mortgage theory

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mortgage theory

Postby UpstateNY86 » Fri Feb 01, 2013 5:42 pm

Sorry if this sounds stupid. I was mulling this over though and can't seem to get a straight answer. Lets say I take out a mortage(3o yrs) and have to pay 800 a month. 30 years later you are still paying the same 800. According to the inflation calculator 1981-2011 800=1900+. Wouldnt you much better off taking out a mortage at a low % and letting inflation eat at that then paying cash? You could use the cash to invest and earn even more returns with compounding etc..
Thank You.
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Re: mortage theory

Postby Cut-Throat » Fri Feb 01, 2013 5:54 pm

UpstateNY86 wrote:Sorry if this sounds stupid. I was mulling this over though and can't seem to get a straight answer. Lets say I take out a mortage(3o yrs) and have to pay 800 a month. 30 years later you are still paying the same 800. According to the inflation calculator 1981-2011 800=1900+. Wouldnt you much better off taking out a mortage at a low % and letting inflation eat at that then paying cash? You could use the cash to invest and earn even more returns with compounding etc..
Thank You.


Yeah, as long as you 'earn even more returns'.....Ask the people in Japan 'How's that workin out?'
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Re: mortage theory

Postby MrMatt2532 » Fri Feb 01, 2013 6:04 pm

We have another thread going about mortgage being treated as negative bonds where this topic you bring up is talked about.

You need to realize that taking out debt means you are leveraged, so therefore your portfolio as a whole is at greater risk. Think about how wild the market has been for the last 5 years and multiply that by some factor depending on how leveraged you are. This means that you probably wouldn't want to do this unless you think you can handle greater risk than 100% stocks gives you.

Nevertheless, for a long term investor, with 25+ years until the money is needed, leverage can make sense.
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Re: mortage theory

Postby bottlecap » Fri Feb 01, 2013 6:06 pm

UpstateNY86 wrote:Sorry if this sounds stupid. I was mulling this over though and can't seem to get a straight answer. Lets say I take out a mortage(3o yrs) and have to pay 800 a month. 30 years later you are still paying the same 800. According to the inflation calculator 1981-2011 800=1900+. Wouldnt you much better off taking out a mortage at a low % and letting inflation eat at that then paying cash? You could use the cash to invest and earn even more returns with compounding etc..
Thank You.


Also consider that toward the end of the mortgage (when inflation "reduces" your payment the most) you are largely paying yourself in the form of principal repayment. This is all factored in from the beginning of the loan.

JT
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Re: mortage theory

Postby UpstateNY86 » Fri Feb 01, 2013 6:07 pm

thanks for replies,
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Re: mortage theory

Postby Drain » Fri Feb 01, 2013 6:23 pm

bottlecap wrote:Also consider that toward the end of the mortgage (when inflation "reduces" your payment the most) you are largely paying yourself in the form of principal repayment.

No, you're not paying yourself. You're paying the lender money that you owe. If you don't believe me, give me a 30-year loan at 0% interest--then I'll be doing nothing but "paying myself" for 30 years. I'll take that.
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Re: mortage theory

Postby NYBoglehead » Fri Feb 01, 2013 6:42 pm

bottlecap wrote:
UpstateNY86 wrote:Sorry if this sounds stupid. I was mulling this over though and can't seem to get a straight answer. Lets say I take out a mortage(3o yrs) and have to pay 800 a month. 30 years later you are still paying the same 800. According to the inflation calculator 1981-2011 800=1900+. Wouldnt you much better off taking out a mortage at a low % and letting inflation eat at that then paying cash? You could use the cash to invest and earn even more returns with compounding etc..
Thank You.


Also consider that toward the end of the mortgage (when inflation "reduces" your payment the most) you are largely paying yourself in the form of principal repayment. This is all factored in from the beginning of the loan.

JT


I think what you meant to get at was toward the end of the mortgage you are paying much more in principal than you are in interest so this is when it is most beneficial to not pay off the mortgage but invest instead with extra cash since the interest savings at that point would me minimal.
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