paying off houses sooner

[maxtower]

Of course all this assumes you are already contributing as much as you can to tax deferred retirement accounts.

[BradleyT]

Do you want 750K "locked up" in a house and condo and not avialable for any other business uses?

Maybe take the middle road and make double payments on each for the next 2-3 years and re-evaluate. This way if any business ventures come up you'll still have plenty of available capital to put towards it. If nothing comes up, you've cut 5-8 years off each loan.

[squiffy]

The analysis I set forth is nothing new. If you do a search for prepay mortgage you will come up with the same numbers in many different websites. This is one helpful summary. Though other sites I have seen provide more mathematical depth. I don't see why people are skeptical about the numbers. Inflation and taxes are a factor to consider.

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

[squiffy]

Also, the right choice can also depend on your age.
If you are 25, you can pay off the mortgage in 30 years and have it all paid off by age 55. If you are 55 and in poor health and unable to work, you may lose the home if you cannot pay off the mortgage. So accelerating payments makes sense. Then even if you are incapacited by illness, you still have a place to live.

At any age, the safer course is to pay off the mortgage. If you are injured or get sick or get laid off, there is a risk you won't be able to make the monthly payments and could lose the home. If market prices decline a lot for some reason, you may not be able to sell for a profit, or you may be forced to sell at a very weak price.

Having said that, if you stay in good health, keep your job, and are not injured, and if inflation or interest rates skyrocket to 10 or 15%, you will wish you had borrowed 100 million that you can now invest in CD's for a safe profit.

Your house is likely to retain its real value despite inflation, and bank interest rates will rise too. They are already at about 5% or so for CD's, which is very close to beating the 4.5% gain you get from paying off the mortgage.

[prohornblower]

[ QUOTE ]
If you are 55 and in poor health and unable to work, you may lose the home if you cannot pay off the mortgage. So accelerating payments makes sense. Then even if you are incapacited by illness, you still have a place to live.

[/ QUOTE ]

Right, but this is much easier to do when you are 30 years old, and in good health. It would be exponentially more difficult to make accelerated payments in your 50's when you are in poor health. And who needs the added stress when you get there?

Take care of your golden years now, when you are young, healthy, and energetic. I think so many people in this country do it backwards. They buy [censored] they don't need in their 20's and 30's just to try to impress everyone, then get into financial trouble which eats them up by the time they are in their golden years. At this point, they look around and expect the government to take care of them, or somebody else.

OK, I'm off my soapbox. [img]/images/graemlins/grin.gif[/img]

[DesertCat]

[ QUOTE ]
Do you want 750K "locked up" in a house and condo and not avialable for any other business uses?

[/ QUOTE ]

It's never "locked up". You can always refinance. The risk you take is that you might have to refinance at a higher rate in order to fund your new business venture. But it's going to be relatively rare that you actually do refi to finance a business investment, and that rates are substantially higher while you do it. In the meantime you are earning excess returns (over CDs/T-Bills) by paying down the mortgage and those extra earnings help compensate for the unlikely risk of a forced higher rate refi.

[DesertCat]

[ QUOTE ]
The analysis I set forth is nothing new. If you do a search for prepay mortgage you will come up with the same numbers in many different websites. This is one helpful summary. Though other sites I have seen provide more mathematical depth. I don't see why people are skeptical about the numbers. Inflation and taxes are a factor to consider.

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

[/ QUOTE ]

Liz is correct that you should first, a) pay off higher interest debt, and b) fully fund pre-tax retiremenet plans, since your returns are likely to be much higher in both cases.

But in our case OP had presumably already paid off other debt and fully funded a 401k. In this case paying down a mortgage can be very attractive. Liz makes a few big errors in her logic, including...

1) Overestimating the tax benefits of the mortgage in relation to other investments. Essentially when you pay down you lose those benefits. If you are in a 30% tax bracket (state + fed), with a 6.5% mortgage, paying down each $100 of your mortage saves you $6.50 in interest a year. But it also costs you $1.95 in lost tax benefits (30%), so your net benefit is $4.55 per year, or 4.55% "after tax" return on your investment.

What happens if you instead invest in a 5% money market fund? Well you have to pay 30% in income taxes on that. Your "after tax return" is only 3.5%. So you have to find a higher risk adjusted return than your mortgage interest rate (remember your mortgage is essentially risk free compared to other investments) before it's a better deal. You can't find that in CDs, money markets, bond funds, etc, today.

And the comparison gets worse. Because there is one big exception for people who make over $100k per year. The AMT (alternative minimum tax) is starting to hit high earners, and under that system, your actual tax deductions are reduced. So instead of losing that 30% writeoff on each dollar of mortgage interest, you might only be losing 20%, 10% or less. Your after tax return may be close to your mortgage rate, which then totally blows most other options.

2) Liz totally overestimates your potential returns from a blended portfolio of bonds/stocks/cash. Today putting 40% of your portfolio into bonds/cash means that portion only earns 5% pretax. To get the entire portfolio to average 8% returns requires your equity portion to return 10% per year, which is extremely unlikely (historically equities are closer to 8-9%). She's hung up on historical returns and is ignoring todays low return environment.

[DesertCat]

[ QUOTE ]

Having said that, if you stay in good health, keep your job, and are not injured, and if inflation or interest rates skyrocket to 10 or 15%, you will wish you had borrowed 100 million that you can now invest in CD's for a safe profit.

Your house is likely to retain its real value despite inflation, and bank interest rates will rise too. They are already at about 5% or so for CD's, which is very close to beating the 4.5% gain you get from paying off the mortgage.

[/ QUOTE ]

You are correct in that paying down a fixed mortgage in an accelerating inflationary environment won't make sense. You've got cheap money and you will likely be presented with the opportunity to earn higher returns elsewhere. But that's not true today. If you put money into CDs at todays rates thinking they will protect you from inflation, you can get burned. CDs are a way of locking in todays interest rates for longer periods, so unless you keep their duration short i.e. ladder them, you'll be locked into rates much lower than future rates, while inflation increases.

In my other post I point out that the after tax return from a 5% CD is substantially less than the after tax return of paying down a 6.5% mortgage.

[celiboy]

I'm in the boat of getting the mortgage paid off ASAP - I'm from Canada by the way.

It's a tax free guaranteed return. My mortgage was abit over 5% and at my marginal tax rate that works out to around 8% in pre-tax return. Also by paying it off I have all this AFTER TAX extra cash to invest each month.

In Canada, mortgage interest is not deductible. If it was like in the U.S., it would be a closer decision. Also being mortgage free is a great feeling. I know that if I lost my job tomorrow, it really would be no big deal. I like the security in that.

[pig4bill]

[ QUOTE ]
I'm in the boat of getting the mortgage paid off ASAP - I'm from Canada by the way.

It's a very low tax free guaranteed return.

[/ QUOTE ]

FYP

[ QUOTE ]
Also being mortgage free is a great feeling. I know that if I lost my job tomorrow, it really would be no big deal. I like the security in that.

[/ QUOTE ]

LOL. Yeah, having the $640k instead of paying off the mortgages would have me worried to death if I lost my job. Where oh where will I get the cash to make next month's payments?