Is it better to pay off your mortgage early or invest the extra money?

[ringmastery]

I've always thought it was best to get rid of debt and pay off your mortgage on your home as soon as possible to avoid excessive interest rates.

Paying off your mortgage early and getting out of debt leaves you with more disposable income to do with as you please.

I like the idea of owning my home outright and that there is no way someone can come in and foreclose and kick me out of my home if I lose my job or can't make the mortgage payments.

The argument against paying your mortgage early is that you get an interest rate tax deduction and can invest more in the market.

The way things are going with the stock market now....I think I can get a hell of a lot more return on my investment in real estate which is increasing at 15%-20% a year right now where I live than the shitty stock market. It's much less riskier.

Am I missing something? Most articles I've read from financial planners say paying your mortgage off early is not wise, yet it makes perfect common sense to me.

[burythehatchet]

1. It depends on if u think that the world will end w/in 12 years

[Florida_Geek]

2. financial planners = salesmen

I do not know if this has changed, but in Canada you can not get a tax ded. for homes and some banks offer "weekly" mortgages.

No as one that has been out of work 3 years, having a house paid off makes the monthly living expense a lot lower.

[southerngirlwriter]

3. People who don't pay their home off because of the tax deduction

are not thinking clearly.

In one case, they were sending $10,000 in interest to the bank to save $3,000 in taxes. I told them to send me just half of what they usually pay in interest -- $5,000 -- and I'd pay their freaking taxes and keep the $2,000.

Pay it off.

There is a risk aspect to be considered here -- as you've laid out, once you own it free and clear, it can't be taken away. Also, 100% of the time that you pay your house off, you stop losing money in interest.

You're thinking clearly. Pay it off pronto.

[Lars39]

15. Also, all the previous money spent on monthly payments

will come in handy as property taxes and medicines go sky-high as you get older. Paying the mortgage off early allows you to do what you need to do to prepare for retirement.

[Dookus]

16. but you're miscalculating something

you're forgetting the investment income the money that would OTHERWISE be used to pay off the mortgage brings in.

If you're paying 6% on your mortgage, and can get a return on investment of 8% elsewhere, you're better off NOT paying your mortgage. You gain 2%, in addition to the interest deduction.

[southerngirlwriter]

19. That sounds fine on paper.

But real life happens.

A fuckwad gets selected pResident, the economy tanks, and your job ends up in India. You can't find another one.

You become disabled, and the income you get on your disability insurance isn't enough to keep up the mortgage payments.

Your child becomes disabled, and you have to quit your job to look after them. The new, more flexible job you find doesn't pay enough to make the payments.

You have to calculate risk into the equation. 100% of the time that your house is paid off, you stop losing money in interest. 100% of the time that your house is paid off, you have a place to live no matter who the BFEE puts in office or what the economy is doing. 100% of the time. Without any debt, you can then invest a lot more money every month without the risk.

[Dookus]

20. I wasn't arguing what-ifs

I was arguing your math.

[southerngirlwriter]

21. You should only look at math

if you live in a vacuum where unexpected things never happen and the best-laid plans of men always work out the way you expect.

[Dookus]

22. You're missing my point

You argued that people made a mathematical error by paying 10k for 3k. I pointed out you were leaving out a HUGE variable, which was the investment income from that money.

[southerngirlwriter]

23. you're missing mine, too

investment income is not guaranteed. No matter where you put your money, there's some risk. Even in mutual funds, there's some risk attached to it. When your house is paid off, the risks attached to an ENORMOUS number of real-life variables vanish. You can live there forever and ever and ever and ever and no one can take it away.

If his house was already paid-off, would you tell him to go get a mortgage on it so he could have money to play the stock market with? As long as he made enough money to meet the payments and just a few bucks more than that, he's "making" money. But what's he risking? I doubt you'd tell him to do that. That's basically what he's doing if he plays the markets instead of paying off his home.

[Dookus]

24. yes, I probably would

Let's move away from the mathematical issue (which you seem to not understand) and just say that if one has zero tolerance for risk, one should pay off one's mortage.

One should also refuse to get out of bed.

[southerngirlwriter]

25. I see a very big difference between taking the risk

of getting out of bed and taking the risk of losing the roof over one's head.

If you would take out a mortgage to have money to play the stock market with, despite having a paid-for home, you are either the purest optimist on this earth or have been very, very, very, very lucky in life, or both.

However, this math minor who is not the idiot you imply me to be hereby agrees to disagree.

Goodnight! :hi:

[Dookus]

26. I didn't call you an idiot

I simply said you made a mathematical claim that didn't take into account any of the other important variables.

Also, I never said the stock market was the only way to invest the money.

Goodnight.

[ayeshahaqqiqa]

4. Pay off the mortgage

My great grandmother said never to trust the stock market. Had something to do with what happened in October, 1929.

[NewHampshireDem]

5. Better to invest, especially now

You're already building equity in your home as it appreciates. The best thing about that equity is that it is leveraged at about 5-to-1--you probably put 20% down to buy your house. You can't do that with stocks, bonds, etc.

And, you are right about the tax advantages.

Take the "extra" money you have and put it into the market. Yes, I know it's down, but I never think of it as down--I think of it as being "on-sale." The mistake is buying when prices are going up, not when they have gone down.

You are also right about the peace-of-mind factor, which is why most folks who pay off their mortgage early do so.

You should check out a good financial site so you can get more in-depth info than I could give you here. I myself like www.fool.com

Good luck. :)

[Mr_Lefty]

6. I think invest

You are probably paying under 6% interest on your mortgage- If you think your investment will pay higher than 6% say 10% you would net 4%. Also mortgage interest is tax deductable. I'm an engineer but have a masters in management (MBA lite) - one of my accounting professors told the class to do two things: not pay off mortgage and open a Roth IRA (tax free).

[Dookus]

7. With rates as low as they are

you can invest the money relatively safely and make more money. PLUS you get the interest deduction.

[southerngirlwriter]

8. Also consider this

If * lets another terrorist attack happen, the markets will be shaken up. If * is re-selected, your job might be next on the chopping block. Peace of mind is worth a hell of a lot. If you have a paid-for house (and, one assumes, are not in debt elsewhere) -- then if * fucks the economy even harder, all you have to do every month is keep the utilities and phone turned on and groceries in the refrigerator. That's a hell of a lot easier to do when you're not worried about losing your house.

I am adamant about this because a friend got a $200,000 inheritance and instead of paying cash for a house, put half down and played the rest in the markets. He lost a great deal of that money, and now is about to lose his house because his job went to India. If he'd paid cash for the house in the first place, his life wouldn't be in the state that it's in.

Edited for a typo.

[Ugnmoose]

9. There is no right answer to this question

I am a Certified Financial Planner and I deal with this issue all of the time. The answer really depends on two points. They are:

1. How do you feel about debt. If you are someone that takes great comfort in being debt free you should pay off your mortgage.

2. Do you have the discipline and expertise to invest the monthly savings from paying off the mortgage into something that will earn you a better rate of return after taxes.

With mortgage rates at 40 year lows it can be tempting to borrow at 5% (possibly 3.5% after tax benefits) and reinvest in securities like bonds or other financial assets like dividend paying stocks, or REITs to get a better overall return. Obviously this requires more confidence on your part.

It sounds to me like you are someone who would sleep better being out of debt. If so then you should pay off the mortgage.

Good Luck

[ringmastery]

27. What do you think of balloon loans vs 30/15 yr fixed and ARM's?

In my situation, I'm thinking about buying a new home. I'm thinking that if I don't buy the new home outright in cash, a compromise might be a balloon loan. I can probably lock in a cheap 4.0-4.5% interest rate.

The risk with the balloon is if I can't make the final payment, I would have to sell the house or refinance in an unpredictable interest rate environment.

Barring a catastrophe, I should be able to make the final balloon payment without a problem and have five years growth in my investments on top of it.

[Broadslidin]

10. My plan

Hello Ringmastery, Good Luck, whatever you do.

My plan since entering the work force has been:

1.) Always paid cash for cars.
2.) Never carry a balance on a credit card.
3.) Thirty year fixed rate mortgage,
paid off in ten years.
4.) With the U.S. government debt approaching $7.2 Trillion,
government and corporations competing in the debt markets,
increasing energy costs and inflation,
weakness in the U.S. dollar and trade deficits,
weakness in home values when interest rates begin to rise,
Just a few reasons, I am accumulating cash at this time.
The current Dow Jones P/E is 19.22
5.) Have bought only common stocks and preferred
that are rated "A" by Standard and Poor and were experiencing
a lull in earnings. Drug companies are always closely watched.
A) Always look at the balance sheet.
As an example, Never get sucked into a company like
Ford Motor Co. which is currently $120 Billion in debt.
($155 Billion including Ford Motor Credit)
6.) Take a Look at no load, low expense ratio mutual funds such
as Vanguard and American Century.
7.) And probably most important, I have always had my attornies
draw up iron clad pre-neptual agreements.
If you like playing the odds, be aware in Oakland County, Michigan, the divorce rate is 63%.
The state of Nebraska has a divorce rate of 71%

[jobycom]

11. Investing is the trendy answer, but trendy doesn't always mean good

Business schools are teaching that you carry as small a payment as possible on as much money as possible and invest the rest, pointing out that if you pay 6% in interest on a home but could invest for an average of maybe 12% longterm in the stock market, you would come out ahead by holding the loan and investing the money you would pay it off with in the market.

There is a good mathematical reason for not doing that, though, and you nailed it. Risk. Carrying a loan carries risk-- risk of losing your house, risk of losing your job and having to spend your investment money making loan payments, etc. You also carry risk in the stock market, obviously. Even though the longterm average is pretty high for stock investments, there are dramatic falls, and there are always stocks that fall even when the market climbs. So there is always the risk that your stock will wipe out at just the wrong time, and then the averages won't work for you. If they wipe out just at retirement, and you've put everything into your stocks, then you could wind up with no house AND no stocks, and have to work another ten years to rebuild a nest.

The other factor is the real world. You are most likely to lose your job (and have trouble finding a new one) when the economy is bad, which is exactly the same time that your investments are likely to crash. If you own your house, you have less need for the money, and thus you will have more flexibility with the savings you have.

When businesses calculate expenses, they always factor in risk, yet the people telling you to dollar cost average in the stock market aren't showing you the risk. It is there. They make money by selling to you, so they are more worried about their retirement than yours.

Anyway, there are advantages to both. The least risky is paying off your house, for all the reasons you said. There is more risk in the investment method than you are commonly told, but it can be safe and more profitable if done properly. So it depends on what risks you want to take, and what you want when you retire. I was convinced on the investment route myself, but over the last couple of years have been slowly turned away from it, at least in regards to carrying debt to free up investment cash.

Don't even consider the tax deduction argument. You get 30% (or your bracket's margin) of what you pay to the bank back in taxes, but that still means you've lost 70% of the money to the bank. The tax deduction just means you are paying less than it appears to the bank. That's good to keep in mind when figuring your profit and loss, but it's not a reason in itself to carry a mortgage.

[rucky]

12. If you can get a higher return investing than the interest you pay

investing is the way to go.

[fullcount]

13. If you could pay it off right now then its better to do it

but its likely years before it's paid so the idea that you're missing 15-20% is false.

Find the happy medium. Make a thirteenth payment each year (tax refund perhaps ?) and that shortens things up by about a like 7 years over 30 if I remember right.

Then invest the rest. Best of all worlds.

[AlCzervik]

14. As A Realtor

and a cpa in my former life i will tell you w/o hesitation....NO!!! Your mortagae is about the biggest debt you will ever have except maybe tuition for your kids education. You are borrowing a large sum of money at a very low rate. Conversley, credit card debts and car loans are almost always high so it behooves you to pay them off quickly. The best way to pay down a mortgage quickly w/o losing the beneifts of tax write-off is to have a mortage that allows you to pay every 2 two weeks. It acclerates your payment schedule on a 30 to a 22 year. Not all mortgage companies offer this for the obvious reasons. Also you may want to consider making a principle only payment every couple of months. The last bit i'll offer is if you have a 30 try the rifi rout and change it to a 15.

[Dookus]

17. agreed

that's what I'm doing. I pay the SAME amount every month, only I pay it bi-weekly. It saves a fortune.

[AlCzervik]

18. Good for you!

Thats one of those little secrets no one ever shares.

[welshTerrier2]

28. my two cents

several excellent points have been made in this thread ...

one especially good point is that each of us is different and we are likely to have different "saving disciplines" and different "tolerances for risk" ...

i think that the best investment advice is to diversify ... i don't like the "put it all in the stock market" answers to your question ... what you invest in should be balanced against your other investments and also against your spending needs ... the longer the spending horizon, the more risk you may be able to tolerate ... so, if you're planning on sending a kid to college or planning to retire in a few years, keep your investments somewhat more conservative ...

for me, the bottom line is this ... i currently have a fixed rate mortgage (10 year term) at 4.74% ... my net interest expense after my tax deduction is around 3.25% ... i expect to see interest rates averaging around 7% or 8% over the life of the mortgage ... so the wrong question to ask is "why pay any interest if i could pay off the mortgage" ... the right question is "can i realize a return greater than 3.25% with an investment that i don't consider too risky" ... i figure, even if i invest in CD's, not calculated at today's rates but rather the anticipated average rate over the term of the mortgage, i believe i can easily beat the 3.25% i'm paying in net interest expense ...

and the advantage of not paying down the mortgage now means that if i do lose my job, i still have use of the mortgage proceeds (i.e. liquidity) because i retained control over the money ... i can pay off the remaining balance at any time as long as i don't lose the money in risky investments ...

so my advice is, keep your cash and invest it conservatively ...

[jmowreader]

29. What I would do

I assume you ran into some money, enough to retire your mortgage, and you're trying to decide what to do with it.

I would:

a) Retire my mortgage.
b) Any money that's left after the mortgage is gone gets invested.
c) Now, invest your house payment. You still make a payment in the amount of your mortgage installment, but instead of sending it to the mortgage company, send it to whatever investment you have chosen.
d) If you're tax-averse, and you're using your mortgage as a tax deduction, open a savings account. Sit down with your 1040 and do a what-if calculation: first run your taxes with your mortgage interest deduction. Now zero the deduction out and run your taxes again. Subtract the with-interest tax bill from the without-interest tax bill, divide by twelve, and deposit that much money into the savings account every month. At tax time, if you owe the IRS anything use the money in savings to pay it. (If you will receive a refund, just smile and think "I have a nice little nest egg.")