detlef Posted March 10, 2011 Share Posted March 10, 2011 I constantly grapple with this question. So, we both max out our Roths. Neither of us is employed by a company that sponsors a 401K. But we end up with extra money at the end of the month. The lure of throwing extra against the house is always there, even though I'm always aware that, technically, we could get better than the 4.625% we'd save in interest. Here's the wrinkle that keeps me coming back. Money earned is taxed, money saved is not. For instance, we could pay off our house in 11 less year by bumping up our monthly payments by $261. That's basically a savings of $163,500 (the payments we would not have to make over the next 11 years). Now, by all accounts, we could make at least that much by investing that same $261 every month in something else. However, we'd pay taxes on that, all along the earning period. That has to figure into the deal. Doesn't it? I also realize that we get to deduct the interest paid on the loan, so that also has to factor into the whole deal. Another thought I have on the subject is that, if we push extra money into the house, we can build up enough equity, soon enough, that we can stop holding as much in low paying but very liquid accounts (like MMAs) because we can then just open a HELOC and keep that around as our access to emergency funds, allowing us to push the cash reserves into more profitable but less liquid vehicles. Quote Link to comment Share on other sites More sharing options...
cliaz Posted March 10, 2011 Share Posted March 10, 2011 PM me Quote Link to comment Share on other sites More sharing options...
SEC=UGA Posted March 10, 2011 Share Posted March 10, 2011 Personally, and going against all the math and financial wisdom, if I had the ability to, I would pay off the house as quickly as possible. I fully understand that you could put that same money into an investment vehicle and gain a higher rate of return on it than the 4.7 +/- IR that you are paying on your mortgage, but just think how good it will feel shedding the burden of a mortgage 11 years sooner. That being said, there may be a happy medium that you can find. Instead of plopping down the full $261 extra per month, why not do 150 or so. Then take the 110 and put it somewhere for a rainy day event? Quote Link to comment Share on other sites More sharing options...
Caveman_Nick Posted March 10, 2011 Share Posted March 10, 2011 I made the decision 6 years ago to pay off the house instead of investing the money. While I *may* have been able to make more money investing it, I am enormously happy to have a place to live, mostly worry free so long as I take care of it. I saved (whatever the interest would be on a 280K mortgage over 30 years), and now have some cash flow to invest wherever I want, without having the risk of being homeless if I lose my shirt in the market. People buy insurance for peace of mind. I bought my house for it. Quote Link to comment Share on other sites More sharing options...
SEC=UGA Posted March 10, 2011 Share Posted March 10, 2011 PM me Who? Quote Link to comment Share on other sites More sharing options...
Square Posted March 10, 2011 Share Posted March 10, 2011 Pay off the house. It dramatically lowers your risk (which is hard to put into a basic math problem). It's much easier to cash flow everything when you aren't paying 10K + in mortgage interest every year to a bank. Quote Link to comment Share on other sites More sharing options...
cliaz Posted March 10, 2011 Share Posted March 10, 2011 People buy insurance for peace of mind. I bought my house for it. This sounds like the catch phrase of a commercial. Quote Link to comment Share on other sites More sharing options...
Cunning Runt Posted March 10, 2011 Share Posted March 10, 2011 I made the decision 6 years ago to pay off the house instead of investing the money. While I *may* have been able to make more money investing it, I am enormously happy to have a place to live, mostly worry free so long as I take care of it. I saved (whatever the interest would be on a 280K mortgage over 30 years), and now have some cash flow to invest wherever I want, without having the risk of being homeless if I lose my shirt in the market. People buy insurance for peace of mind. I bought my house for it. I agree. I want my house paid off asap. I want to be 100% debt free and should be in about 5yrs, maybe a bit less. Quote Link to comment Share on other sites More sharing options...
Azazello1313 Posted March 10, 2011 Share Posted March 10, 2011 (edited) Here's the wrinkle that keeps me coming back. Money earned is taxed, money saved is not. well...earnings on interest are taxed at regular income rates. earnings on stocks and such are taxed at capital gains rates (typically a bit lower, but in the future who knows). but at the same time, paying money against your mortgage is reducing a tax deduction. the effect is more in the future than the present, but it still factors in. it would be pretty tricky to calculate all that. but to my mind, I like the idea of paying toward equity in the house because it gives you more future flexibility. it gets you to that point where you don't have a house payment at all sooner, and that is the ultimate in financial flexibility. but also, the more equity you have, the less any future real estate transactions will end up costing you. the first goal is 20% equity in your current place if you don't already have that. then you're not paying PMI or a more expensive second mortgage. but you certainly don't want to stop there, because you'd like to still have at least 20% equity if you decide to move. particularly if you decide to move to a more expensive home. and once you're ahead a little bit, you're in a position to look at doing things like refinancing for a shorter term at a lower rate. and if you've got a good amount of equity, you can always borrow against that at favorable rates if things get dire. so it's more than just a straight up comparison of tax and interest rates, you're also looking at future financial flexibility, lowering future transaction costs, and so on. Edited March 10, 2011 by Azazello1313 Quote Link to comment Share on other sites More sharing options...
Fatman Posted March 10, 2011 Share Posted March 10, 2011 This is fundamentally a question of rick tolerance and opportunity cost. How much do you value the certainty of paying down your mortgage versus giving up the opportunity to make each dollar work more efficiently for you? If the question is more than the 1.75% spread (or whatever the difference ends up being on a conservative portfolio) then pay down your mortgage. The friction of taxes needs to be addressed, something Az discussed. Quote Link to comment Share on other sites More sharing options...
MrTed46 Posted March 10, 2011 Share Posted March 10, 2011 I'd throw everything at your mortgage, not only do you get a rate of return that is guaranteed but you accelerate your principal on each regular payment every month until it is paid off. Quote Link to comment Share on other sites More sharing options...
detlef Posted March 10, 2011 Author Share Posted March 10, 2011 well...earnings on interest are taxed at regular income rates. earnings on stocks and such are taxed at capital gains rates (typically a bit lower, but in the future who knows). but at the same time, paying money against your mortgage is reducing a tax deduction. the effect is more in the future than the present, but it still factors in. it would be pretty tricky to calculate all that. but to my mind, I like the idea of paying toward equity in the house because it gives you more future flexibility. it gets you to that point where you don't have a house payment at all sooner, and that is the ultimate in financial flexibility. but also, the more equity you have, the less any future real estate transactions will end up costing you. the first goal is 20% equity in your current place if you don't already have that. then you're not paying PMI or a more expensive second mortgage. but you certainly don't want to stop there, because you'd like to still have at least 20% equity if you decide to move. particularly if you decide to move to a more expensive home. and once you're ahead a little bit, you're in a position to look at doing things like refinancing for a shorter term at a lower rate. and if you've got a good amount of equity, you can always borrow against that at favorable rates if things get dire. so it's more than just a straight up comparison of tax and interest rates, you're also looking at future financial flexibility, lowering future transaction costs, and so on. Yeah, that dawned on me after I wrote my post. But, like you said, that could be pretty damned tricky to reconcile. For the record, our equity is already safely over 20%, so the PMI is not an issue. Also, our neighborhood is, well, sort of boring. It's not "up and coming" which means it's also less likely to crap the bed. We trailed the region in terms of home appreciation during the boom of the late 1990s and early 2000s but we also didn't see any fall back, nor have there been any foreclosures. So, I'm not that worried about the home losing enough value to push me back under 20% either. Thanks, in general for everyone's responses. I was certainly leaning this way as it was and now feel like I'm just going to go ahead and do it, perhaps even upping the ante. That said, we both owe on our cars and would be well-served to knock those out first (well, at least mine because it was used and, thus has a higher interest rate. My wife's new car may actually have a lower rate than our mortgage because it was new). In terms of risk tolerance, given the very risky nature of my business, we tend to be a bit more conservative in what we do with whatever money we actually take home than one would typically be at our age, so I do think the security in owning a bigger piece of my home sort of fits into that plan. Quote Link to comment Share on other sites More sharing options...
Square Posted March 10, 2011 Share Posted March 10, 2011 Car loans? I'd get rid of all debt and then work on your house. Quote Link to comment Share on other sites More sharing options...
MrTed46 Posted March 10, 2011 Share Posted March 10, 2011 Car loans? I'd get rid of all debt and then work on your house. +1 absolutely no reason to carry debt on your car as you get no benefit and their rates are usually high Quote Link to comment Share on other sites More sharing options...
Azazello1313 Posted March 10, 2011 Share Posted March 10, 2011 Car loans? I'd get rid of all debt and then work on your house. not if you've got manufacturer financing at 0% or close to it. at the point where you've already taken out the loan, that is basically free money, you might as well keep taking it. Quote Link to comment Share on other sites More sharing options...
detlef Posted March 10, 2011 Author Share Posted March 10, 2011 not if you've got manufacturer financing at 0% or close to it. at the point where you've already taken out the loan, that is basically free money, you might as well keep taking it. Exactly. I don't think my wife's loan is that good, but I do think it's better than 4.625 we're paying on the house. Mine, on the other hand, being used, is certainly higher and should be priority #1. Mind you, it's not crazy, but it is above 5%. Quote Link to comment Share on other sites More sharing options...
frenzal rhomb Posted March 10, 2011 Share Posted March 10, 2011 I agree with those who say pay off the house. That way, loss of job etc. wont be as a painful. Once my house is paid, I can work for 10.00 an hour and get by, it will put a crimp in my retirement, but I will have a roof over my head Quote Link to comment Share on other sites More sharing options...
Square Posted March 10, 2011 Share Posted March 10, 2011 not if you've got manufacturer financing at 0% or close to it. at the point where you've already taken out the loan, that is basically free money, you might as well keep taking it. He just prepaid the interest but I get what you are saying since there is not putting the toothpaste back in the tube. I still don't think I'm going to have a car hanging over my head. If det is serious that he is pretty tight with his money (and I don't remember him being a hugh car guy so I assume he isn't rolling something ridiculous) it shouldn't take very long to knock out car debt. But I would submit that he probably paid too much for the new car as many people buy into the shell game of 0% interest. Quote Link to comment Share on other sites More sharing options...
detlef Posted March 10, 2011 Author Share Posted March 10, 2011 He just prepaid the interest but I get what you are saying since there is not putting the toothpaste back in the tube. I still don't think I'm going to have a car hanging over my head. If det is serious that he is pretty tight with his money (and I don't remember him being a hugh car guy so I assume he isn't rolling something ridiculous) it shouldn't take very long to knock out car debt. But I would submit that he probably paid too much for the new car as many people buy into the shell game of 0% interest. As I said, it's not 0% on her car, and we negotiated the price before the loan, so it was what it was. It was a few years ago, but I think we went through Costco or something for the financing. Regardless, I think her rate may be better than our house but not by much. None the less, better is better. Mine, on the other hand, is most certainly higher and, as you guessed, I'm not a car guy, so it's not a huge nut. Quote Link to comment Share on other sites More sharing options...
sundaynfl Posted March 10, 2011 Share Posted March 10, 2011 (edited) I agree with those who say pay off the house. That way, loss of job etc. wont be as a painful. Once my house is paid, I can work for 10.00 an hour and get by, it will put a crimp in my retirement, but I will have a roof over my head What if your loss of job or something like a disability happens while you are paying off the house early? It's a lot harder to borrow money when you can't qualify for the payments without a job. I would suggest a tax free muni or insurance annuity, which I am currently in with a guarantee of a 7.2% and should I need the money I can withdraw 20% without penalty. Det's mortgage is only costing him about 3.24% if he is in a 30% tax bracket... Edited March 10, 2011 by sundaynfl Quote Link to comment Share on other sites More sharing options...
tonorator Posted March 10, 2011 Share Posted March 10, 2011 but at the same time, paying money against your mortgage is reducing a tax deduction you get a deduction based on the mortgage interest paid, not based on your mortgage payments. so in effect, this reduces the interest you are actually paying, making the mortgage loan more attractive to just keep and then redirect your funds into higher returning vehicles. having said that, it's all about stage of life and peace of mind. those with a longer horizon and stable income can take more risk. those with a shorter horizon and variable income could benefit more from the removal of a massive debt as quickly as possible. Quote Link to comment Share on other sites More sharing options...
Big Country Posted March 10, 2011 Share Posted March 10, 2011 Didn't read the replies yet (will do once I get back), but please tell me where I can invest my money, risk free, and earn a 4.625% guaranteed rate of return? View the paying extra towards the mortgage as the bond portion of portfolio and go a little heavier into equities within your ROTH. You can always set up a HELOC at very low rates to help preserve some extra liquidity, but assuming you have a sufficient emergency fund, you shouldn;t need to tap the equity. Back more later when I get some time to read other responses and re-read your original post in more detail. Quote Link to comment Share on other sites More sharing options...
bpwallace49 Posted March 10, 2011 Share Posted March 10, 2011 . I would suggest a tax free muni or insurance annuity, which I am currently in with a guarantee of a 7.2% and should I need the money I can withdraw 20% without penalty. but please tell me where I can invest my money, risk free, and earn a 4.625% guaranteed rate of return? Glad I could get you crazy kids together . . Quote Link to comment Share on other sites More sharing options...
cliaz Posted March 10, 2011 Share Posted March 10, 2011 Many of you have touched on the point that it is really based on your stage in life and your financial goals whether or not to pay off a house quickly. You have the one benefit of the interest is tax deductible which is nice but eventually that runs out and you lose the deduction. For me, we will enjoy the interest deduction for 2 maybe 3 years at most and then, based on our financial plan we have, we will devote all extra funds to the principle of our mortgage and shoot to pay it off with in 9 to 11 years after the 2/3 years we are waiting for the interest. I'd rather pay off the house as quickly as possible. We never use the equity in our house but one time and that was to get a new kitchen in our Bowie home back in the day. Outside of that, we wont touch it. So paying off the house and building up that equity is part of our 10/15 year financial plan. Will that come to pass? Most likely not. Because of our kids' conditions and even with moving to another state for better medical services, we still get those random $40k+ bills that we have to fight the insurance companies for. When that happens, it is far better to pay the bill and then fight to get the money back than to refuse to pay it and your credit get nailed. All IMO and nothing more. Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted March 10, 2011 Share Posted March 10, 2011 I made the decision 6 years ago to pay off the house instead of investing the money. While I *may* have been able to make more money investing it, I am enormously happy to have a place to live, mostly worry free so long as I take care of it. I saved (whatever the interest would be on a 280K mortgage over 30 years), and now have some cash flow to invest wherever I want, without having the risk of being homeless if I lose my shirt in the market. People buy insurance for peace of mind. I bought my house for it. This. Quote Link to comment Share on other sites More sharing options...
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