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ArgentCy

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Jan 13, 2010
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Can you expand on this a little bit? I can't wrap my head around why getting a mortgage on a house that is going to hypothetically be worth 10% of its current value is better than waiting for a house's price to crash and then buying it with cash.

That was a quote from the article. It is a little hard to understand and he writes on the blog on the topic from time to time. A LOT has to do with where the Real Estate is located. Not all markets are going to see 90% loses. States that go broke and need to raise taxes to the nth degree on property will be the worst. Plus, this is more of a hedge. So even if the value of the house declines your payments are not going to change. He is also an advanced investor so probably looking at the opportunity to use the extra cash and as interest rates rise you can make money on the loan. It would be like borrowing at 3.5% and putting it into a CD at 7%. Renting would likely be another option for the average person.
 

RonBurgundy

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How much more could you be investing without a mortgage payment? Also, if you lost your job in a downturn. Can you make a mortgage payment?

Unless you've got many thousands invested. I also would say pay off the mortgage. Your ability to cashflow investments post mortgage will easily make up for the initial hit. If we are looking 10+ years out

This is another reason I recommended the same approach. A lot of people saying that 4% interest is worth it for 7% returns are just projecting the past onto the future. But **** happens. Economy might go into the crapper, fully destroying those returns accumulated over this bull market. So then you have no investment gains, and still have a mortgage. And if you lose your job, your peace of mind will be 100% better with your house paid off.
 

247cy

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Nov 14, 2006
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we have a $8,500 car loan at 0% and a second $12,500 car loan at 2.9%.

Is your remaining mortgage more than 12.5 + 8.5 = $21K? Maybe it would be better to use a smaller chunk of the brokerage to pay off the vehicle balances first instead? Redirect all (or some) of what would've been your monthly car payments toward the mortgage. Presumably you'd still have a larger % in your brokerage to direct toward growth, and that might make you happy or at least more at ease with your overall situation.
 

CprE84

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Mar 31, 2006
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There is no single right answer to this question. Although I suppose if there was, it would be a real short thread. In theory, borrowing at 4% to make 6%+ is the right answer.

You're paying something like $4,000 in interest per year. In exchange for that cost, you are keeping a bunch of money semi-liquid and making a decent return, probably more than the $4,000. Is that $4,000 cost worth it to keep your powder dry and make a return?

To the peace of mind argument: if you keep the stocks, you can ALWAYS pull the trigger and payoff the house at any time in the future. Assuming you don't lose ALL your stock investments in the market, which would be quite a feat of stupidity. So the stocks are a security blanket, imho.

The only reason I can see to sell the stocks and payoff the mortgage is if you think the market is going to take a major dump. But that's timing the market, and tricky at best. If you truly think that, then I'd hedge it, and go halfway. Then you keep some stocks, still payoff a lot of principal, reduce the interest cost, and bring forward the day when it IS paid off by several years. If the market goes up, well, OK, you were half-right.

I looked at doing exact same thing more than once on my place. But I am paying 3.25% on a 15 year, and didn't make sense to me.

I like this approach. Moving toward paying off the mortgage much earlier, while keeping some liquidity seems wise. I generally think liquidity is under-appreciated. I would rather have an account with a good chuck of money in it vs that much less debt for the benefit of liquidity. Becoming debt-free is definitely a good goal, but keeping some liquidity along the way could save you if something bad happens.
 
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capitalcityguy

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I like this approach. Moving toward paying off the mortgage much earlier, while keeping some liquidity seems wise. I generally think liquidity is under-appreciated. I would rather have an account with a good chuck of money in it vs that much less debt for the benefit of liquidity. Becoming debt-free is definitely a good goal, but keeping some liquidity along the way could save you if something bad happens.

Agreed, however I think it is pretty commonly understood by those motivated to pay down debt, that you first establish an emergency fund. Having 3-6 months take home pay (or value of expenses for that time period) stashed away, takes the liquidity concern out of the equation.
 

capitalcityguy

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I enjoy this topic for a couple reasons. I'm a bit of a personal finance geek and secondly, I used to be firmly on one side of this argument (don't pay off a mortgage financed with cheap money! Invest instead!! ) to where I am now -- pay off your mortgage as quickly as you can (assuming you have an emergency fund and all other debts are already paid off).

Why the change in my stance?

1) living through dot.com bubble, 9/11, and 2008 housing bubble(great recession) and witnessing the helpless feeling of not having any control over these external factors that are directly affecting my portfolio.
2) watching the national debt continue to skyrocket and now BOTH parties seemingly uninterested in have the guts to address. #TeaPartyisDead. I see a scenario(s) where this eventually causes a complete meltdown of the economy and the markets. If that happens, best case scenario it is a painful decade (or so) of recovery needed just to get back to where we started. Worse case, in a panic, it ushers in full scale takeover by the government (and an accepting American public going along since the majority do not have any money invested in the market) ) of a lot of private enterprise. Result: we never recover from it...at least in our lifetimes.
3) a mentor of mine who is very well read, highly intelligent and thoughtful, sharing this advice -- (paraphrasing) I have numerous options to invest my money but there is only one investment that I can have some measure of control . That is, how much I invest in my house (vs how much I allow myself to be leveraged with debt on what I still owe on my home). I can control that. In other words, if everything in the world goes sideways, there is little, if anything, I can do about my stocks and retirement accounts losing 50% or more of their value. However, I can control that if this scenario happens, today I still have the power to control whether or not I will have to still write out a mortgage check every month during those dire circumstances (possibly on an asset that has now been greatly devalued) or if I instead am free of that obligation that most likely my friends, family and neighbors will be strapped with during this very challenging time.

It took several discussion with my wife, but I got her on board a couple yrs ago and we cashed in enough stocks, to pay off our mortgage. We paid it off about 10 yrs before we would have had we played it out to maturity.
 

Cyclone06

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For those that would rather invest than pay off mortgage early, are you paying more than the minimum on the mortgage or planning to go full term?
 

DeereClone

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we have a $8,500 car loan at 0% and a second $12,500 car loan at 2.9%.

We can agree to disagree on cars - my rule is never borrow money for a car because they are horrible for you financially - if you save up and pay cash you will buy less car because it hurts more, and when you buy less car you are financially better off.

Larger than that, my rule of thumb is keep total car values in the house less than 25% of our household income. $100,000 income should = max total car values of $25,000. We hummed along at about 5% car-to-income ratio for a while after college and it put us in a good position to buy a house early and do other investing.
 
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ArgentCy

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Jan 13, 2010
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I enjoy this topic for a couple reasons. I'm a bit of a personal finance geek and secondly, I used to be firmly on one side of this argument (don't pay off a mortgage financed with cheap money! Invest instead!! ) to where I am now -- pay off your mortgage as quickly as you can (assuming you have an emergency fund and all other debts are already paid off).

Why the change in my stance?

1) living through dot.com bubble, 9/11, and 2008 housing bubble(great recession) and witnessing the helpless feeling of not having any control over these external factors that are directly affecting my portfolio.
2) watching the national debt continue to skyrocket and now BOTH parties seemingly uninterested in have the guts to address. #TeaPartyisDead. I see a scenario(s) where this eventually causes a complete meltdown of the economy and the markets. If that happens, best case scenario it is a painful decade (or so) of recovery needed just to get back to where we started. Worse case, in a panic, it ushers in full scale takeover by the government (and an accepting American public going along since the majority do not have any money invested in the market) ) of a lot of private enterprise. Result: we never recover from it...at least in our lifetimes.
3) a mentor of mine who is very well read, highly intelligent and thoughtful, sharing this advice -- (paraphrasing) I have numerous options to invest my money but there is only one investment that I can have some measure of control . That is, how much I invest in my house (vs how much I allow myself to be leveraged with debt on what I still owe on my home). I can control that. In other words, if everything in the world goes sideways, there is little, if anything, I can do about my stocks and retirement accounts losing 50% or more of their value. However, I can control that if this scenario happens, today I still have the power to control whether or not I will have to still write out a mortgage check every month during those dire circumstances (possibly on an asset that has now been greatly devalued) or if I instead am free of that obligation that most likely my friends, family and neighbors will be strapped with during this very challenging time.

It took several discussion with my wife, but I got her on board a couple yrs ago and we cashed in enough stocks, to pay off our mortgage. We paid it off about 10 yrs before we would have had we played it out to maturity.

We are entering a huge CREDIT crisis. Bonds and especially government bonds are the bubble right now (which is why we see negative and plunging interest rates.) This is not a stock market bubble. I think this is the start of the "blow off top" in government bonds.
 

capitalcityguy

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For those that would rather invest than pay off mortgage early, are you paying more than the minimum on the mortgage or planning to go full term?

When I used to be in the camp (see my previous post), I set up biweekly payments with my mortage company so I'd at least get an extra payment in each year. Also, I do have a rental property that I am still paying a mortgage on. In that case, I do round up my payment to the next hundred and also do the biweekly payments in an effort to pay it down quicker.

I'm contemplating paying off this mortgage early too, but there are a few more tax advantages on the rental property side of things so I"m dragging my feet a bit on this decision.
 
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capitalcityguy

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We are entering a huge CREDIT crisis. Bonds and especially government bonds are the bubble right now (which is why we see negative and plunging interest rates.) This is not a stock market bubble. I think this is the start of the "blow off top" in government bonds.

If you looks at the numbers compared to 2008, we are possibly entering another housing bubble too (or maybe you are equating the two with your "credit crises" label?)
 

ArgentCy

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We can agree to disagree on cars - my rule is never borrow money for a car because they are horrible for you financially - if you save up and pay cash you will buy less car because it hurts more, and when you buy less car you are financially better off.

Larger than that, my rule of thumb is keep total car values in the house less than 25% of our household income. $100,000 income should = max total car values of $25,000. We hummed along at about 5% car-to-income ratio for a while after college and it put us in a good position to buy a house early and do other investing.

This seems to be THE most correlated to wealth. Cars are very expensive (some cost more than the house I last bought) and they depreciate very quickly. Almost all of the millionaires that call into Dave Ramsey have one thing that they all say. They Never bought a new car, or they had done that once and saw the folly and never repeated the mistake. I know he recommends not having more than 50% of your income in the value of things with motors. 5% is rather impressive to pull off.
 
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ArgentCy

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If you looks at the numbers compared to 2008, we are possibly entering another housing bubble too (or maybe you are equating the two with your "credit crises" label?)

I would call this more of the echo peak in housing. Real values never made it back. I have this chart of his on my wall.

RealEstate.jpg


https://www.armstrongeconomics.com/real-estate/real-estate-v-quantitative-easing/
 

2forISU

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Oct 8, 2008
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When I used to be in the camp (see my previous post), I set up biweekly payments with my mortage company so I'd at least get an extra payment in each year. Also, I do have a rental property that I am still paying a mortgage on. In that case, I do round up my payment to the next hundred and also do the biweekly payments in an effort to pay it down quicker.

I'm contemplating paying off this mortgage early too, but there are a few more tax advantages on the rental property side of things so I"m dragging my feet a bit on this decision.
Why tie up your money paying off the mortgage on the rental when the renter is paying that mortgage off?
 
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capitalcityguy

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Why tie up your money paying off the mortgage on the rental when the renter is paying that mortgage off?

Believe me, I've struggled with these questions for awhile.

The attraction to paying it off: 1) if the rental market goes south, won't be any pressure on making the mortgage payments if there are empty months or I have to reduce monthly rent to get a new tenant. 2) would provide me flexibly to have the unit open longer between tenants to do upgrades that might allow me to charge more going forward 3) creates an additional income stream for my family if the rent payments are no longer offset by mortgage payments (i.e...maybe I can retire earlier or take a job that pays less but I enjoy more?) 4)piggy backing off that last point -- drawing upon the experience/feeling I have of having my primary mortgage paid off -- it is a very freeing feeling. Hard to explain (and people tried when I was sill paying a mortgage). You feel so much more in control of your life. It is a very rewarding feeling to not owe anyone or any institution anything.
 
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capitalcityguy

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I have zero incentive to pay off my $8,500 car loan at 0% interest. It costs me $200/month and has no long-term negative consequences of NOT paying it off early. My other car note is $12,500 at 2.9% I'm earning 2.2% in my emergency savings account and more than that in dividends every year so while I might decide to pay that off, it really isn't the end of the world. it costs about $25/month in interest. The mortgage, at 4% also doesn't really hurt me but there is some attraction to pay it off and be done with it. It would save about $4,500 in interest but reduce my dividends by $4,000 by no longer having that money invested. I think the markets will go down eventually (probably not in the next few months or so due to a fed interest rate cut) but having the extra cash floe each month *seems* awesome.

Once you're in a 0% interest loan on a car, agreed, the incentives melt away for paying it off early. That said, the time to rid yourself of such a loan is BEFORE you enter into it.

Why do dealerships and auto manufacturers offer 0% loans?

Because they know from experience (and understanding of human nature) you will buy way more car than if you had saved $$ and written out the check at the time of purchase.

If you instead save X amount for your next vehicle and stay firm to not financing any of it, you will make a much more modest purchase.

True with a 0% interest you are not paying financing charges, but in the end, you could very well have spent an additional $10k on the overall price that you never would have had you decided to write a check at time of sale. It is very powerful, and yes, makes car shopping a lot less enjoyable....but that is the idea.
 

JRE1975

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I enjoy reading these threads and how people are thinking through changes in financial decisions based on government actions.

It sounds like you will no longer be itemizing deductions, so paying off a 4% mortgage would result in an after tax rate of return of 4%. If you live in Iowa and are middle class or above your return on your stocks will need to be over 6% to get to the same place after tax.

I think getting a 6-7% return on the stock market during an extended period of when 10 year treasuries are 2% to 2.5% will be hard to get.

From other posts I have read or yours, you are an above average manager of your personal finances. That fact that you are even asking the question should tell you to pay off the mortgage, and be as smart with your increased monthly cash flow has you seem to have been up to this point with the rest of your money and you will sleep well at night and enjoy life!
 

Gunnerclone

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I have zero incentive to pay off my $8,500 car loan at 0% interest. It costs me $200/month and has no long-term negative consequences of NOT paying it off early. My other car note is $12,500 at 2.9% I'm earning 2.2% in my emergency savings account and more than that in dividends every year so while I might decide to pay that off, it really isn't the end of the world. it costs about $25/month in interest. The mortgage, at 4% also doesn't really hurt me but there is some attraction to pay it off and be done with it. It would save about $4,500 in interest but reduce my dividends by $4,000 by no longer having that money invested. I think the markets will go down eventually (probably not in the next few months or so due to a fed interest rate cut) but having the extra cash floe each month *seems* awesome.

I love that dividend. That’s free money. It would hurt me to see that go away.
 

NickTheGreat

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We can agree to disagree on cars - my rule is never borrow money for a car because they are horrible for you financially - if you save up and pay cash you will buy less car because it hurts more, and when you buy less car you are financially better off.

Larger than that, my rule of thumb is keep total car values in the house less than 25% of our household income. $100,000 income should = max total car values of $25,000. We hummed along at about 5% car-to-income ratio for a while after college and it put us in a good position to buy a house early and do other investing.

I think Dave Ramsey says no more than half your income. For everything with engines combined.

IMO that depends a little based on your income. If you make $50k, it'll probably be a little higher ratio
 

Jmarsh13

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Sep 28, 2006
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I hate sending $900/mo out on my payment when I could have paid it off but it has allowed me to make investments I wouldn’t have otherwise made and it has allowed me more liquidity to handle risk on the farm.
This would be the key for me. Paying off a loan early by depleting savings / investments could leave you in a cash crunch later if something was to arise later. Easier to liquidate stocks for those issues than to liquidate your house.
 
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