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re: Best way to payoff mortgage early?
Posted on 2/13/17 at 10:56 am to stonerolledaway
Posted on 2/13/17 at 10:56 am to stonerolledaway
I like the strategy of taking half of what you can afford to pay extra and split it. Half goes to extra on the mortgage and the other half to mutual funds.
2
Posted on 2/13/17 at 1:45 pm to redfishfan
I used a similar tactic back early in career by taking half of a raise home and half would go into maxing out 457 plan and after that maxing out a roth ira as well.
Posted on 2/13/17 at 2:05 pm to stonerolledaway
quote:
. It is a guaranteed return to not pay others interest
No, it is incorrect to equate interest saved to money earned. All the "saved interest" doesn't return anything until you use it to buy an asset.
quote:
what if you lose your job?
If you lose your job at any point before the mortgage is paid off, you're cash poor and your mortgage is still due next month. Good luck going to the bank and asking for the extra principal you paid early (e.g. a home equity LOAN) without a job. Liquidity alone is enough reason to not pay early.
Comparing the scenario of making a single additional annual principal payment equal to your monthly mortgage payment, which will roughly pay off a 30 year mortgage in ~15 years, I would much rather invest that single additional payment in a mutual fund. 30 years of buying a broad based, total market index fund would be the better option (and will have a positive return over the 30 year horizon).
Alternatively, you have to wait ~15 years to start investing the "saved interest", plus you miss out on the time invested.
This post was edited on 2/13/17 at 2:11 pm
Posted on 2/13/17 at 2:13 pm to redfishfan
This is a more reasonable strategy. I'd make a single additional annual principal payment at year end in the same amount as my monthly payment, which essentially cuts your mortgage in half, and invest the rest.
Posted on 2/13/17 at 2:16 pm to GoIrish02
quote:
No, it is incorrect to equate interest saved to money earned. All the "saved interest" doesn't return anything until you use it to buy an asset
Why?
quote:
If you lose your job at any point before the mortgage is paid off, you're cash poor and your mortgage is still due next month.
Unless you did indeed pay your mortgage off early.
Posted on 2/13/17 at 2:33 pm to OceanMan
Saving interest will never put new money in your pocket. A mortgage is a debt, not an asset that pays you.
Earning interest/dividends/return will put money in your pocket and is only associated with an asset. A return on your money logically has to put money in your pocket that wasn't there before.
No bank will ever send you a 1099-INT for interest you didn't pay. The intangible idea of saved interest is a fallacy. If anything, you're trading liquidity for avoiding interest, but no new money exists in the scenario.
In this scenario, you're removing money from your pocket to repay principal & avoid paying future interest you agreed to pay. While you saved the future interest, you still haven't added any more assets to your personal balance sheet than you had at the inception. Plus you squander decades of time in market, which is the real driver of long term wealth.
My entire point is there are so many more better uses for your money that will increase your total wealth instead of paying off a historically low interest, tax deductible mortgage. It is irrational to fear such debt and it is amazing to me people still hold on to pre-Depression fear of a mortgage.
Earning interest/dividends/return will put money in your pocket and is only associated with an asset. A return on your money logically has to put money in your pocket that wasn't there before.
No bank will ever send you a 1099-INT for interest you didn't pay. The intangible idea of saved interest is a fallacy. If anything, you're trading liquidity for avoiding interest, but no new money exists in the scenario.
In this scenario, you're removing money from your pocket to repay principal & avoid paying future interest you agreed to pay. While you saved the future interest, you still haven't added any more assets to your personal balance sheet than you had at the inception. Plus you squander decades of time in market, which is the real driver of long term wealth.
My entire point is there are so many more better uses for your money that will increase your total wealth instead of paying off a historically low interest, tax deductible mortgage. It is irrational to fear such debt and it is amazing to me people still hold on to pre-Depression fear of a mortgage.
This post was edited on 2/13/17 at 2:46 pm
Posted on 2/13/17 at 3:27 pm to GoIrish02
quote:
While you saved the future interest, you still haven't added any more assets to your personal balance sheet than you had at the inception
Equity in your home isn't an asset?
quote:
My entire point is there are so many more better uses for your money that will increase your total wealth instead of paying off a historically low interest, tax deductible mortgage. It is irrational to fear such debt and it is amazing to me people still hold on to pre-Depression fear of a mortgage.
Your point is not incorrect, taken in a vacuum. But It is not irrational to not want to hold debt. It seems as though you are ignoring the eventuality that the mortgage WILL one day be paid off earlier than contracted.
Again, I'm not saying you are wrong, but there is certainly a counterpoint that is not as irrational as you are making it seem. It is all about risk tolerance, and investment horizon. There are tons of 30 year mortgages taken every year by people that have a slim chance at living (and more importantly earning for) 30 years. Is your advice the same for them as it is for a late 20s early 30s person?
Posted on 2/13/17 at 3:36 pm to TigerintheNO
Buy the book The Total Money Makeover. Get debt free. Nothing feels better. Banks aren't paying dick on your accounts.
Posted on 2/13/17 at 4:00 pm to GoIrish02
quote:
Investing the difference instead of paying principal will ALWAYS be the best course of action
No it won't be.
It's only the best course of action if you can earn a higher rate investing than you pay on your mortgage. A DOW/NASDAQ/RUSSELLs tracking ETF is likely to do that, but it's no certainty.
Other issues:
Tax advantages to paying a mortgage exist only if you itemize; and even if you do, you aren't earning the full deduction unless you itemize independent of mortgage interest an amount at least equal to the standard deduction. Otherwise, you would have gotten some of that deduction without carrying the mortgage.
This post was edited on 2/13/17 at 4:01 pm
Posted on 2/13/17 at 4:04 pm to OceanMan
Equity is 100% illiquid and every dollar of home equity is offset by a reduction in your free cash, so I would contend your balance sheet is unchanged on a net basis and worse off in terms of liquidity.
Equity is unrelated to the market value & ownership of the house, the real underlying asset.
If I were planning to live less than 30 years, why would I care about paying it off early? A mortgage is secured by the property, whether a borrower lives or not.
Equity is unrelated to the market value & ownership of the house, the real underlying asset.
If I were planning to live less than 30 years, why would I care about paying it off early? A mortgage is secured by the property, whether a borrower lives or not.
This post was edited on 2/13/17 at 4:06 pm
Posted on 2/13/17 at 4:25 pm to GoIrish02
quote:
Equity is 100% illiquid
That isn't true. There are numerous ways to pull cash out of home equity. Get the same tax benefits too.
quote:
every dollar of home equity is offset by a reduction in your free cash, so I would contend your balance sheet is unchanged on a net basis and worse off in terms of liquidity.
How is this any different than buying any given asset? It's always a zero sum game.
quote:
Equity is unrelated to the market value & ownership of the house
Not sure what you are getting at here.
quote:
If I were planning to live less than 30 years, why would I care about paying it off early?
Because you have to service the mortgage as long as it is outstanding? To do that you need assets or income. Older folks tend to want to retire/work less and thus not earn an income. If they had piled all their money in a brokerage account, they are at risk of that money that would have otherwise paid their mortgage off not being enough to cover the balance. In other words, there are no guaranteed returns in the market. All of the instruments that would traditionally outearn the rate of mortgage are more risky. Good luck finding a "risk free" investment like a CD or treasury note that would even pay 25% of the interest of a mortgage.
quote:
A mortgage is secured by the property, whether a borrower lives or not.
I think you missed my point.
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