paying off houses sooner

[mike l.]

im thinking of putting all my money into paying off my house and a condo we own much sooner than the loan period (30 yrs). like 2 years for the condo ($165k owed) and 5 years for the house ($475k owed). there are no prepays on either loan. is this a good idea or bad idea and why? i have no other debt and would prefer to not pay so much interest to banks over the next several years. we have NO plans to sell these houses for a long time.

[DesertCat]

Essentially you are investing your savings in mortgages. Your return will be the mortgage interest rate, minus the tax deductions you'll lose. I always treat it as a "pre tax" interest rate because of the lost tax deductions, which roughly correspond to the taxes you'd pay on a taxable investment.

If you are in AMT territory (alternative minimum tax) this is less true since you aren't allowed to use all of your mortgage interest as a deduction. If one is an investment property, then talk to a tax advisor, but presumably it's entirely deductable.

So taxwise, a 6.5% mortgage is like a 6.5% money market/CD. If you were going to invest in CDs or money market accounts clearly you'll get a much better return paying down your mortgage. Over long periods you will probably get a slightly higher (8%ish) return investing in an index fund, but then you have to accept volatility risk. I.e. an index fund could underperform for 5 years or more. Paying down your mortgage has no volatility risk, and no repayment risk.

Essentially, unless you have an opportunity to invest in something that provides a significantly higher risk adjusted return than your mortgage, you should pay it down.

The only real risk is that you get financially strapped overpaying your loan, have no savings, then lose your income. You might be forced to sell a house or take a higher rate refinancing. Keeping a home equity line for emergencies like this is a good idea.

[stinkypete]

what are your interest rates?

[mike l.]

6.5%

[DesertCat]

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6.5%

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What a read!! <pats own back>

[4CardStraight]

Perhaps you should look into a 15 year refi ...

You could potentially put a little money up front and make sure your interest rate is quite lower than 6.5, you would be locking into a higher monthly payment, but it seems like you have the cash to afford it. After you are locked in with a lower rate at 15, then take your excess and probably invest it appropriately for when you need the funds (equities and bonds) and the equity portions into etf index funds. Or if you are extremely risk adverse, paying off the mortgages in as soon as 4 years can make sense...

Good Luck!

[stinkypete]

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risk adverse

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i cringe every time [img]/images/graemlins/crazy.gif[/img]

[DesertCat]

[ QUOTE ]
Perhaps you should look into a 15 year refi ...

You could potentially put a little money up front and make sure your interest rate is quite lower than 6.5, you would be locking into a higher monthly payment, but it seems like you have the cash to afford it. After you are locked in with a lower rate at 15, then take your excess and probably invest it appropriately for when you need the funds (equities and bonds) and the equity portions into etf index funds.

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I refied into 15 year and got a quarter point lower rate out of it, but i'm regretting it. My payment is $2k per month higher and my income is "intermittent", it sucks making that big payment during months where my income is zero. So in my case I feel it wasn't worth it.

And investing money into bonds at todays rates when you have a 6.5% mortgage will hurt your returns as I'm not aware of any risk free 6.5% bond opportunity out there.

[RJT]

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risk adverse

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i cringe every time [img]/images/graemlins/crazy.gif[/img]

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Pete is saying “irregardless” of one's risk tolerance, the word is averse.

[pig4bill]

Don't refi unless you get a substantially lower interest rate. You will pay out the behind for fees and closing costs, much of which is not deductible. It also should be easy to average more than 6.5% annual return by investing the money rather than paying off the house.