here. "equity indexed whole life policy" does not garantee you don't lose money. Your $100,000 can go to zero. There's something called "credit risk". The company wrote the policy can go south. Your policy will worth nothing regardless of it's book value. This is just another form of annuities. It garantees a certain return as long as everything works out well for the company.
The book simply gave you an investment idea that may work to your advantage under normal circumstances. The author should at least point out there's a downsize to this idea.
This house financing example has me really confused. I'm just not good at math!
No way can I get those quoted numbers to add up. It seems there is an unaccounted 100K there somewhere which I can't seem to find. [img]/forums/images/icons/confused.gif[/img] [img]/forums/images/icons/confused.gif[/img]
Egon [img]/forums/images/icons/confused.gif[/img]
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