charlieg1 wrote: ↑
Wed Dec 05, 2018 12:56 pm
Admiral wrote: ↑
Mon Dec 03, 2018 12:14 pm
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
The remaining term / how much is interest vs. principal is irrelevant. The relevant numbers are the rate and remaining balance.
Admiral wrote: ↑
Mon Dec 03, 2018 7:23 pm
Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
It is the same decision as anyone who purchases or refinances a home w/ a mortgage and yet still plans to invest while they have a mortgage. Otherwise, no one would invest until they completely paid off their mortgage.
Admiral wrote: ↑
Tue Dec 04, 2018 7:47 am
ThrustVectoring wrote: ↑
Mon Dec 03, 2018 7:17 pm
If you throw an extra $1000 at a mortgage that's at 4.5%, you get an extra $45 per year until the mortgage is paid off. $45/yr per $1000 is either a worthwhile rate of return or not, whether you're paying a lot in interest or not on your mortgage doesn't matter.
Meanwhile, you're locking in that rate of return over the remaining time of the mortgage. A given interest rate can simultaneously be fantastic for locking in your money over a short period of time, decent over like 5 years, and a terrible idea over 30 years. If you believe that the yield curve exists for good reason, then the longer duration you have left on the mortgage the less you should want to pay it down.
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
It is exactly correct. Just because the monthly payment did not change doesn't mean you didn't realize the gain from partially paying off the debt. The savings is also not in the future - the extra money you paid earns your mortgage rate immediately.
Admiral wrote: ↑
Wed Dec 05, 2018 12:18 pm
I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.
Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
The rate of return on the house/asset is irrelevant - whether you prepay the mortgage or invest, you still own the house and still realize the return. The only decision is between the mortgage rate and the expected return of your investment (with some accounting for illiquidity of the house and risk of the alternative investment).
A number of responses.
First, there' s a distinction between unrealized gain, realized gain, and savings.To wit:
My mortgage is 4% for 15 years, with a payment of $100. I can pay $100. I can also pay $104, putting the $4 to principal. Or, I can pay $100, and invest the $4 at 4%.
Next month, I can sell my investment, in which case I've gained 16 cents (ignoring taxes). But my mortgage payment is still $100. It's true that I am paying less in interest over 15 years, because I have an unrealized gain via debt reduction, but I cannot access the gain to spend, or to save, until the house is paid off. If the house becomes worthless, what is my gain?
Next, we're dealing with straight percentages, but also with a total sum that is reduced over time, or compounds if invested, that the percentage is applied to. That's why the amount of savings varies with where one is in the amortization sked.
I'm going to use a mortgage calculator to show why the duration matters:
I have a $100,000 mortgage for 10 years at 4%. If I pay it off tomorrow (versus paying for 10 years), I am out $100,000 but save $21,494.17 in interest.
Let's now say I have 5 years left. I owe $44,840.29. I could pay it off, and save $3,758, which is my remaining interest through the end of the loan if I make all scheduled payments.
Or I could invest $44,840.29 for 5 years at 4%. Compounding monthly, I've earned $9,909.55, for a total of $54,749.84. (Compounding annually, I've earned $9,714.78). Subtracting the interest I've paid over that time ($9909-$3758) I've still come out ahead.
So, yes, it's all the same percentage, but in one case I have my money invested and compounding, it's liquid, and I have a realized gain (if I want it), whereas in the other, my investment is paying off debt but is not compounding, and it is unrealized and inaccessible. Liquidity matters because that's what gives you the power to take advantage of compounding.
In year 5 (or 10) I can of course begin investing my former mortgage payment. But I'm starting with a smaller amount, adding a litle each month, and my investment has less time to grow.