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I definately agree with the last statement. You don't want to be making payments on your home (or car or anything) at retirement.
I wouldn't expect most people to want to separate their emotions from their handling of money, but I would expect that people try to understand the full consequences of their decisions. If they're willing to forgo a low-risk future income of (for example) a few thousand dollars a year in order to feel "at ease" earlier by paying off a mortgage sooner, then that's a perfect, *personal* decision.
This personal aspect is also why one-size-fits-all financial mantras are often bad financial advice.
I completely agree. It would be wonderful to have no mortgage when living off a fixed income. I hope I'll be in that position. :-)
If this was true, then why is called 'personal' finance? People's emotions and character work hand-in-hand with money, at least how money is handled.
"Once you retire and income presumably drops, you don't want to have that much of a mortgage payment preventing you from using your money for other living or enjoyment expenses."
Wouldn't it be nice to have NO mortgage when you have a fixed income? :)
When I think about what's less stressful, being debt-free or losing a million dollars, the later always comes out on top.
I love the way you put that. Paying on a mortgage is a low-risk, low-yield investment, and in that sense it is very much a diversification of your portfolio.
Continuing with that reasoning, think about a 30-year mortgage as a 30-year fixed-rate CD. If you have a long time until retirement, how much $$ do you want to allocate to that CD vs. stocks and stock funds? The answer to that is easy . . . not much. And that's exactly how you should think about extra payments on a mortgage: low-yield investing. Over the long-term, such investments never (at least not yet) do better than the stock market, and it's not even close. My minimum monthly mortgage payment is enough exposure to this investment for me, since I'm just 27. I can tolerate short-term volatility to get the long-term payoff.
If I have a $160k 30yr fixed at 6% my payments are $989 a month. I pay $500 extra a month to pay it off early instead of investing, I pay it off in 13 years shaving 17 years off the loan and $115,038 in interest. I invest the monthly payment of 989+500 a month for 17 years and I end up with $796,898 minus a few thousand a year for taxes since I lose my mortgage interest deduction, say a good $50k over 17 years leaving me with $746,898 invested after 30 years.
OR I just put in $500 a month and end up with $1,085,600. All assuming 10% return. A difference of $338k.
With a low interest rate on the mortgage and a high return on your investments, it's a no-brainer as far as wealth building. Keep the mortgage and divert your free cash to investing . . . unless your investment horizon is short, like less than 10 years. In that case the low risk of the 6% mortgage may be preferable to the stock market, since in a short period your investment in the market stands a better chance of losing money.
The only place where disagreement can arise is the psychological side of it. For most people 90% of personal finance is the psychological side. I mean, really...most of this stuff is very basic math.
For most people being completely debt free is quite the invigorating thing that allows you freedom to do what you want, when you want.
If you don't know anything about investing, you're probably better off paying it down (after you've built up a large emergency fund).
By the numbers, paying off the mortgage early or investing is basically a wash. It becomes an emotional decision.
It comes down to three factors:
1. Estimated alternative return. Long-term future return from the stock market is likely to be about 7% (not the 10% commonly quoted). See this article:
http://www.investorsfriend.com/return_versus_gd...
for details. This article is the best explanation around and justifies the 7% annual return number. Don't just quote 10%!
At 7% the difference between, for example, $1500 invested monthly for 17 years vs. 500 invested monthly for 30 years is pretty much a wash.
2. Volatility. The 7% stock market return is an average. Look at stock market cycles. If you had to cash out for retirement in 1999, for example, it would have been great. If you had to cash out in 2001, it would have been terrible. If you invest all the money in the stock market (no diversification, which would likely reduce the 7% return) then you better be comfortable with risk.
3. Taxes. The mortgage deduction tax only lasts for the first few years of the mortgage payback, and is further impacted by the AMT. There is a difference, but it's not a huge difference.
Realistic Numbers show this decision is about emotion. The numbers are a wash. If you less oriented toward risk, then you pay off the house and diversify the investments after that. If you are more oriented toward risk, then you stay on the regular mortgage schedule, don't diversify, and hope you sell out at a high point in the market cycle.
Your choice.
I can agree with your statement. I get 50% employer match for me 403b contributions, up to 5% of my annual salary. Not great, but $5000 + matching $2500 is the best money available to me right now. I plan on maxing that every year. After that, it seems to me early mortgage retirement is my next best investment, since saving money is not taxable today or ever, but earning money and investing is taxable someday. Make sense? Kind of like diversifying.
I also feel better paying off loans. That is why I pay more to my super low interest student loans. Sometimes emotions override pure logic.
following up on the point made by Stein that paying off a 6% mortgage is equivalent to a 6% return on your investment-- and it's guaranteed-- we should also take into account that it's like earning 6% absolutely tax-free. Because if you're getting rid of a debt that's at 6% it's arithmetically the same thing as earning a 6% return-- but crucially it doesn't involve any income as defined by the IRS!
Now I'll admit that when I had a house I didn't overpay my mortgage-- I put extra money into the stock market instead (buy and hold, baby!). But I did this in full awareness of the fact that if I could earn 6% in stocks (outside my retirement account), I'd have to pay taxes when I sold, but if I made my debt go down and thus avoided a 6% interest rate on the same money, there would be no taxes. (Seriously: where's the line on your 1040 to list "how much less I owe on my mortgage now"? If you can't list it even if you wanted to, then you can't pay taxes on this "earning").
Be debt free. You have many more options in the future. Hey, if you lose your job, you probably won't lose your house! As we can see in this market with times of huge government spending and borrowing, times are changing.
It's funny to read the comments from the know-it-alls above about the mathematics of investing and bla-bla-bla. I dare anyone to find a portfolio that has returned 10% annually for the last 10 years! What bull! The last 5 years s&P 500 rate is a negative -2.5%! and before that we had the 2001-2002 crash.
Is everyone still as sanguine about making a 10% return on the stock market now as they were in June 2007?
The stock market has always had it's ups and downs. While I think timing the market is futile for nearly everyone, I haven't been able to resist myself and have recently doubled my monthly investment into several funds. It's like money is on sale now!
The most reliable way we have to make decisions about the stock market is it's past performance, and past performance indicates that we'll continue to average 10% or greater returns going forward, with intermittent dips. Past performance also shows us that 95% of the 5 year periods and 100% of the 10 year periods, in the history of the stock market have made money, and 100% of the 10 year periods. Which is why if you're investing for the short term you don't use the stock market...