paying off houses sooner

[prohornblower]

Mike,
I think it's a good idea. So good of an idea, that I'm planning on doing the same. [img]/images/graemlins/laugh.gif[/img]

Of course, I value peace-of-mind way more than most people. [img]/images/graemlins/grin.gif[/img] To me, there is no financial substitute for peace of mind. I use money to leverage POM, not POM to leverage money.

[Ray Zee]

its a great plan but make sure you have a decent buffer to fall back on if you go awhile with low income so you dont have problems paying your payments.
owning things free and clear makes you sleep well at night and enable you to take other good risks when you know that if they fail you arent in danger.

[squiffy]

First, there is often no correct answer to a question like this. The correct answer depends on your particular circumstances and needs.

On the one hand, paying off the mortgage early gets you peace of mind. If you get injured and don't have sufficient disability insurance or lose your job, you have a place to live.

On the other hand, interest rates are at their lowest level in about 30 years. If gasoline is selling for a $1 a gallon, why not stock up? If money is cheap, why not borrow a lot now, at a cheap rate.

One analysis I saw somewhere explained that it is really not costing you 6.5% The bank is charging you 6.5% interest. But over 30 years, with inflation running at 3% a year, you are paying back in dollars that are worth less and less, so you are really only borrowing at 3.5%.

If you borrow in today's dollars, you would rather pay it off as slowly as possible, so that when you pay off in dollars 30 years from now, you are paying them off in cheaper dollars.

Also you get tax deductions and breaks that are worth an additional few percentage points off your taxes, so effectively you are borrowing money at say 2%, which is pretty damn cheap.

My view is that I would love to control a 500K property for only 100K down, and borrow the rest, as long as I can make the monthly payments. That gives me leverage.

Over time, I expect the 500K home to appreciate substantially (if I live in California or NYC.) It does depend where you live and how much appreciation you expect over 30 years.

I would say that real estate debt is good debt. And good leverage. And I would say that if you can afford to live a comfortable life and only make the payments, then in the long run, you have more money to invest in stocks, or buy more real estate, or for emergencies or repairs.

And you have already borrowed the cash at a very low rate.

If interest rates some day reach the 8% or 10% level (though hopefully they won't) then you may be very glad that you borrowed a lot of cheap money.

I think having the extra cash in the bank gives you more flexibility than having the cash locked up in your home equity. And it's worth paying 2% a year interest to have immediate access to the liquid cash.

In theory, you can tap the equity in the future, with a home equity loan, but that might be at a time when interest rates are much higher, and you may regret not having borrowed at the cheaper rate. Just as I regret not buying $10 million worth of gasoline futures when gas was selling for a dollar a gallon a few years back.

Having said that. If you really cannot think or any reason why you might like to have extra money sitting in the bank, then pay off the mortgage.

You should go to the library and review a few books on real estate and mortages.

I guess the key question is whether you have any other use for the cash, either as emergency money, or to invest.

Again, this is all dependent on your own situation. Where you live, how much money you make, how much money you need, etc.

If you are dying of cancer and have only 1 year to live, I would spend the cash now and not pay off the mortgage. I would travel, spend time with friends, etc.

If you plan to stay there long term and cannot come up with any other use for the extra cash -- stock market, buying additional real estate, etc. -- then pay it off.

To me it just seems like a waste to have 500K sitting tied up in my home.

And be sure you have good insurance. My neighbor's home burned down and he had to have the entire home rebuilt.

In California, owning a home can be risky if you live in an earthquake prone city. Many insurers don't offer earthquake coverage, and it's not clear that the state fund will be solvent in the event of a major quake.

In that case, it's not clear that you want to have all your money tied up in the home. If you lose the home, you lose most of the money, except the land value.

If the mortgage is non-recourse, then if you lose the home, the bank's remedy is to take the land and home, in most states. You only lose the downpayment you made on the home. Non-recourse means that the bank cannot come after you personally if you default on the mortgage. They bank's remedy is to sell the land, with the earthquake damaged home on it.

[SossMan]

[ QUOTE ]
One analysis I saw somewhere explained that it is really not costing you 6.5% The bank is charging you 6.5% interest. But over 30 years, with inflation running at 3% a year, you are paying back in dollars that are worth less and less, so you are really only borrowing at 3.5%

[/ QUOTE ]

that's some interesting math. I bet someone could poke a few holes in it if they thought for about .5 seconds.

[prohornblower]

[ QUOTE ]

Over time, I expect the 500K home to appreciate substantially (if I live in California or NYC.)

[/ QUOTE ]

So what if it does? It isn't a realized gain because you utilize (live in) it. Once you realize the gain (sell the home), you then have to find other shelter which has already realized this gain as well (in the same market). Unless you plan on selling a California home, and moving to a much cheaper market. But you can't be sure of that being in your future.

I don't think of my primary home as an investment, per se. If I own two homes or more, then yeah. That way, if the housing market booms, you can sell of the home you don't live in, stay in the first, and then re-buy a 2nd home after the market receeds a bit. But when you are utilizing your only home, it's not like you can just realize the profit very easily.

[Mr. Now]

if the Fed is diluting the dollar like they seem to be, it makes sense to pay off in diluted dollars.

no one knows for sure, given there is no M3 to examine any longer. nothing to worry about there. everything is ok. relax, everything is fine with the financial system.

http://articles.moneycentral.msn.com...tionGauge.aspx

[pig4bill]

[ QUOTE ]
its a great plan but make sure you have a decent buffer to fall back on if you go awhile with low income so you dont have problems paying your payments.
owning things free and clear makes you sleep well at night and enable you to take other good risks when you know that if they fail you arent in danger.

[/ QUOTE ]

There really is no such thing as free and clear when it comes to real estate. You still have to pay for insurance and you still have to pay property taxes. Stop paying your property taxes and the government will take it away from you just like the bank would.

There's also the point squiffy made about unforeseen natural disaster. Think New Orleans. Would you rather have the bank sharing your risk or you taking it on all by yourself?

A mortgage is a beautiful thing. The bank takes on a lot of your risk. You get ALL the appreciation. You have total control over how it's used. You can sell it whenever you want.

[maxtower]

The answer to this question is easy. It only requires knowing what you would use the money for otherwise. Just compare the expected returns of the alternative investments.

About the only thing I can think of that would make a better use of your savings than paying down the mortgage is putting the money in an index fund. If that volatility scares you then just pay off your mortgage.

[NajdorfDefense]

[ QUOTE ]
The answer to this question is easy. It only requires knowing what you would use the money for otherwise. Just compare the expected returns of the alternative investments.

About the only thing I can think of that would make a better use of your savings than paying down the mortgage is putting the money in an index fund. If that volatility scares you then just pay off your mortgage.

[/ QUOTE ]

So if you have a 5.25% 30-yr mortgage you should rush to pay it off? Hardly.

[maxtower]

I didn't say that.
I said if he didn't want to put the money into stocks, he might as well pay down his house. There aren't really any better passive options for investment money.
Also the OP is paying 6.5%.