Investing Like Your Grandparents

onewhippedpuppy · 10-10-2008, 01:43 PM

Just an observation: those that paid off debt before investing their money are in a much better spot right now. That approach has drawn a lot of criticism in here over the years, but today we can see the virtue. Investing at 8% instead of paying off your 5% home loan will net you 3% during the good times, but what about when the market drops? Your investments loose all their value, but the mortgage still comes due. Sometimes being conservative has it's benefits. Your grandparents really weren't senile.

Moses · 02:50 PM

Quote:

Originally Posted by onewhippedpuppy

Just an observation: those that paid off debt before investing their money are in a much better spot right now. That approach has drawn a lot of criticism in here over the years, but today we can see the virtue. Investing at 8% instead of paying off your 5% home loan will net you 3% during the good times, but what about when the market drops? Your investments loose all their value, but the mortgage still comes due. Sometimes being conservative has it's benefits. Your grandparents really weren't senile.

My father never graduated high school. He home is worth more than a million dollars. It's paid for. The total of his pensions is more than he can comfortably spend. His lives a simple life, but has everything he needs.

HardDrive · 10-10-2008, 02:48 PM

My wife and I took out an 80%/10% when we bought our house. We then took her bonuses for the next 5 years and paid off the HELOC, and have occasionly paid off principle on our main mortgage when cash has come our way. We now owe about $350k on a house the tax man says is worth $792K. Zillow says $890K. Truth is somewhere in the middle.

We were told that we were stupid for trying to pay off our mortgage by more than one person. One gal and her husband were told by their financial planner (who's now probably waiting tables.....) that they should NEVER own their home. He told them to take out a HELOC for the max, and sell their house every 2 years. This would all work out great, because the houses value is always going to skyrocket.....right?

Why do people believe that they can defy the laws of financial physics?

turbo6bar · 10-10-2008, 03:04 PM

Quote:

Originally Posted by HardDrive

Why do people believe that they can defy the laws of financial physics?

Defying laws is easier than sacrifice and discipline. It works well until it doesn't.
jurgen

ckissick · 10-10-2008, 03:17 PM

We refinanced our house a few years ago. One slick guy we talked to suggested we get a loan for the total value of the house and put it all in the stock market. Our mortgage payments would go from $2K per month to about $12K, way more than we even earn before taxes. But what the hell, the profits in the stock market would allow us to pay the mortgage, and we'd still make a fortune. We told him to take a hike.

I'm not sure, but I think that was him I saw this morning selling pencils on the street corner.

VaSteve · 10-10-2008, 03:37 PM

Quote:

Originally Posted by Wayne at Pelican Parts

In general, that statement is correct. The highest return on investment is when you leverage your funds to buy a larger asset. As you pay down your mortgage, your leverage decreases, and your ROI falls as well. Real Estate has built-in advantages that make it a pretty low-risk investment, providing that you follow some simple guidelines (get only a fixed-rate mortgage, and make sure that your salary can pay it each month within reason, also accounting for financial hiccups). Unlike a corporate or muni bond, the bank cannot call a fixed-rate mortgage from you because the rate is too low and they are losing money. On the other hand, you can refinance as rates drop. This is a huge advantage for the homeowner. The mortgage is covered by the actual house - a relatively stable investment, even in turbulent times.

-Wayne

This kind of thinking is what got people in trouble. Your home is NOT an "investment" any more than your 911 is. Sure, you can turn an investment/increase out of it sometimes, but in principle, it should be primarily a place to live.

Rental property, etc, etc...all bets are off.

HardDrive · 10-10-2008, 03:59 PM

On paper, not owning your home does make sense. But I don't live on paper. I'm a human being, and I know that the less uncertainty I have, the more I enjoy life. I don't want to think about money, I want to think about life.

So I guess perhaps I am a fool for wanting to own my home. But I'm ok with that. The wife and I are trying to get the house paid off before we are 50, about 12 years from now. I believe we can easily achieve that, and still have our actual 'investments'. Perhaps were stupid old fuddy duddys. But we will be 2 stupid old fuddy duddys sitting on the deck of our home overlooking Seattle with no mortgage to think about. Exactly how does one value that piece of mind in all of these equations?

DARISC · 10-10-2008, 04:10 PM

I could pay off my 5%, 15 yr. mtg. if I chose to.

But, I'm making 4.5% or more on the money I'm not using to pay it off (I always keep at least that ammount in safe, liquid investments).

Come tax time, with the 5% mtg. interest being deductible, it works out that my mortgage is actually only costing me 3%.

So, I'm 1.5% better off keeping the money invested at 4.5%.

Considering my particular situation, why would I want to pay off my mtg.?

onewhippedpuppy · 10-10-2008, 04:38 PM

Quote:

Originally Posted by VaSteve

This kind of thinking is what got people in trouble. Your home is NOT an "investment" any more than your 911 is. Sure, you can turn an investment/increase out of it sometimes, but in principle, it should be primarily a place to live.

Rental property, etc, etc...all bets are off.

Yup. Stocks are investments. A house is a residence. You can easily do without your stocks, not so much your house. Lots of people in SoCal thought of their homes as an "investment", it didn't work out too well for them. I prefer not to gamble with the roof over the head of my family.

Quote:

Originally Posted by DARISC

I could pay off my 5%, 15 yr. mtg. if I chose to.

But, I'm making 4.5% or more on the money I'm not using to pay it off (I always keep at least that ammount in safe, liquid investments).

Come tax time, with the 5% mtg. interest being deductible, it works out that my mortgage is actually only costing me 3%.

So, I'm 1.5% better off keeping the money invested at 4.5%.

Considering my particular situation, why would I want to pay off my mtg.?

1.5% is a very small gain for a potential risk of losing your residence. However, if you keep enough to pay-off your home in safe liquid investments, you're pretty well covered. So long as those investments are as safe as you think they are......