Stock Market

[wartknight]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

 

[wartknight]

I can tell I'm not going to change your mind about any of this, and I've run the numbers in enough cases to know (minus the emotion of it) that paying off your mortgage is not the most efficient way of doing things, so you're not going to change mine. If you want to carry on the conversation, why don't you PM me.

 

[balken]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

The return on your investment (paying off the mortgage versus investing) should be computed without consideration for the value of the home. The return from paying off the mortgage is a function of the cost of borrowing money, not the value of the home itself. If the home depreciates in value, your net worth will change, but your mortgage obligation will not. This change in net worth will occur regardless of how you handle your mortgage. However, you do need to consider market risk when investing.

To use the previously posted example, you need a 1.9% annual return to break even with paying off the mortgage. In essence, you have $150,000 earning a negative 1.9% interest if you do nothing. However, if you invest the money in a money market or treasury earning 1.9% interest, you will be breaking even with very little risk, but no advantage over paying off the mortgage. If you choose to invest in the stock market, and anticipate an 8% average annual return, you will receive 6.1% effective return over paying off the mortgage. However, you will have to accept stock market risk to achieve this return.

I am not advocating either approach in these posts, but simply providing the math for people to consider.

 

[jmb]

OK, You can claim your RoR on the interest rate you would have paid- I'll give you that, but it you pay off your house, and the value goes down, like a lot of houses have lately, you lost money on a sale.
If you have the money in a side account making money, and your house value goes down and you sell, you are not out as much because instead of tying up the money in a depreciating asset, you had it making money on the side.

I guess this begs the question what type of investing are you doing that is market oriented that hasn't lost money?

 

[wartknight]

I guess this begs the question what type of investing are you doing that is market oriented that hasn't lost money?

It doesn't have to be market-oriented to get a market-like rate of return.

 

[jmb]

It doesn't have to be market-oriented to get a market-like rate of return.

Ahh yes you are discussing non-correlated assets.

If you are using non-correlated assets typically you are going to either have liquidity issues, or volality issues. If you have found a nca that doesn't have liquidity issue, nor volatility please advise-how?

 

[wartknight]

For a situation like money that would otherwise be going to a mortgage, it needs to be a safe investment, no volatility, give a competitive RoR (I consider that better that 6% when there is no volatility) tax-free, and able to have the check if I need it within the week.

 

[capitalcityguy]

This is an interesting discussion and I am surprised to find the differing of opinions on both side of this issue to this extent. Some of the comments do give me a sense that we (i.e.…those that advocate that it may not necessarily be a wise financially to pay off your mortgage) are misunderstood. From the tone I get I sense that people assume we have this belief based on some notion that we recklessly spend money we don’t have or carry a lot of debt. Not at all. For me it is years of reading about those that tend be successful financially and how they did it. The vast majority of the time, the most successful businessmen and investors believe and use of leverage to get where they are today. It is called using other people’s (in this case the banks) money to make money for oneself.

Do I sound reckless with my use of debt?

Own two vehicles but haven’t had a car payment in 6 years. Paid cash for most recent purchase.
Zero credit card debt
Zero home equity lines of credit.
Two mortgages – one on my primary home. One on a rental property.

So outside my two mortgages, I have zero debt. Far from reckless (as some want to imply) and actually pretty conservative if you ask me. But for me to start plowing money into my mortgages when I have such an incredible interest rate on both place and tie up that cash, it would not be conservative. IMO it would instead be borderline mismanagement of my funds and an incredible lost opportunity for the future of me and my family.

It is classic Rich Dad, Poor Dad (for those that have read this book).

 

[Cyclonepride]

I'm pretty much in agreement that, from a broad financial picture, investing rather than paying off your mortgage makes sense, and I think everyone agrees with that as well. The lack of a house payment gives peace of mind, and therefore happiness. I'm not sure what price you can put on that.

 

[Phaedrus]

Do I sound reckless with my use of debt?

Own two vehicles but haven’t had a car payment in 6 years. Paid cash for most recent purchase.
Zero credit card debt
Zero home equity lines of credit.
Two mortgages – one on my primary home. One on a rental property.

So outside my two mortgages, I have zero debt. Far from reckless (as some want to imply) and actually pretty conservative if you ask me. But for me to start plowing money into my mortgages when I have such an incredible interest rate on both place and tie up that cash, it would not be conservative. IMO it would instead be borderline mismanagement of my funds and an incredible lost opportunity for the future of me and my family.

It is classic Rich Dad, Poor Dad (for those that have read this book).

In general, I agree with the premise of the book, but disagree with the use of debt.

But my central point is that to treat your home as an "investment" is not very wise. It's not an "investment" as much as it is the place you live.

In addition, treating it as an investment can generate emotional dissonance between you and your spouse.

Plus, I would suggest that the returns we are discussing are not worth the additional stress plus risk.

To treat owning one's home outright as "mismanagement" though, is kind of nutty, if you ask me. If it's that much money, relative to your investments, you have too much house, imo.

BTW - I am not talking about owning a home in lieu of investing. In order to own a home cash, you need to be debt-free, own a full emergency fund and already have a hefty investment plan.

And my modest home isn't going to break me, financially, by paying it off. In fact, I will reiterate, that a modest, paid off home beats a house payment (regardless of interest rate) on a McMansion 10 times out of 10, when it comes to investing.

 

[Irresponsible]

But my central point is that to treat your home as an "investment" is not very wise. It's not an "investment" as much as it is the place you live.

At a minimum one must think of a home in terms of an investment to evaluate purchasing vs. renting.

 

[Phaedrus]

At a minimum one must think of a home in terms of an investment to evaluate purchasing vs. renting.

And, in that case, you should evaluate ALL the costs of home ownership. The idea that renting is just throwing money away is greatly overstated. Often, you can rent cheaper than you can own.

The value of a home as an investment often conveniently overlooks the total cost of ownership.

 

[CyInSoonerland]

I really don't understand the "tying up cash" side of the argument. At one time, I thought leverage was wise and even used it to buy a second home for the family. However, my math made me quickly realize that by selling off one home and paying down the mortgage on the other home actually freed up a lot more cash in the long run. After the first home was paid off, I noticed that I had A LOT more cash every month to invest, spend, and bless others.

I know it may sound like very simple math, but it's still math.

 

[Wesley]

One favtor decding to lock in a big mortgage is the expectd rate of inflation for the next twenty years and impact on investments. Some people might say if you expect high Carter inflation, lock in a big mortgage as inflation will make it dwindle in value. If you expect stable times, investments may not grow much and it is not worth the risk.

For Nebraska, depending on the house, property taxes can be steep and exceed mortgage interest.

The election will sway this discussion also -
a little more to the right - opinions, politics, humor, news ... whatever
One proposal by Obama is to tax houses over 2400 sf at some point because you owned too much house. That would creat a novel trend of downsizing to match our new, smaller cars.

CAPITAL GAINS TAX

MCCAIN
0% on home sales up to $500,000 per home (couples) McCain does not propose any change in existing home sales income tax.

OBAMA
28% on profit from ALL home sales

How does this affect you? If you sell your home and make a profit, you will pay 28% of your gain on taxes. If you are heading toward retirement and would like to down-size your home or move into a retirement community, 28% of the money you make from your home will go to taxes. This proposal will adversely affect the elderly who are counting on the income from their homes as part of their retirement income."

 

[wartknight]

OBAMA
28% on profit from ALL home sales
"

So if I sell my home at a loss, do I get to write that off?

 

[dmclone]

One favtor decding to lock in a big mortgage is the expectd rate of inflation for the next twenty years and impact on investments. Some people might say if you expect high Carter inflation, lock in a big mortgage as inflation will make it dwindle in value. If you expect stable times, investments may not grow much and it is not worth the risk.

For Nebraska, depending on the house, property taxes can be steep and exceed mortgage interest.

The election will sway this discussion also -
a little more to the right - opinions, politics, humor, news ... whatever
One proposal by Obama is to tax houses over 2400 sf at some point because you owned too much house. That would creat a novel trend of downsizing to match our new, smaller cars.

CAPITAL GAINS TAX

MCCAIN
0% on home sales up to $500,000 per home (couples) McCain does not propose any change in existing home sales income tax.

OBAMA
28% on profit from ALL home sales

How does this affect you? If you sell your home and make a profit, you will pay 28% of your gain on taxes. If you are heading toward retirement and would like to down-size your home or move into a retirement community, 28% of the money you make from your home will go to taxes. This proposal will adversely affect the elderly who are counting on the income from their homes as part of their retirement income."

I think you got this information from a spam email or something.

• Home Sales: The claim that Obama would impose a 28 percent tax on the profit from "all home sales" is false. Both Obama and McCain would continue to exempt the first $250,000 of gain from the sale of a primary residence ($500,000 for a married couple filing jointly) which results in zero tax on all but a very few home sales.
  
  
• Capital Gains Rate: It's untrue that Obama is proposing a 28 percent capital gains tax rate. He said in an interview on CNBC that he favors raising the top rate on capital gains from its present 15 percent to 20 percent or more, but no higher than 28 percent. And as for a 28 percent rate, he added, "my guess would be it would be significantly lower than that." Furthermore, he has said only couples making $250,000 or more (or, his policy advisers tell us, singles making more than $200,000) would pay the higher capital gains rate. That means the large majority of persons who pay capital gains taxes would see no increase at all.
  
  
• Tax on Dividends: Another false claim is that Obama proposes to raise the tax rate on dividends to 39.6 percent. Dividends currently are taxed at a top rate of 15 percent, and Obama would raise that to the same rate as he would tax capital gains, somewhere between 20 percent and 28 percent but likely "significantly" lower than 28 percent. This higher tax also would fall only on couples making $250,000 or more or singles making more than $200,000.
  
  
• Taxing IRAs and 529s: Contrary to the claim in this e-mail, raising tax rates on capital gains or dividends would not result in higher taxes on any investments held in Individual Retirement Accounts or in popular, tax-deferred "college funds" under section 529 of the Internal Revenue Code. The whole point of such tax-deferred plans is that dividends and capital gains are allowed to accumulate and compound tax-free, and neither Obama nor McCain proposes to change that. And as previously mentioned, any capital gains or dividend income from stocks, bonds or mutual funds owned outside of tax-deferred accounts would continue to be taxed at current rates except for couples making over $250,000, or singles making more than $200,000.
  
  
• Doubled Taxes? The claim that "Under Obama your taxes will more than double!" is also false. The comparative rate tables this e-mail provides for McCain and Obama are entirely wrong, as we explained in an earlier article March 13 about another false e-mail from which these tables are copied. It is supposedly a comparison of tax rates before and after the Bush tax cuts, but it grossly overstates the effect of the Bush cuts. Furthermore, Obama proposes to retain the Bush cuts for every single income level shown in this bogus table.
  
• Estate Tax. The claim that Obama proposes to "restore the inheritance tax" is also false, as are the claims that McCain would impose zero tax and that Bush "repealed" it. McCain and Obama both would retain a reduced version of the estate tax, as it is correctly called, though McCain would reduce it by more.
  
  The tax now falls only on estates valued at more than $2 million (effectively $4 million for couples able to set up the required legal and financial arrangements). It reaches a maximum rate of 45 percent on amounts more than that. It was not repealed, but it is set to expire temporarily in 2010, then return in 2011, when it would apply to estates valued at more than $1 million ($2 million for couples), with the maximum rate rising to 55 percent.
  
  Obama has proposed to apply the tax only to estates valued at more than $3.5 million ($7 million for couples), holding the maximum rate at 45 percent. McCain would apply it to estates worth more than $5 million ($10 million for couples), with a maximum rate of 15 percent.
  
  
• "New Tax" Falsehoods: The e-mail continues with a string of made-up taxes that it falsely claims Obama has proposed. He has not proposed a tax on new homes with more than 2,400 square feet, or a new gasoline tax or a tax on retirement accounts. The most laughably false claim is that Obama would tax "w

I don't think Obama will make a good president and he will definitely raise taxes but some of these assertions are pretty crazy.

 

[Wesley]

Any way you cut it, mortgage decisions would be made under a different universe if new tax proposals are enacted by a govt that may need money. If the proposals become law, what seemed like the right way to go, that might change after some thought. The mortgage deduction is a big bennie for home owners. However, in the need for more taxes, it may not be sacred to Congress.


One more spam site possibly:
http://answers.yahoo.com/question/index?qid=20080729232959AAbQ15S

 

[djkent01]

Just so everyone knows, the home mortgage interest deduction is already being limited under the current code. The CPA rags that I read indicate that the IRS is going to make a big push in reviewing tax returns for the interest deduction.

This is under CURRENT code:
1 - The higher your income, the more likely your interest deduction will be limited - in fact, most of your deductions are limited. That happens well before AMT kicks in.
2 - There are limits as to the total amount of mortgage debt for which the interest can be deducted, and relatively small limits on the amount of home equity for which interest is deductible.

It's fairly complicated so I'm not going to get into it here, but fairly significant limitations are already in place. Affects us less in Iowa due to the reasonable home prices, but was cleaerly an issue when I practiced in California.

 

[capitalcityguy]

And, in that case, you should evaluate ALL the costs of home ownership. The idea that renting is just throwing money away is greatly overstated. Often, you can rent cheaper than you can own.

The value of a home as an investment often conveniently overlooks the total cost of ownership.

Very good point. People also don't consider the amount of time home ownerships entails. Upkeep of the home, yard, etc. You must value your time and what it is worth and in that case, in some instances renting may make even more sense.

 

[Bobber]

Just as a follow up; this time of year I always review my investments and see where I'm at. The 12 month return numbers are simply amazing right now. Generally most of my mutual funds and stock have almost doubled in the last year. I have a few International fund investments that are showing a 70% return. I have one loser bank stock that is worth less than it was a year ago which isn't saying much about that bank.

It's hard to believe now, but a year ago the sky was falling and a lot of people were advising caution. I actually plowed some money into the market last March.

It irks me just a little bit that the media focused so much on the weaknesses of stock market investments a year ago yet seems to be giving the latest rally little attention.

Could this be a somewhat false rally and we're due for a correction? Sure. Still the last couple years have convinced me that dollar cost averaging into the stock market still makes a lot of sense and if you want to gamble a bit, pick your bottoms and stick some money in at those times.