Consumer Reports Article: Paying down your mortage = not really a good thing...

[frogger]

Originally Posted by MRM

You go to a state school. You live in a rooming house at $70 a week. You eat a diet that consists of cereal, milk, bread, generic cookies, peanut butter, cheese and water-added ham product (sandwiches) and generic mac and cheese. You work 30 hours a week and so you take five years to graduate. You don't go on spring break, you don't buy an expensive car, and you stay home most nights.

It's not pleasant but it can be done.

Ramen, for every meal. Mmmmm.

[JavaBrewer]

Don't forget the local happy hour. $2.00 draft and all you can eat taco bar.

[Porsche-O-Phile]

Most of that I did. I lived far from lavishly while in school. My graduate program (and yes, I consider a graduate degree a "necessity" nowadays - a bachelor's is good enough to get you a $30k a year job and that's about it in most fields, it's about what a high school diploma used to be) was at a state university and cost $60k. The balance is from my undergrad.

Most of the people I know with similar levels of education owe at LEAST what I owe. I am actually towards the low end.

[berettafan]

The article, while lost in the details, has a valid point. Protect your cash flow IF you know what to do with it.

Of course if i didn't have a mortgage right now i'd be working for myself and much more satisfied with my professional life.

[turbo6bar]

Originally Posted by Porsche-O-Phile

How in the world do you get to have no school loans? I think that's more of a function of being from wealthy parents than anything else. I had very good grades in high school and actually did have a scholarship, but it didn't come anywhere CLOSE to paying my college for me. Not by a longshot. It helped, but I still owe quite a bit on that.

State school with co-op program. I sacrificed my breaks to alternate quarters of school and work. My parents also helped, but for at least 2 years of the 5, I paid all from my pocket. If I didn't have money from my parents, I would have gone to one of two schools that offered great scholarships. Of course, those schools are in flyover country and below standards for some folk.

I was of the school that promoted leveraging to grow quickly. It allows for rapid growth, but brings risk. I found myself out of balance and started paying down debt. I don't bring near as much income, but my expenses are far less now. Why work so hard when Uncle Sam and the man are there at every corner with outstretched hand? Vary Your Mileage May.

jurgen

[fireant911]

This same argument pops up occasionally. To be completely honest, I will never be able to understand how someone could think it is 'better' to keep the loan at the contracted length. Simply looking at the interest should be grounds enough for eliminating this burden as soon as possible. I guess the next point made is that the interest rate itself is unimportant... this has to be true as since the focus would be perceived to make as little downpayment as possible - at least it would be according to this strategy. Seeing a questionable article, even if it comes from a reputable source, does not mean it is a wise thing to do.

I paid off my home in 3 years and 4 months - words do not do justice for the financial freedom that this provided. Tax writes-offs are a joke in the actual scheme of things. Banks apparently LOVE people that believe in this purported strategy.

My current net worth is considerably higher using the maximum payment to principle philosophy. Given another opportunity, I would do nothing different (other than trying to making a larger downpayment). I am not surprised that resoundingly the responses favor the less wise choice.

[Superman]

Originally Posted by MRM

You go to a state school. You live in a rooming house at $70 a week. You eat a diet that consists of cereal, milk, bread, generic cookies, peanut butter, cheese and water-added ham product (sandwiches) and generic mac and cheese. You work 30 hours a week and so you take five years to graduate. You don't go on spring break, you don't buy an expensive car, and you stay home most nights.

It's not pleasant but it can be done.

Wow, you ate expensive food. When I was an undergraduate (this was several hundred years ago), Kraft Macaroni and Cheese was ten cents per box. To this day, potatoes are about the same price as beauty bark. I ate those things. Potato Stew.

[legion]

Originally Posted by turbo6bar

If I didn't have money from my parents, I would have gone to one of two schools that offered great scholarships. Of course, those schools are in flyover country and below standards for some folk.

Wow, that's a pretty elitist statement.

Of course, those of us in "flyover country" didn't get suckered into paying $900,000 for a 800 sq. ft. house. We put 20% down and got 30 year or *gasp* 15 year mortgages. We did stupid stuff like spending 25% (or less) of our income on housing. Now our tax dollars are going to be tapped to bail out the geniuses on the coasts. (Like it always is.)

[daepp]

I went to a California State school and worked 25 hrs/week. Plus lots of mac & cheese!

Of course, I can;t brag abut my credentials, but I also have no debt whatsoever.

[Superman]

Agreement between us should scare you Wayne, but not me. I'm comfortable as long as Mule disagrees with me. (wink)

Guys, let's look at this really simply. Scrap up 5K cash, get an FHA loan and buy a 100K house. At the end of the first year, let's say RE has appreciated 10% (not unreasonable). Now you're sitting on a 110K asset. Let's go forward another year. Now you've got a $122K asset. On a $5K investment. You sell, pay off the $95K note and keep $27K.

Now sure, that ignores the fees you pay to the RE agent. And it ignores the interest you pay, but that amount is probably not far off from the rent you would otherwise be throwing away. And then there is the tax exemption.

If you execute the above plan and, instead of making the minimum payment you pay extra on principle....then guess what your ROI is on the extra principle money you paid in? Yup, you guessed it. 0%.

[the]

Originally Posted by Wayne at Pelican Parts

If you can instead invest that in the stock market, then you will get a good return. I'm not sure if the article made this clear. Another primary advantage to homeownership is the deductibility of interest. If you pay down your mortgage, then you slowly eliminate this advantage too. Your rate on your loan isn't really 6%, if you factor in the tax advantage, it's probably more like 4%. Borrowing money at 4% and then investing elsewhere for a higher rate - that's what this article was trying to impart.

If you invest it in the stock market, you MAY get a good return. Or you may also lose money. I'd direct you to the wonderful stock predictions made in the stock prediction thread here in OT to see how much money has been "made."

Borrow money at 4%, then invest it elsewhere for a higher rate. Much, much easier said than done. Esp. when you invest that money, and are lucky enough to get a positive return, you are going to have to pay taxes on it. So if you are borrowing at 4% and investing it, to net 4%, you are going to need to make 6%.

Owning a home is a great hedge against inflation. Having a big loan on it doesn't help that hedge (unless you are getting the loan for free).

[the]

From what I've seen, there are really only 2 groups of people who don't pay off their mortgages:

1) Those that couldn't pay it off significantly early, even if they wanted to. Thus making the decision moot.

2) The wheeler dealers who don't pay it off (but could), and then use that money for other, real money making purposes. Most of these that I know tend to be small business owners that need the money for the business. So the money is helping to sustain a real business, and is making money.

Group No. 1 is 90% of the people. Although 99% of those in that group delude themselves into thinking they are in Group No. 2.

[the]

Another way to look at it is in the reverse. This is more useful because it eliminates Group No. 1, and presents a REAL choice.

Say someone inherited a $500,000 house, fully paid for.

Would you advise that person to take out a loan on the house, to use the money to try to make money in the stock market?!? IMO that would be very bad advice.

[Tobra]

Originally Posted by s_wilwerding

One thing to consider - everyone talks about putting money into your house as an investment. The problem is that, when you sell your house, let's say you got $10,000 more than what you paid. That $10,000 is yours, regardless of whether you own 0% of your home or 100% of your home. That's what my mortgage broker told me - when you pay down your mortgage early, you're not "making a return" - you're just saving interest.

That said, I like to pay my mortgage down early. Yes, it's possible that I could be making a better return somewhere else, but once I have my mortgage paid off, that's like a $1500 a month annuity. That's what I'm buying by paying down my mortgage - the earlier I pay it down, the earlier I get the annuity.

If your interest rate is 7%, you pay extra on your mortgage and you are GUARANTEED a 7% return on that money, plus the taxes you paid on the income it took to pay that note. Figure net of around 10% return, not too shabby ROI, and it is a slam dunk. Just because the interest is deductible from your income does not make it "free"

The logic in your article may be sound, but that does not necessarily make it the correct thing to do.

[cab83_750]

When you pay-off your house, ensure that you are insured up to your ying-yang (fire, earthquake, liability, .....)!


BTW, there was also an article about "Do not contribute to your 401K any more than the matching %." In other words, if your employer will match 50cents on the $ up to 6%, then you should not contribute more than 6%. So, if you could sock away 8%, invest the 2% in stocks, not into 401K.

[frogger]

I'm expecting a few years of stagflation. Leverage makes no sense to me.

[MRM]

Originally Posted by dmoolenaar

Don't forget the local happy hour. $2.00 draft and all you can eat taco bar.

You spent two bucks on supper? Man, you must have been rich . . .

[Porsche-O-Phile]

Ramen noodles was the bomb. $20 on that and a 50-pound bag of rice for about $10 and you could eat for a whole semester! (yes, I did this).

A former roommate had it worked out that he could eat for free, 3 meals a day all year. He'd do happy hours a couple nights a week (they had free chips & peanuts and stuff), church & synagogue spaghetti dinners, etc. He had it down to a science. Pretty funny.

[Jims5543]

My house was was paid off since I was 37 years old. I have since purchased a second home, a vacation home, that one has a mortgage. I considered selling it for about 40-50K more than I paid for it, now 3 years later, but instead, I am considering making it into a vacation rental and letting the vacation rental monies pay off the mortgage, however long that takes and then making mortgage payments size payments to my retirement account. (IRA's in both mine and my wifes names)

Then investing further into the stock market.

I already have a decent amount of money tucked away in my savings, enough to live for a year without any income. So at the ripe old age of 41 I am ready to attack my retirement portfolio. In the fall, I can realistically sock away an easy 25-30K a year. Once I get the vacation rental established.

Anyone want to rent it from me? I'll give you a good deal, 4 bed 3 bath 2 car garage surrounded by some of the best driving roads I have ever been on. (Dragons Tail and Devils Backbone both within an hours drive of it)

PM Me for details.

[Paul T]

Originally Posted by cab83_750

BTW, there was also an article about "Do not contribute to your 401K any more than the matching %." In other words, if your employer will match 50cents on the $ up to 6%, then you should not contribute more than 6%. So, if you could sock away 8%, invest the 2% in stocks, not into 401K.

That's just nuts - everyone should max their 401k contributions, company match or no, IMO. You can't beat tax deferred growth...