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Early mortgage payoff, or ???

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mopowers
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Early mortgage payoff, or ???  Reply with quote  

After playing with a mortgage calculator, I figured out a doable way that I could payoff my current mortgage in 13 years making extra payments. If I made the minimum scheduled payments, it would take 28 years (loan is 2 years old). BTW: I still owe $280k.

Since my mortgage rate is only 3.25%, wouldn't it be better to invest the funds I would've otherwise used to pay off the mortgage loan? Seems like if I could make more than 3.25% annually on those funds, that would be the better option.

Thoughts???
Post Wed Mar 04, 2015 6:05 pm
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oldguy
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Home loans in the US is one of the cheapest sources of capital in the world - all other nations require short (usually 10 yr) resets. But in the US you get a 30 yr Fixed Rate locked in loan. I would never prepay a low-rate 30-yr loan, keep it for the full term.

You were probably going to add about $1000/m to your payment to arrive at the 13-yr paydown? Instead, put $1000/m into an 11%/yr fund, that should be about $600,000 in 20 yrs. And $1.7M in 28 yrs.
Post Wed Mar 04, 2015 6:27 pm
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Wino
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Re: Early mortgage payoff, or ???  Reply with quote  

quote:
Originally posted by mopowers
After playing with a mortgage calculator, I figured out a doable way that I could payoff my current mortgage in 13 years making extra payments. If I made the minimum scheduled payments, it would take 28 years (loan is 2 years old). BTW: I still owe $280k.

Since my mortgage rate is only 3.25%, wouldn't it be better to invest the funds I would've otherwise used to pay off the mortgage loan? Seems like if I could make more than 3.25% annually on those funds, that would be the better option.

Thoughts???

There is one variable that you have not considered: Risk.

If you are put in dire financial straits for any number of reasons, having loans without the ability to pay them can cause financial ruin.

Oldguy's numbers require you to HAVE the $280K now for investment. His method works (historically, no one knows what will happen tomorrow) if you have $280K that you DO NOT use to pay off the house, and invest it, and get the historical gains.

My recommendation is to pay off the house as you've outlined, then build wealth. If you want to try oldguy's methond, once you have a bit of money invested - call it $150K or so - buy one or two rental properties with loans at the admittedly good rates and then play the difference game.

With oil prices plummetting and layoffs announced in many sectors, the market may be due for a correction which is actually overdue. Typically, every 7 years or so there is a major correction, and the last one was around 2008. Of course, no one knows if this pattern will hold, but as I said, every 7 years there has been a correction for the last 30 years or so.

2008/9, 2001/2, 1998 (shorter that time), 1987 (note that 1987 to 2001 is 14 years, meeting the average) ... all of these saw major market corrections of 15% or more. The time to buy in each case would be after the correction for maximum gain. What year would be 7 years from 2008/2009? Buying right before a correction means you immediately lose 15%, assuming similar losses.

Now, if you pay off your house, you will have "free money" to invest. with that, you can afford to keep buying as the market swings, and from that realize gains as oldguy predicts (again, assuming future is roughly like the past and there's no reason not to assume that) without undue risk.

My recommendation, pay off the house, and as you get raises, pay it off even more quickly. After your house is paid off and you're out of debt, start to diversify your investments into mutual funds, real estate, bonds, and anything else that appreciates in value. Again, wait until you have the assets before courting the risky investment scheme you've pondered and oldguy has seconded.
Post Thu Mar 05, 2015 5:18 am
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mopowers
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Thanks for the input, guys.

Wino: I'm not sure I'm making the connection between market corrections and whether or not to pay the house off early. Are you saying that knowing a correction is eminent means it'll be more difficult to assume a rate of return on investments will be greater than the interest rate of the house??
Post Thu Mar 05, 2015 2:22 pm
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Wino
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quote:
Originally posted by mopowers
Thanks for the input, guys.

Wino: I'm not sure I'm making the connection between market corrections and whether or not to pay the house off early. Are you saying that knowing a correction is eminent means it'll be more difficult to assume a rate of return on investments will be greater than the interest rate of the house??

First off, no one "knows" if a correction is imminent or not. What I am saying is that paying off the mortgage is a known, absolute plus in your favor. The market is an unknown, and you may actually lose money. You may also make more money in the market than you would by paying off the house. That's the "risk to reward" that everyone talks about.

The thing is that with the "risk" you can also LOSE money. With the mortgage payoff, you will not lose money. The market correction was only mentioned to illustrate that it is quite possible that a 15% or larger loss could be encountered in the near future. In 2009, it took about 20 months to recover. This means that you won't even break even until about 2 years, and you'll have lost all the gains you would have made toward paying off your house.
Post Thu Mar 05, 2015 3:56 pm
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mopowers
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Ok, I get it now. Thanks for your input.

I'm 32 now and make more money than I know what to do with. I'm beginning to think splitting it up and doing a little of both options may make sense.
Post Thu Mar 05, 2015 4:13 pm
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oldguy
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Prepaying a 3.25% loan is the same as investing in a 3.25% CD (+/- the tax break if applicable). So that's the comparison for you.

The Law of Investing - "risk and return are directly proportional" - applies. If you are risk averse, a 3.25% CD would be a desirable investment. And if you want more risk, you would lean toward the 11%/yr market. Or pick anything in between 3.25% and 11% by mixing the two.

When I was age 32, in my wealth-building years, I invested fully in 11% risk, And now that I'm retired, in my wealth-preservation years, I stay down at about a 6% to 7% risk level.

quote:
a 15% or larger loss could be encountered in the near future. In 2009, it took about 20 months to recover. This means that you won't even break even until about 2 years, and you'll have lost all the gains you would have made toward paying off your house.

Wino brings up a good point. 'Investing' is a longterm process, 25 or 30 years. So you must commit to a discipline, if you trade in & out every few years, it is almost certain that you will lose, very few traders do well. So if you "invest", you must steel yourself to caring about the Market in Year2045 - the near-years could be anything, eg up 40%, down 40%, you need the resolve to ignore that. Wait for the ups/downs to statistically cancel over 25 or 30 yrs.
Post Thu Mar 05, 2015 4:52 pm
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Wino
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quote:
Originally posted by mopowers
Ok, I get it now. Thanks for your input.

I'm 32 now and make more money than I know what to do with. I'm beginning to think splitting it up and doing a little of both options may make sense.

I'm going to be blunt. The highlighted area above is plain stupid.

I like your idea to split the extra money between paying off the mortgage and investing. You'll get the security of removing your debts, allowing you to invest more over time. In addition, you'll get the benefit of compounding for 30 years at your young age.

I think that's the best plan. It is conservative on the pay off, and it is also speculative on the investment. I may not always agree with oldguy, but we are both in agreement that 30 years in the S&P 500 is probably the most "sure thing" high return out there. You are pretty much putting your money into the US economy, and "betting" that the best 500 companies will continue to grow in the future as the best 500 grew in the past.

History backs oldguy's 11% average, which is probably about 9% compounded, due to volatility.
Post Thu Mar 05, 2015 5:30 pm
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mopowers
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quote:
Originally posted by Wino
quote:
Originally posted by mopowers
Ok, I get it now. Thanks for your input.

I'm 32 now and make more money than I know what to do with. I'm beginning to think splitting it up and doing a little of both options may make sense.

I'm going to be blunt. The highlighted area above is plain stupid.



I know it's stupid. That's why I'm trying to educate myself. Thanks for both of your folks' input. I appreciate it.

I have an appt with my financial adviser as well to help educate me on what my best option is...
Post Thu Mar 05, 2015 6:14 pm
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littleroc02us
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I agree with Wino, but think of it this way. Yes you could just pay the minimum on your mortgage and all of the interest and keep the mortgage for 28 more years. What your not thinking of is all of that income that is tied up in payments. Personally, I don't like making payments, because it allows me to use my income to generate wealth which is 1000 times less riskly then using leverage like OldGuy suggests.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu Mar 05, 2015 10:17 pm
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mopowers
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Thanks for all the input guys. Just met with my financial adviser as well. I have a good idea of what I'm going to do now. Thanks again.
Post Fri Mar 06, 2015 5:14 pm
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