The "pay off early" vs "never pay off" is an interesting debate. To me it all boils down to your personal philosophy about debt. If you abhore debt and worry about it, then by all means pay off early. If you are more tolerant of debt, I think there is an opportunity to grow your money faster by carrying a mortgage on your house. Of course, you do assume some risk if you were to lose your job or what have you. It's all personal choice.

Yea, we'll see. For now it'd be awfully nice to build a little chunk of equity to use to trade up later (whether involved with a relocation or not), but I'll forego it to avoid getting into either a "house poor" situation or a "sucker loan" situation like so many others have been lately.

I'd rather be happy and renting than miserable and owning. Ownership will come. . . eventually.

I chose to pay off early as I plan to retire soon. Not having a mortgage reduces the amount I have to withdraw to pay the bills. At the time I didn't see anything else to invest in. I look at it as part of my fixed income holdings. I still have plenty invested in the market and other things.

The less I have to withdraw, the less taxes I have to pay.

Precisely...

How does someone grow their money by having a mortgage?

Well, as I understand it, it goes like this:

1). Mortgage rates must be low (as they are now).
2). Accept the fact that the value of your house will grow or shrink independant of how much equity you have in it. You stand to gain the same whether you pay cash or mortgage 100% (ignoring interest for now...see later in the post).
3). You must invest the money that you otherwise would have sunk into the house. If you spend it, the whole thing doesn't work.
4). You must gain about 10% in the market on average (which is the average yearly return) to make money once you factor in the interest on your mortgage and inflation.

So, if I buy a house for $200k and pay cash, then sell it in 5 years for $300k I have made $100k on my $200k investment.

If I take the same $200k and invest it in the market for 5 years I will have around $320k from the investment assuming 10% per year. I also buy the same house and finance 100% at 6% interest. Assuming I sell the house the same 5 years later for the same $300k, I will have made $100k on no investment, less the interest and closing costs. Lets say (just for argument) that comes out to $75k. Thus I have made $195k on my $200k investment by mortgaging the house.

The example is a bit simplistic, but you get the idea. It's the same principle as buying stock on margin. You leverage your money in order to make more money and accept the risk that your return will not be greater than the interest rate. Now, if mortgages were 15%, it wouldn't work very well, but since they are 6% it is a viable option.

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and every other McMansion in suburbia.

Florida McMansions don;t look like that. :cool:

I agree, we should all go back to living in 1200 sq. ft. cookie cutter tract housing :rolleyes:

How about an older neighborhood with mature landscaping, pedestrian friendly sidewalks that lead to nearby retail and parks? It keeps the pounds off you (as well as little Johnny) and you might actually get to interact with the people that share your neighborhood.

Neighborhoods with houses that contain character and don't have a trace of "builder's beige" on them.

Afterall, beige mcmansions are the new tract housing, just with 2600 sf added to them (along with a dynamite 2 story entry foyer).

I agree with you, however, that the house (to your taste) is out there. You just have to look and be prepared in some instances to move.

However....Since the first years of a mortgage are massively comprised of interest, there is lost opportunity to be considered.

Assume a mortgage of $100,000 at 6% (easy to figure). Monthly payment for 30 years = $599.55. Total for 360 payments = $215,838. Interest paid = $115,838.

Now not everyone can have a F&C home, but what would that $115,858 gain you over the next 10 or 20 years if invested? What if the $599.55 were put into something as mundane as a Mutual Fund each month?

Then, assume you can put down 20% and reduce our hypothetical mortgage to $80,000. THis would result in a monthly payment (for 30 years) of $479.64. Now...investing the differential of $119.90 each month for the next 30 years would result in what kind of nest egg? Where would the "break even" point be? In under 10 years the accrual would begin to be in favor of the higher down payment and lower m onthly payment, as long as one has the discipline to religiously invest that differential. No to mention that the interest paid over the 30 years has been reduced to $92,670.40.

THat is why I say it is not a cut and dried situation that fits all cases.

BTW...Your payments that you were making during the time your property (hopefully) went up in value by $100 k must be "modified" to reflect the interest paid which is a loss in investment circles (cost of doing business). Then, if you paid cash, factor in the investment of the amount monthly that you would have been paying to the lender. The figures change significantly since that money is making you money as well.

Using my rather simplistic model of the $100k @ 6%, five years worth of payments would result in $35,963 that you have invested had you paid cash.

Different paths to the same goal.

Legion, I know you are smarter than that. Don't EVER pay any convenience fee for a bi-weekly set-up. Just pay extra principle each month and it's same thing but with no "convenience fee". Every mortgage payment coupon I've ever seen has a box for extra principle. Just make sure whatever extra you pay, it goes into that box.

True, but in your model you have to put the 100k into the house in the first place in order to gain $35k to invest over 5 years. If you put the 100K into investments you make over $100k in returns which is much better than $35k isn't it? Again, to each his own.

Well, that would be ideal, however it isn't always available. In our instance, Keller was a very small town between Dallas and Fort Worth until about 15 years ago. So, there are shacks and there are homes that are 15 years old.

It would be a different situation if we were looking in an area like Boston where there are nice older homes available.

My sister lives in Keller - she works for wachovia - I'm sure she would be happy to give you some help - if needed.

The problem I see is your using stock market returns that have a higher risk. I looked at it from a fixed income outlook. That would be closer to the same risk tolerance. I could also by stock on margin or options but the risk is greater. Paying off the mortgage is a guaranteed return.

By paying off the mortgage it allows me to be comfortable with a higher stock allocation.

You just have to look at all the options and decied which is best for you. Just be sure your comparing similar investments. The stock market may have averaged 10% but it could also average alot less in the next 20yrs. You just have no way of knowing.

Well that is true, I used the stock market. It also depends on your age and where you want your investments. If you put the money into less risky and thus lower return investments the model doesn't work. I am considering it because I am only 34 and can afford to wait out the ups and downs of the market. If you are in a different stage of life or have a different risk tolerance the answer might be very different.

Historically the equities market has averaged 10% per year. The country has seen wars, depression, bull markets, and bear markets in that time. I suppose it is possible that the market would deviate from its 100 year history in the next 50 years, but I think it is more likely to continue its winning ways. The thing is you have to have the time to let the peaks and valleys even out. People get burned in the market when they invest for the short term. If that is what you are doing you may as well go to Vegas, IMHO.

When I refinanced a few years ago, I went from 25 years on my loan to 15, that ten years is about $350,000 that isn't leaving my wallet. Sure I could have put those additional funds in the market instead, but the fact is that I, or my wife, would have probably spent it on other things. Also, when its paid off, is a few years before I hope to retire.

Rick:

There is a great degree of difference between the two scenarios. You are assuming a positive growth in (a) the property and (b) in the market. Talk to those who have lost their shirts in downturns. Five years is not a long enough period to use the so-called "average" return on the market. I wish I had a grand for every person I know who thoufht they "understood" the market(s)!! Some are just plain lucky; most are not>

Want to know how to make a small fortune? Start with a big one.......

Look back on the "lost opportunities" costs and recalculate your actual ROI potential. Strangely, it is not unlike trying to make people understand that the average poor soul pays 50% of his or her gross hourly earnings in taxes.....We all tend to minimize potential bad news and maximize expectations.

True, 5 years is not really the investment timeframe I am talking about, I just used 5 years as an example. If you take the strategy to its end, you end up taking out a mortgage for as much of the sale price as you can, investing the leftover profits from the sale of your prior home in the market. That money stays there for the long term. If you sell the house in the future, then whatever profits you make on that house then go into the market as well and you get a new mortgage for the new house. The other option is to re-finance and cash out the equity in the house every 10-15 years and again invest that money. It isn't a short term strategy.

And you are correct, I assume a positive return in the market. I assume that because that is what the market has done since its inception. If you give the market time, you make money. You are right in that people lose money in the markets, mostly in the short term. Long term players will almost always make money. Now whether you will meet that 10% per year goal is uncertain.

Of course there is risk in the strategy. You take the risk of investing in the market, namely that the market will crash and not recover. That hasn't happened in the history of the market but it is possible. The risk of the housing market is equal across both strategies though. If you pay $200k cash and sell the house later for $150k you lost $50k. Houses aren't any safer places to put your money than any other investment. Ask the people in California who are sweating out the bubble bursting right now. In fact, real estate has a higher volatility over its life than the markets.

I just tend to not look at a house as an investment vehicle. It is a dwelling. I choose not to sink a bunch of money into my dwelling if I can avoid it. I think there are better places to put my money if I want to invest it. That's my opinion, yours may differ. I consider the interest I pay on the house as the fee I assume for living in that dwelling. The nice thing is, that fee is tax deductible so I get some of it back each year.

Rick:

Just curious; perhaps a bit of defining terms. Is not paying 30 years worth of interest not sinking a bunch of money into a house? Generally, that interest will sum up to more than the amount borrowed. Am I the only one that has aversion to making the lenders richer than they already are?

At one point, I had dozens of clients. Every one of them, before I would take them on, had to undergo a rigorous process re: their philosophies about money and investing. One of the most important factors is "risk aversion". Some people willingly invest in high risk projects, assuming that one of them might just turn out to be another Microsoft (most turn out to be a Global Crossings or Enron). Others are more interested in a higher degree of certainty and invest in things like General Electric. I really was not interested in those who were actually "gamblers". These are the kind of "investors" who wind up suing their advisors when things go South. I did not need that kind ot hassle. Also, as people age and close in on retirement, their goals should change and the mix of investments should begin to trend toward the more conservative end of the spectrum.

BTW....Do a bit of research and see what kind of return an individual would have made over the last 20 years by consistent periodical investments in things like GE. You might just be surprised!!