Quote:
Originally Posted by Gummee
If you're paying off your home, you're shoving money into the walls that you could be using to build a nest egg that will allow you to pay off the house whenever you want. ...which is more important these days than it was in your parent's time. Your parents were the last to have a pension. (aka annuity!)
You and I are in different circumstances. There's no lifetime of income coming automatically every month. ...but yet... Last generation's thinking is still being preached as gospel.
Shoving $ into something that you can't get it out of in need: your home means you're not investing into something that's earning you interest. It takes less $ to invest over a long period of time to get to the same point as paying off the house then investing. ...or... you can invest slightly more and really come out ahead
M
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we have to remember that the people in question are in the early 60s, and there is a higher likelihood of net negative return for the next 15-20 years in the equity market, compared to people who have 35-40 years to go for investing. Even if it is not net negative for the next 15-20 years, the sequence of returns will affect the final balance quite a bit (unless that money doesn't get touched for 15-20 years).
next, even assuming one could get a positive return in the equity market, the exposure is likely quite small. The amount invested per month is the difference in the mortgage payments, and I'm not sure how much it may be. However, for a loan size of $400k, the difference in monthly principal + interest payment is about $1k, when comparing principal + interest payment difference on a 15 yr loan at 3.25% vs 30 yr at 3.65%. So $12k extra per year (but if one were sane, not all that $12k should be exposed to the equity market), at return of 7%, after 10 years, $144k worth of investment principal is put in, and the investment return is ~$20k. Of course, a sane person would only put in at most 50% of the monthly investment into equity, while leaving the rest in bonds, so the investment return is likely lower.
And here's the rub, as most people who look into their finances know, it takes a long time (usually 20-30 years) for the annual investment returns to exceed annual investment contributions.
Of course, investment returns in the long term will be substantial, but we are talking someone in his 60's.
Which really returns to the heart of the issue, which is that if investment returns generated solely form difference in monthly mortgage payments is significant to one's net worth, the solution shouldn't be to go for a longer termed loan. The solution ought to be significant downsizing, so that one has add'l income (e.g. via SPIA) in retirement. This is especially true, if the annual real estate taxes are significant (which is likely the case in a state such as CT). If, on the other hand, this investment return doesn't mean jack s*** to one's net wealth (say this person already has $2M in retirement saving accounts + brokerage + home equity), this person has "won" the retirement planning game and should stay the eff out.