Comments on: Money Magazine – May 2007

By: Lifeguard

Lifeguard — Thu, 19 Apr 2007 21:14:01 +0000

Money: Paying off a mortgage is a great investment.
Me: My mortgage is at 4.875%. My car loan is even lower at 3.75%. Vanguard Prime Money-Market Account pays ~5.1%. For me, it makes more sense to leave my money in the Vanguard MMA instead of paying off the mortgage early.

Of course, if interest rates reverse, and the MMA earns less than the mortgage, then I can shift money from the MMA to pay ahead on the mortgage.

By: James

James — Thu, 19 Apr 2007 19:25:34 +0000

I guess I just fail to see how PAYING 8% interest on your mortgage payments (6% after tax benefits) is considered a rate of return.

I get that you are paying down your debt, which is good…and that the tax benefits reduce your effective interest rate, which is also good…but what is the reasoning/logic/math behind how paying interest becomes a rate of return?

By: Andamom

Andamom — Thu, 19 Apr 2007 19:05:42 +0000

One of the side articles caught my eye… It was on the 3 ways to drop a cell-phone contract (page 20). It is shocking to see how these cell phone companies lock people into exorbitant contracts and then find ways to make them unhappy (excess fees, poor billing, etc.). So, it is nice to know that there are options for getting out of a contract.

By: Pat

Pat — Thu, 19 Apr 2007 19:01:23 +0000

I have trouble with the Discover Card. I’ve got 2 of them and pay them off religiously every month so I’ve never had a balance move from one month to the other. I’ve yet to pay a single penny of interest to them. In fact on a couple months when I ended up with an extremely small balance (around $1) Discover Card has actually written it off and zeroed my card for me.

By: Blair

Blair — Thu, 19 Apr 2007 18:46:55 +0000

I certainly understood the notion discussed in the article about paying off your mortgage early, however, one of the issues to consider is liquidity. While it is true that if you pay off your mortgage you can always get access to that money via a home-equity line of credit. However, these rates may not be as favorable now as they were in the late 90s. Furthermore, you have to go through the hassel of working with banks to set one of these up. Whereas, with say a Vanguard Prime Money-Market Account (paying roughly 5.1%), with the click of a button, you can have the cash you desire in a matter of days. I am certainly in favor of paying off your mortage early, but I also think it is important that each investor consider what that value of liquidity is worth to them and be sure to incorporate it into your analysis. So if you had an 8% mortgage (whic would be about a 6% return if you paid it off, according to the article) versus a 5.10% return investment (not including the amount taken out for taxes) you have to decide if that difference is worth it for you.

By: Henry @ Binary Dollar

Henry @ Binary Dollar — Thu, 19 Apr 2007 18:32:13 +0000

Wow what the crap? I didn’t know Discover did two-cycle billing. Thanks for the heads up.

By: Trent

Trent — Thu, 19 Apr 2007 18:09:57 +0000

James: what do you mean? The 6% return on paying off an 8% mortgage includes the income tax benefits of mortgage interest.

By: Carl

Carl — Thu, 19 Apr 2007 17:30:12 +0000

Wow, I did not know that about Discover Card. I hardly if ever use mine (except for gas 5% cashback, but i barely drive my own car – company truck)

By: James

James — Thu, 19 Apr 2007 17:11:58 +0000

Care to explain the math they used behind paying off your mortgage?