Poll: Interest rates and debts worth paying off

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I would rather pay off a debt versus save/invest when the interest rate reaches:

Any level- I prefer to be debt free at all costs
14
34%
0-1%
2
5%
1-2%
1
2%
2-3%
8
20%
3-4%
8
20%
4-5%
6
15%
5-6%
1
2%
6-7%
1
2%
7-8%
0
No votes
8-9%
0
No votes
9-10%
0
No votes
More than 10%
0
No votes
 
Total votes: 41

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mlewis
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Poll: Interest rates and debts worth paying off

Post by mlewis »

I am curious what people consider to be a break-even point for intrest rates on debts when it comes to saving/investing versus paying off those debts.
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Rob5TCP
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Re: Poll: Interest rates and debts worth paying off

Post by Rob5TCP »

It depends on what type of debt. If c.c., I would avoid at all costs. As for a mortgage under 3%, I intend to take on a mortgage
even though I could pay cash for it. If interest rates keep falling, I would just refinance.
Random Walker
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Re: Poll: Interest rates and debts worth paying off

Post by Random Walker »

I think a Person's answer is so individualized depending on net worth relative to the debt, the AA stock/bond split, and accumulation/decumulation stage. For me, I'm pretty aggressive, so I would rather take from bonds to erase interest bearing debt. Then return to my AA as fast as possible.

Dave
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momar
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Re: Poll: Interest rates and debts worth paying off

Post by momar »

I'm going to own the same percentage of bonds either way. It's not like I would pay down my debt and then own no bonds.

I determine my stock/bond mix based on what kind of losses I think I can stomach. If I expect that it has a reasonable likeliehood of outperforming debt, I will continue to add to it.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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tipswatcher
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Re: Poll: Interest rates and debts worth paying off

Post by tipswatcher »

My wife and I always had an aversion to debt, so we long ago paid off our mortgage, we have no credit card debt, car loans or debt of any kind. Once the mortgage was paid off, we started investing that same amount in index funds. We paid cash, even for a very large home remodeling project.

I agree that you can make the case for some types of debt - especially deductible mortgage debt at these very low rates. But not for us.

One thing ... I were buying a car and the dealer was offering zero percent financing, yes, I would take that.
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digit8
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Re: Poll: Interest rates and debts worth paying off

Post by digit8 »

Our goal is to stay debt free except the mortgage. When I worked in collections, I saw way too many examples of people going off the rails because they couldn't keep up with the car or credit card payments.The money I don't use by keeping the mortgage in play is balanced out by significant goodies from 401k/IRA retirement investing it frees up, but to my mind owing for anything else is basically just draining from better financial options.
"You can't latte yourself to bankruptcy. The bladder won't allow it." | -Katherine Porter
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grabiner
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Re: Poll: Interest rates and debts worth paying off

Post by grabiner »

Rob5TCP wrote:It depends on what type of debt. If c.c., I would avoid at all costs. As for a mortgage under 3%, I intend to take on a mortgage
even though I could pay cash for it. If interest rates keep falling, I would just refinance.
It shouldn't depend on the type of debt (except for the tax situation); all debts have the same effect on your finances. If you will finish paying off off a loan at 4% fixed-rate interest in five years, and you pay an extra $1000 today, you will reduce your payments by $1217 five years from now, whether that debt is a mortgage, car loan, student loan, home-equity loan, or fixed-rate promotional credit-card offer.

The reason that taking a mortgage is often attractive is that mortgage rates tend to be much lower after-tax than the rates on other loans, or to be about the same when the loan is of much longer duration (and thus the lender is taking more interest-rate risk).
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G-Money
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Re: Poll: Interest rates and debts worth paying off

Post by G-Money »

mlewis wrote:I am curious what people consider to be a break-even point for intrest rates on debts when it comes to saving/investing versus paying off those debts.
I'm confused by the poll question as it relates to your post. Your poll question asks about just interest rates (presumably of the debt? It doesn't specify). Your post talks about a break-even point, which implies that we should be comparing debt interest rates with something else, but again, I'm not sure what.

I honestly don't know how to answer this poll question. I have a deductible HEL at 1.99% with 4 years left. Since investment grade bond funds are yielding more (and since the HEL will be paid off relatively soon anyway), I invest any excess cash. If I had a 30 year mortgage at 3.5%, my answer would likely be different.
Don't assume I know what I'm talking about.
Grt2bOutdoors
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Re: Poll: Interest rates and debts worth paying off

Post by Grt2bOutdoors »

I like a clean balance sheet - if cash is earning nil or zero and you normally hold large amounts of cash as a matter of practice, why would you hold debt that costs more than the cash can earn? Using the cash to eliminate the debt will earn you a guaranteed return of x% that you were previously paying on the debt. Pay it off and give yourself more options.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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