So, IF the SHTF and your house is paid off you can stay there instead of a cardboard box with a 401K or IRA that lost all it’s value.

But IF you can keep a job and they hyperinflate it would be nice to pay off the house with depreciated dollars. The dow would probably skyrocket since it is based on dollars and those will be worthless, essentually you will have the same more or less.

What I think is going to happen is the banks are going to have to reel in their investment hedges thus collapsing the economy, first one out wins.

Hold tangable assets, that is why the central banks are secretly moving towards the exits and grabing gold.

Paying off a mortgage has very low risk. The equivalent risk in investing would be an FDIC insured bank account, which is going to pay very little interest in comparison.

Today (2011) you can get mortgages aroudn 4%. To get the equivalent return in investing, you would have to go to very, very long term bonds (30 years) in a company that has a lower credit rating than U.S. treasuries. This introduces interest rate risk and return of principal risk. This is higher risk than paying off your mortgage, and all it does is match the return of paying off your mortgage.

The next option is stocks. You could get a higher return than 4%, or you could lose a substantial amount of money. You must factor risk into the equation. On average, returns in stocks are 7%, not 10% commonly quoted. And you greatly increase your risk.

Here’s another way of looking at the same situation. You are nearing retirement and your house is paid off. Should you mortgage the house for full value so you can invest the money in the stock market? If you are scoffing at that idea . . . you know what you should be doing.

And to Chris, you didn’t complete the analysis. You only looked at the difference over the first 17 years. But after the mortgage is paid off, you have much more money to put towards investments. You’ll find that you will quickly catch up, and with much lower risk. Much greater peace of mind.

Regards, Everyone.

Thanks Alfie

However, take a common scenario, divorce after 10 years of marriage. You as a the single income earner are on the hook for a large portion of your income, for many years. Also, living expenses rise since the couple is now living apart. Additionally, the female’s skills are now outdated making it very difficult to get anything but a low paying job. So for the sake of both parties and your finances in general, have her work as soon as is reasonable. Part time, contract, whatever it takes.

As to the question of the day. I say pay off the mortgage. No debt guaranteed financial security. The stock market might have a higher return but past performance is no guarantee of future results.

1.) I say hammer on the mortgage until it’s 1/2 paid off. Why? You can easily knock off several months with $5000, especially just starting a 30 mortgage. After a while, the same amount doesn’t knock as many months off. So lop the top off your mortgage, then forget about it.

2.) Stay in the same house. Transaction costs are killers when buying/selling a house.

3.) Don’t marry a crazy women. This is a tough one to accomplish.

4.) Ensure your wife works and makes good cash. This is key. Remember, if she stays at home doing nothing for several years, then when you get divorced, you have to pay her for being so useless all that time.

5.) Find a partener who respects a dollar, not someone who’s spending out of control. You can figure this out on the first few encounters.

6.) Be suspect of people assuming a12% return on a investment. This past decade wasn’t nearly that amazing, not even close. But I do believe Wall Street white collar crime is a winner.

7.) Consider all costs when making a purchase. It’s always the extras that get you.

8.) Don’t trust anyone. Well, maybe your granny.

Would you take out a SECOND mortgage at 5% interest just to take that money and invest in stocks? A THIRD? Why not a FOURTH while you’re at it?

If yes, get as much “low interest” debt as possible and gamble in the market. If no, pay off the house!

The stock market or the S&P 500 went down -37.22% in 2008, which will take many years to recover from. The stock market is unpredictable so paying off your mortgage is a safe bet.

Stated to pay off the debts first.

save 8 months emergency fund.

Then go after the 2nd mortgage.

Then refinance the first with a fixed rate.

Then Max deferred comp and $6000 a year Roth.

My situation in August 2010 will be debt free minus a $135,000 first at 4% interest. And a $89,000 2nd at 4% interest.

I will have $3500 a month extra to use to invest or pay off the mortgage and 2nd.
My thoughts were to

1) After all debts are payed, I plan on saving the 6 months emergency fund.
2) After that my choice is to go after the 2nd mortgage and put $3500 a month extra on the payment.
3) After that is when I need to decide to double the payment on the house and do the Max Deferred Comp allowed.

OR

Go after the mortgage and when payed off then put the max Deffered comp up and invest the rest?

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…

Is everyone still as sanguine about making a 10% return on the stock market now as they were in June 2007?

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.

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”).

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.

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_gdp.htm

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.

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).

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.

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.

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.

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.

I definately agree with the last statement. You don’t want to be making payments on your home (or car or anything) at retirement.

When I think about what’s less stressful, being debt-free or losing a million dollars, the later always comes out on top.

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? :)

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. :-)