Motley Fool's Selena Maranjian found little ol' HP, and wrote about my post "Here's an idea - lose the mortgage", where I said never ever again will I have a mortgage - I'll sell my stocks if I have to. MSNBC picked it up too.
My argument is why pay someone interest, when there's no way the market will return 6%-8% annually over the next 10 years or so, not with our problems (past performance does NOT equal future returns). I'll take the guaranteed 6%, 7% or 8%, then invest any cash left over in risky stocks. And that mortgage interest deduction? Not as valueable as it's made out to be, and in risk of going away.
Bottom line - she disagreed with me. Do you?
As I was traipsing around the Internet the other day, I stumbled upon a blog titled "Housing Panic," where I read an interesting post. The writer asked for anyone's thoughts on this question:
"Anyone thinking of cashing in stocks, bonds, 401(k)s, etc., to pay off your mortgage instead? Say you have $200,000 in disposable financial assets, and a $200,000 mortgage. What do you do? ... My goal -- rent 'til this sucker blows over, then buy my next house for cash. No more mortgages for me..."
It's a question that many of us can relate to -- perhaps especially those who have already paid off a big chunk of their mortgage. Those with new mortgages might highly value the tax-deductibility of mortgage interest, but as your mortgage ages, you'll be paying less in interest and more against your principal.
My own answer would be that for most people, it's smart to keep the mortgage. There's that deductible mortgage interest, for one thing. And then there's the low interest rate that most of us, by now, should enjoy. When your rate is low, such as 5% or 6% or even 7%, you can compare that with what you'd make in the stock market over the long haul, and stocks will generally win out.
May 31, 2006
MSM picks up (and disagrees with) HP's post on paying off the mortgage vs. buying stocks
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35 comments:
I disagree with MSM because I did just what you posted. A day beforehand in fact, then I expressed my joy in having done so on your blog.
That MSM article had some interesting links below it about how to make money in RE. I doubt the articles said the path to riches was to short HBs. They also had a bunch of links to mtg companies. Fair reporting or leading the sheople?
I disagree with you Keith.....purely from a historical perspective. Here's my points of disagreement:
- If your 200k is in diversified assets (such as the s & p), this investment historically generates a 9% return (or it has for the past 100 years). It would be foolish to sell a 9% returning asset to pay off a 4% (figuring in the mortgage tax deduction) loan
- Bonds, CD's, Cash: I agree with you here......if you are foolish enough to have assets such as the above AND debt, by all means pay off your debt. Start with credit cards first, followed by auto loans, then your mortgage.
- Do NOT cash out your 401ks early to pay off your mortgage.....are you CRAZY? There is no way the withdrawal penalties you would incur would justify paying off your mortgage from your 401k.
Keith - I know your argument is that "past performance guarantees future results". I agree with that statement, however based on the 100 years past performance of the stock market, I think that the stock market will go up in the next five years (including this year), not down.
If you are sooooo sure that the stock market will go down, you should take the whole 200k in disposable income and short the market.......let me know how that works out for you.
People who understand "interest", collect it.
People who don't, pay it.
I would pay it off all day long if I could. I owe $100000 on our $350000 appraised (how ridiculously inflated, built for ~$200000) home. Even with the sweet 5.5% fixed rate we have. We have no ability to deduct any of this gd interest as the article says to do. You gotta be screwed to be able to deduct. We owe nothing but this mtg. It's another case of those that are financially sound getting bf'ed. Just pissing away $ on interest. Put it in the markets? You gotta be kidding. The word 'FLUSH' comes to mind. You just gotta love how stupid people are and how they can steer the lemmings wrong with horrid advice.
auto - if you could GUARANTEE me 9% returns, I'd keep the mortgage. But you or nobody can.
And I feel we're in dangerous, disruptional times ahead. Never before has a country run up the debt we have. Never before has a country owed other countries so much. Never before has a country outsourced its entire manufacturing base. Never before has one country been financially responsible for the policing of the world. Never before has a country had the massive future liabilities that we now face.
Frankly, I think we'd be lucky to get 0% real growth in stocks for the next 5 to 10 years.
So with that thinking, pay off debt first, guarantee the interest savings, then fart around with the rest, trying to stay above water with the shrinking dollar.
The real story is the total destruction of the Dollar by this Administration and the greed of most Americans who refuse to save, research and invest.
It won't end till all markets are screwed, $$$ semi-worthless and a shitload of people under/non employed.
A huge economic downturn is the only thing that wakes people up from our slumber but sadly WE ALL forget rather quickly and hold no one accountable. We've become the nation of half-ass excuses, including myself when I was younger.
Besides, the interest I was paying on my particular mortgage was 8 1/2% vs the 5% I have to pay MYSELF because I borrowed the money from my retirement fund. The fund was one I could manage in various vehicles and it did quite well over the last 3 year bull run. It is a 5 year payoff to return the money with no prepayment. Only cost $50 to do it. I own the property now, which was my last debt. All my money now can be saved / invested / squirrelled away in PMs or other solid assets, an option I did not have before.
The trick is finding a way to do that in a protection mode.
The question is whether to invest in the market while carrying a mortgage or "invest" in paying off the mortgage.
Let me introduce another component into the mix. We have talked a lot here about inflation. Inflation acts to reduce the size of one's debt in real terms. Therefore debt is a hedge against inflation! Provided that the inflation rate is higher than the interest rate, you are actually coming out ahead by keeping that mortgage!
If you anticipate rapid inflation as Keith appears to, then paying off one's mortgage today is very silly. Why pay off the $200,000 now when the dollar is relatively high, pay it off in a few years when $200,000 is worth a lot less, right Keith? Hell, you might as well take out a home equity line of credit to buy gold or something that way in a few years you just toss a small nugget at the bank to settle the debt. Right, right?
Don't get me wrong, I don’t think anyone should borrow money to buy gold, but if you really believe that hyperinflation is imminent, then that would seem to be the logical course of action.
Practically speaking, your mortgage should be the last thing you pay off. Start with the credit cards, student loans, etc.
We're hanging onto our mortgage. As I mentioned in my earlier post (the one that got quoted in the MF article), it's at 15 years, 4.75%. I've done the math on our investments and the dividend yield on them is actually around 4.5%. Factoring in the tax deduction (which we do use, to offset the dividends), we come out ahead -- even if it's "dead money" for the next couple of years, adjusted for inflation.
But one thing the MF writer mentioned that I didn't think of is this issue of having a chunk of change in the event of a financial emergency. It's a whole lot easier to cash out of the stock market than it is to go out and sign up for a home equity loan.
That said, if we were to come into some type of financial windfall before the loan is paid off, we'd pay it off.
thinker - very good point.
In a high inflation period, how about paying off the loan then and buying TIPS? Or foreign currencies that hold their value?
I'm more convinced of an economic slowdown, and decline of the dollar, than I am of inflation however. I think the fed will continue to raise, inflation will be high but not hyper, deflation will be a risk as the economy collapses, and the sure thing is the dollar will fall.
thoughts?
Lets get our terms right...
Deflation is when the value of the dollar goes up.
Inflation is when the value
of the dollar goes down.
I know it sounds silly, but its true.
Generally during inflation, prices and wages go up but purchasing power stays the same.
Lets not forget "stagflation" otherwise known as "Reaganomics". This is when the value of the dollar goes down (inflation) but wages don't seem to keep up.
keith, everyone is using 20/20 hindsight... looking back, a mtg was ok...good carry trade, but not going forward. Going forward i have to agree with kieth, b/c the returns are uncertain and the big mtg sucks.. the write off is not worth it, and the AMT crowd gets dubble bubble fucked.
Actually, very rich people have neg am interest only loans because they can afford to use them to theur advantage. whatever they save in payments every omnth egts applied to investments elsewhere. Thats why neg am loans are best for sophisticated investors not the average joe trying to buy more house thatn he can afford.
Keith, I would tend to agree with all of your main arguments, except for the fact that I hear so many other people around me saying the same things, it almost makes me want to be contrarian.
This country is screwed up, no matter how you look at it. It may be too screwed up for even good leadership to be able to fix.
Then again, you never know. We could end up with Gore in office in 2008, and a congress willing to work with him. If he raised the tax rates on the top 2%, cut the bloated MIC budgets, invested heavily in biotechnology/alt. energy/technology R&D and education, got a plan and made deals with foreign countries to pay down the debt, took us immediately out of Iraq and the M.E., gave us single payer healthcare... just maybe we would have a chance. We'll never be the superpower again, but we could be the plucky little America with actual growth and industry.
I wouldn't want my money tied up in real estate under that scenario.
Oh what a feeling; when you pay off that mortgage, and don't owe nothing to no one.
If you have the cash pay down the mortgage to the point where you're comfortable with the interest charged. I just prepayed three years with $20,000 and saved 20,000 in interest. The benefit is immediate compared to investing the 20,000 over the next fourteen years to enjoy the same return.
Always keep enough cash for a good nights sleep and the ability to tell your Boss to F*** Off.
What would Warren Buffet do.
Exactly.
Don't pay someone else. Pay yourself.
And enjoy the F out of the fact that the home you live in is yours. All yours. And they can't take it away.
Now if you don't pay it off, put that $$$ into the market, the market crashes, you lose your job, recession hits...
Then you don't have enough $ to pay your mortgage, and you lose your house.
You have no $ and no house.
Hmmm... tough decision.
Can't believe I agree with Kieth. What is the world coming to?
As a simi-professional gambler (I do pay some bills with my revenues) I can tell you nd I think most gamblers will. It is import to remind yourself that the plastic chips are in fact real cash.
Cash in you chips often. Smell the money. Then spend $5.00 on breakfast. Come back and buy more chips back.
When you live in a world of debt. You lose sight of the value of the debt and will only compound it out of control. Living in a fairy tale where your cash flow will persist into your 80's.
It hurts to pay down debt. There is only one way to keep this reality real.
I always shake my head at these financial know-it-alls who are sure that you can get better returns in the stock market than the interest rate on the mortgage. The only way that is done on a fairly consistent basis is to invest in stock index funds that mirror most of the stock market as a whole.
How many people 'roll the dice' by selecting specific stocks, or investing in some go-go mutual fund, only to get returns that woefully underperform the market? Answer: it happens a LOT, way more than 50% of investors end up this way.
And I do discount the whole mortgage interest deduction thing, although not as much as Keith. Like some have already said here, you have to pay up the ass to do it. And it's not like you can just take your income tax rate and use that as your basis because of the high threshold to qualify. You just have to see how much you actually save on your tax returns with the deduction to figure out how beneficial it really is. I don't discount the issue as much as Keith because if this provision ever went away (and there is VERY strong support to keep it), you could consider paying off your mortgage at that time.
thx chris g, who said:
I always shake my head at these financial know-it-alls who are sure that you can get better returns in the stock market than the interest rate on the mortgage. The only way that is done on a fairly consistent basis is to invest in stock index funds that mirror most of the stock market as a whole.
auto effects said
If your 200k is in diversified assets (such as the s & p), this investment historically generates a 9% return (or it has for the past 100 years). It would be foolish to sell a 9% returning asset to pay off a 4% (figuring in the mortgage tax deduction) loan
Looks like we are in agreement
"Lets not forget "stagflation" otherwise known as "Reaganomics". This is when the value of the dollar goes down (inflation) but wages don't seem to keep up."
Isn't that what we have right now? If the feds don't keep raising the interest rate it will just get worse. I think the message today was we will at least go up another .5 but for now only .25 percent. It will go as high as it needs to go to avoid stagflation or hyperinflation. Housing be damned.
Learn from history. When inflation was umpteen percent, people were awfully happy to have low yielding mortgages.
I think we will see inflation in the future. Heck, CDs are already paying 5%, it's almost matching my 5.5% fixed rate anyway. I'll keep it.
Keith,
Nice picture. I'll trade in my house for one night with that!
Zinger,
I have to admit, when I saw the D&D reference, I almost stopped reading.
However, I actually have thought along these same lines:
held in a non-operating and non- A parcel of land in which clean and clear title is held in a non-operating and non-breakable Limited Liability Company for the benefit of its members
Thing is, even if I had the right attorney(s), I would have no Idea of how to explain to them what I want to do. What exactly am I asking for? How do I explain it?
auto effects,
I'm not sure if we completely agree. I believe that most people should not be invested 100% in the stock market. Just because one is diversified with respect to stock assets doesn't necessarily mean that their investment portfolio is allocated for their needs. Investing heavily in stocks should only be done if you don't need the money for at least 5-10 years.
Because I don't think most people should be invested that heavily in stocks, the argument to pay down the mortgage faster becomes somewhat more valid because diversification outside of stocks tend to lower returns (the upside, of course, being less risk/volatility.)
401k = don't need the money for at least 5-10 years.
Do NOT cash out your 401ks early to pay off your mortgage.....are you CRAZY? There is no way the withdrawal penalties you would incur would justify paying off your mortgage from your 401k.
Zinger,
Do you mean to tell me that a non-operating LLC has an "Operating Agreement"?
This makes no sense at all.
By all means, pay off the mortgage and live your life free and clear!!
I disagree with the author. This market is too iffy to expose one's 'assets' in the stock market and count on reliable employment in an economy where real inflation is galloping, though it's hidden so far in inflated housing prices and commodities. It has already begun to hit the fan, and with most Americans employed in Service industries, the blowout from the falling housing market will hit everyone, especially as bankrupticies soar despite the new legislation and millions become homeless through forclosure. If someone has the means to do so, I think it's prudent to convert that iffy "capital" in stocks into paying off a mortgage so that one's home remains a solid constant in the rough times ahead. I sold off most of my stocks last year and I sold my house at a super inflated price on the west coast and paid cash for a gorgeous home on almost 5 acres in the Midwest with lots left over. I can work at McDonalds and afford my bills if necessary now. I don't care what the advantages are to mortgages versus paying off loans, but to me, owning my house debt free allows me to sleep at night.
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