OT: Not Paying Off Your Mortgage

[cmg]

Bought into a less desirable neighborhood but it was larger sq. ft than needed, easily affordable, spent next 5 years attacking the principle and paid it off. Spent the next 18 years investing through my work savings plan. Sure taxes and maintenance costs are always there but those are minimal and can be planned over months. i know people that did what the OP is talking about. Starting to invest at 61 is a bit too late in the game. retirement will come knocking when he hits 70.

[echappist]

Originally Posted by Ozz

Don't forget, mortgage interest is no longer deductible on new mortgages (maybe all?), and most older mortgages due to the new tax law.....

that's incorrect; interest may be deducted on the first 750k of debt

whether it would make sense to deduct those interest in a whole separate issue, given that for a married household, the annual interest payment per se needs to be greater than ~$14k (assuming $10k in paid in SALT) in order for it to make sense

[Gummee]

Originally Posted by Ken Robb

I read that they took the money that were no longer going to pay a mortgage and invested it in the market not that they hid it in the walls?

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

[Mzilliox]

i dont like owing people money, do you?

[Blown Reek]

Originally Posted by Mzilliox

i dont like owing people money, do you?

No, but how else are you going to leverage that sweet equity in your house in order to live the dream of compounding interest that comes from stock market certainity?

[C40_guy]

Originally Posted by Blown Reek

No, but how else are you going to leverage that sweet equity in your house in order to live the dream of compounding interest that comes from stock market certainity?

Stock market certainty?

The only thing certain about the stock market is that it will go up and it will go down.

The problem is, almost nobody knows which and when.

[Mzilliox]

Originally Posted by Blown Reek

No, but how else are you going to leverage that sweet equity in your house in order to live the dream of compounding interest that comes from stock market certainity?

i dont know? good point, haha. Sometimes i wonder if im in the right country.

One thing is for certain, if i pay off my house very soon, which i will, then i wont be paying a house payment at all. and my house payment money can go right to savings. and i will have equity available to borrow against should i ever want to acquire more property. or money available for a monthly payment, since i no longer have one of thems. stock markets are at least 30% fake stuff but land and water are always real.

of course im sure i could screw over more people, invest into something crappy that makes money and pollutes the earth, make some rich guys richer, and leverage or something. but enough people do that already

[pdonk]

Financial need to be looked at in their entirety with an understanding of local housing markets, early payment penalties and tax implications.

One thing we did was get term life insurance in the same amount as our original mortgage in case something happened to one of us, at least that way the other person has the option to pay off the house.

Depending on their net worth and investment structures, your friend may want to look at and if its legal/possible in the US is to set up a mortgage to themselves from themselves through one of their "registered" investment accounts. In Canada this is possible, not sure of the rules in the US.

[tomato coupe]

Originally Posted by Mzilliox

i dont like owing people money, do you?

I think that's the primary motivation for people who pay off their mortgage early. There's absolutely nothing wrong with that approach but, in many cases, it isn't the best thing to do from a financial point of view.

[echappist]

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

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.

[veloduffer]

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!)

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

I don’t get this idea that investing in your house is worse than investing in equities. It’s a risk/reward tradeoff and there’s no certainty about equities over real estate. Real estate is an asset, just like stocks and bonds, and like those assets, it’s value can appreciate or decline. For the most part, there is a demand for housing, which can provide support for price levels. But every market is different, as well as every house and needs to be evaluated.

I’ve been reading some of the replies and it amazes me that so many folks seemingly think (or at least biased in their thinking) that the past performance of the equity markets is a reliable indicator of the future, and that after the next cycle the equity markets will take off again.

When you look at the changes in the macro economy and demographic shifts (aging is global risk), long term growth looks weak globally for several years. The US deficit and debt will be a constraint, as will China’s slowdown and transition from a manufacturing economy to services & consumption. Add geopolitical risks (China/US, Japan/Korea, Iran, India/Pakistan, Russia) and climate change to the mix too.

[tomato coupe]

Originally Posted by echappist

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...

The chance of a net negative return in the next 20 years is vanishingly small. The absolute worst performing 20-year period of the stock market spanned the Great Depression, yet it still produced 2.5% per year. In more recent times (i.e. the last 50 years) the worst performing 20-year period produced a 6.4% return per year.

[tomato coupe]

Originally Posted by veloduffer

I don’t get this idea that investing in your house is worse than investing in equities. It’s a risk/reward tradeoff and there’s no certainty about equities over real estate. Real estate is an asset, just like stocks and bonds, and like those assets, it’s value can appreciate or decline.

Yes, both are assets that can increase and decrease in value. Historical, however, the stock market has increased in value more than real estate. For instance, from 1928 to 2013 the stock market increased at an average rate of 9.5% per year, while real estate increased at an average rate of 3.7% per year.

Real estate has done better in recent years. From 1975 to 2013, the average annual increase for the stock market and real estate were 7.6% and 4.3%, respectively.

[echappist]

Originally Posted by tomato coupe

The chance of a net negative return in the next 20 years is vanishingly small. The absolute worst performing 20-year period of the stock market spanned the Great Depression, yet it still produced 2.5% per year. In more recent times (i.e. the last 50 years) the worst performing 20-year period produced a 6.4% return per year.

you quoted the following (emphases added) from my original post

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).

that was a rather disingenuous quoting out of context, and you certainly didn't address the issue of sequence of returns (which is a concern to people in early 60s if they want to use that money in their 70s)

[Ozz]

Originally Posted by echappist

that's incorrect; interest may be deducted on the first 750k of debt

whether it would make sense to deduct those interest in a whole separate issue, given that for a married household, the annual interest payment per se needs to be greater than ~$14k (assuming $10k in paid in SALT) in order for it to make sense

duh...you're right.....sorry, geographical bias and not enough coffee.

interesting perspectives here...lots of valid points, but need to be viewed via the subjects risk tolerance, age, and other financial needs.

Some people don't like debt...other are comfortable with the concept of leverage. Others are too comfortable....

best advice I saw was was to talk to a fiduciary, and not someone trying to sell something...review all assets and liabilities, project a budget for expected lifespan (100?) and develop a plan to generate income for lifespan and meet other objectives. BTW - I am not a fiduciary