Comments on: Extra Mortgage Payments Versus Investments: Which Is The Right Move?

By: asithi

asithi — Mon, 28 Dec 2009 19:16:06 +0000

I am of the same mind set as DeRuiter. I cannot find a CD for our extra money that is more than 2.5%. It makes more financial sense for us to pay down our mortgage to get rid of PMI.

By: deRuiter

deRuiter — Sun, 27 Dec 2009 12:58:03 +0000

Phil’s correct about maxing out any retirement acocunts, certainly up to the MATCHING point where the company gives you money when you put a certain amount into the fund. Max out your ROTH. After that, during the first half of your mortgage, you save a fortune in pre tax dollars by paying extra principle on your mortgage. Get an amortization schedule and you will be amazed ant how little money paid ahead will reap tremendous benefits in money you don’t have to pay. Phil, “earning 6 %”? The rate on CDs and savings accounts ranges from .25% to 1.2%. You get a much better, income tax free return, by prepaying the mortgage. We did this with our house, and also with all our investment properties. Now when no one can pry a loan from a bank, we’re selling our rental properties, holding the paper, one for 8.5% and one for 7.1%. The buyers pay like clock work, the interest is so far superior to the bank, and we only hold paper 1/30 so that we can renegotiate the terms every 12 months and raise the interest in case we get hyper inflation or the buyer wants to get a loan from anyone else.

By: rodgerlvu

rodgerlvu — Fri, 15 May 2009 07:00:00 +0000

thanks. you are the most intelligent person i ever met…

By: Phil

Phil — Wed, 20 Dec 2006 23:46:21 +0000

Are you currently maxing out your retirement accounts? If not, then you may want to reconsider your decision. One of the most powerful tools that you can use to build wealth is a combination of mortgage deductions and retirement savings.

Here is a link to a white paper with a very technical analysis of the issue: http://www.chicagofed.org/publications/workingpapers/wp2006_05.pdf

As a mortgage broker and financial planner, I believe that most people would be better off investing than paying down the mortgage. Why? Even if you are a conservative investor (say you are earning 6% in a mix of cash and bonds) with a fixed mortgage at 6%, investment is preferable because of the tax advantage of the mortgage….even if you are in the 10% tax bracket.

Furthermore, what good does equity in your home do? Once you have a 20% equity position, you are eligible for the most attractive financing available. Any equity beyond that is locked into the home, unavailable to you should you have a financial crisis (sudden unemployment, medical issue, etc). If and when that happens, you have to approach a broker and borrow that equity back on their terms, or face selling your home or losing it to foreclosure.

IF and only if you are able to save those funds (not spend them, as do most Americans), then you are almost definitely in a better position by investing (even in a non-tax-advantaged account) than prepaying your mortgage. Here is another document worth reading – a much easier read than the white paper above: http://www.cmpsinstitute.org/images/HowtoSafelyManageHomeEquity.pdf

Best of luck!