Payoff the Mortgage or Invest?

[Vincent Vega]

heres a chart that’s adjusted for inflation

It peaked at 5500 in 29
It didn’t go significantly above that and stay above that until 1995 ish

That’s 60 years of almost zero gains

I believe you said "several" spans. You've referenced one span and I don't know how you couldn't argue that was an anomaly. Further the fear implicit in your comment is that one invested all of their money in August 1929 and not a penny before and not a penny after. I would be curious to see what the ROI chart would look like assuming someone invested an equal amount per day (or per month) over that period.

I'm not saying a severe market crash can't happen again but I won't let what happened in 1929 keep me from investing 90 years later. I believe sticking to the fundamental recommended approach of dollar cost averaging hedges against the risk of getting whipsawed by downturns (even severe ones). I survived 2003 and 2009 and came out much better in the long run because I was willing to invest when other folks were panicking.

All of this being said I unfortunately think the market does need a breather and don't doubt we'll see some profit taking at some point. I've got some money on the sidelines and I think I'm going to split the baby and put part towards the mortgage and keep some in the back pocket just in case a buying opportunity arises. Yes I realize I'm trying to time the market which is a no-no but that is a risk I'm willing to take.

 

[GeauxLSU]

O
Get a 15 yr mortgage and don’t refinance it , unless you can drop the interest rate by more than 1.5-2 percent

And if you do re fi to lower it , get a loan that’s the same length as what’s left on your original one
Don’t restart the clock all over again

2 things,
1) I agree whole heartedly with the "don't restart the clock all over again! However, you don't have to do that (and may not be able to anyway).
2) Also, you can't categorically say "don't refinance it" as it is simply a matter of the math behind the costs (and there is ALWAYS costs whether paid up front, built into the loan or baked into the rate or any combination of the 3.)
I bought my first house when I was 29. I distinctly remember the cold sweat feeling of looking at the paperwork and seeing the pay off date (30 year mortgage). I thought, "It's going to take me longer to pay this off than I've been alive!" The whole thing felt a little surreal at the time.
(I was a finance major so paying interest has always given me hives. I have no problem collecting interest however. ).
I made the decision right then and there I'd have no mortgage by the time I was 50 years old. Having to pay on a mortgage during retirement just sounded like slavery to me.
I refinanced that mortgage twice and the mortgage on my current home once (all with no closing costs and still netted a better APR). Each time I refinanced I redid my own amortization schedule to keep the payoff date at my 50th birthday and paid religiously according to that. Of course with a lower interest rate the payments went down each time. I generally just kept paying my old amount to accelerate it. When I wrote that last check at 50 years old the feeling of relief was really indescribable. I remember walking into the bank's office and the guy telling me "Congratulations. Most people never do this. I wish I had. If you ever have any need for another mortgage please don't forget us." I thought to myself... "GLWS".
Another note, some people want/need the security of the OPTION to pay a lower note with a 30 yr mortgage vs a 15 (regardless of the what they voluntarily pay each month) and the incremental expense on a 30 vs a 15 year may be worth it to them. Everybody's risk tolerance is difference.

 

[roundhouse]

I believe you said "several" spans. You've referenced one span and I don't know how you couldn't argue that was an anomaly. Further the fear implicit in your comment is that one invested all of their money in August 1929 and not a penny before and not a penny after. I would be curious to see what the ROI chart would look like assuming someone invested an equal amount per day (or per month) over that period.

I'm not saying a severe market crash can't happen again but I won't let what happened in 1929 keep me from investing 90 years later. I believe sticking to the fundamental recommended approach of dollar cost averaging hedges against the risk of getting whipsawed by downturns (even severe ones). I survived 2003 and 2009 and came out much better in the long run because I was willing to invest when other folks were panicking.

All of this being said I unfortunately think the market does need a breather and don't doubt we'll see some profit taking at some point. I've got some money on the sidelines and I think I'm going to split the baby and put part towards the mortgage and keep some in the back pocket just in case a buying opportunity arises. Yes I realize I'm trying to time the market which is a no-no but that is a risk I'm willing to take.

The market was the same level in 1980 as it was in 1950

30 year span

Zero gain

 

[GeauxLSU]

The market was the same level in 1980 as it was in 1950

30 year span

Zero gain

Again. Nobody puts all their money in up front and sits on it for 30 years without additional investments. The charts exist showing the resulsts of consistent investment over time (I'm too lazy to find them). But the time span as mentioned to always come out on top is relatively short (7-10 years if memory serves) in the investment lifetime of anyone living.

 

[Vincent Vega]

The market was the same level in 1980 as it was in 1950

30 year span

Zero gain

Thanks and noted

 

[MJH661]

I've seen several valuable opinions here on the subject of 15yr notes vs 30 year notes. My opinion is use the 30yr note, why you ask? A wise old banker told me once always get a 30 yr note. He said you can always pay it off early and make it a 5yr, 10yr, 15yr, or whatever you want. But you cant turn a 15 yr note into a 30yr note under any conditions. Some may argue the lower interest on a 15yr, but if you pay a 30yr off early the interest becomes much less of a factor. Yes I do practice what I preach, I always use the longest time available within reason for the situation at hand, I am in the rental property business. After almost 30yrs in the field, its pay cash! Don't borrow if it doesn't make sense. just my 2cents of free advice. good luck my man!

 

[whiskerz]

Pay the mortgage. Paying interest to get part of it back as a tax deduction is a fools errand. Plus this frees up money for investing

 

[czub]

^ Valid points but to make a decision that's right for you, you need to understand the whole picture.

When you make prepayments on top of your scheduled payments to pay your 30 year mortgage in 15 years, your effective return on the amount of additional payment is equal to the rate on the mortgage. For 4.5% loan it's 4.5% or 6.25% pretax equivalent assuming 22%+6% marginal tax rate.

If you get a 15 year loan to begin with, not only you will be saving 4.5% on the additional amount, you will also be saving the difference between 15 and 30 year rates on the entire amount. With a 15 year at 4% and 30 year at 4.5% the return will be roughly 5.4% or 7.5% pretax. It jumps with higher rates and steeper rate curve.

With a 5.5% 30-year and 4.75% 15- year, your effective return is 6.9% or 9.6% on pretax basis. Ain't bad for a guaranteed investment.

 

[Vincent Vega]

Well as of March 5th so for far I've reduced the principal by around $1650. I made much of that yesterday.

Y'all made me run numbers lol. A couple of comments: I'm only 9 months into a 30 year mortgage. The total prepayment has knocked off only 4 months off the original loan but it will have saved me $4457 in interest over the life of the loan. If I stuck $1650 in an investment returning 6% per year, compounded and assuming none of that 6% is taxed (I assumed stock growth and no dividends) then it appears I would be in the same position in year 27 assuming I sold the investment that year and was taxed at a combined federal and state rate of 26%

 

[Nuke And Juke]

Financial analysis is worthless unless you factor in your death (another variable).

If your house is paid off and you die...you have pretty much elected to either:
1) pay the death tax (if you're not married)...which is huge...the gov't take a cut and leaves your estate with a lot less...
2) provided a home to the guy that will marry your wife and live in the house you paid for...

Either way, there is a case made for paying off the mortgage and not paying off the mortgage
You have to decide...do you live like a prince or the pauper...but you die at the end no matter what