We thought home values could only go up, never down. But they CAN go down, and in most markets they DID!

Most of us didn’t really understand the purpose of equity. We thought equity was just potential profit, or the amount available for a HELOC. Some of us, like Trent, thought equity was just idle money… money that was being lazy. Well, it turns out that equity is also insurance.

Equity is the cushion when home values shrink. It’s insurance against being upside down in a mortgage when an unexpected move or job loss occurs and we have to sell that home for less than we owe on it, leaving us nowhere to go except foreclosure or bankruptcy.

Trent’s math was mostly right, but RISK was completely missing from his equation.

Some said to use any available money to prepay the mortgage, and others said it would be better to invest the money and build up a big rainy day fund. Maybe the best course is to do both… use part of the discretionary money to prepay the mortgage and use part of it for a bigger emergency fund.

The return is on the appreciation or depreciation of the home, the equity that you have built up in the home DOES NOT affect the value of the home.

Two people on the same street each purchase a 200k home. One person puts a big down payment and the other guy puts down a small down payment. NOW which home is more valuable? They are both still only worth $200k.

This last guy here Jason is totally confused – Tax deductible vs taxable offset each other, not correct.

So 5 years later each person sells their $200k home for $250k which person had a better rate of return?

New sales price minus purchase price = appreciation. Now divide the appreciation by the downpayment. You can make up your own numbers for the downpayment.

While investing does require discipline. Paying off the mortgage faster is going to be very detrimental to you in the long run. Although it seems to make sense that paying less interest saves you money the truth is “SAVING MONEY IS NOT THE SAME THING AS MAKING MONEY.”

I’ve done a side by side comparison of a 15 year mortgage and after the mortgage is paid off to invest that total amount and

a 30 year mortgage and investing the difference in payment between the 15 and 30 year payment now.

End result is you have a lot more money by taking the 30 year mortgage and not paying it off early. You are forgetting the opportunity of that money growing in a compounding interest environment.

In fact, once you understand these concepts. You will NEVER want to pay your mortgage off and this works for everyone. However, most Americans don’t have the discipline not touch the money.

Some very good books to help you understand this are Missed Fortune 101 by Doug Andrew, Stop Sitting on Your Assets by Marian Snow and The Lies About Money by Ric Edelman.

The sad part is YOU DON’T KNOW, WHAT YOU DON’T KNOW and are simply making assumptions without actually having done the math.

Probably everyone here at one point believed in Santa Clause, the Easter Bunny and the Tooth Fairy, however, as adults we don’t because we have been presented with better information.

It’s the same thing here, you are being presented with better information. However, as adults we develop this “I know everything attitude” and are unwilling to learn new things.

The definition of INSANITY is doing the same thing over and over and expecting a different result. How many of your financial situations have improved by going to your job every day and paying your bills? You have to change the equation.

One guy mentioned the average appreciation of 4-6% yes this is based upon the overall value of the home and the less you put into the home the greater the return on your investment. The more you put into the home diminishes this return.

However, when you put money into the stock market your return is on the money that you put into it.

Give me a 4-6% return on the 10k I put into a $100k house any day over the 11% return I can get on the same 10k in the stock market.

Also, most people ASSUME that by having the mortgage paid down that they can access their equity AT ANY TIME, not true.

You must qualify to borrow money out of your home and if things have been tough your scores may be down and you may NOT qualify.

So this means that if you have a smaller mortgage and you lose your job and miss a mortgage payment that you are actually at greater risk of losing your home than some one that has a large mortgage and put all the extra money into savings or investments (they have liquidity to utilize until they get a new job).

Think….Will the bank lose less money foreclosing on the person with the small mortgage or the larger mortgage? They will foreclose upon the person with the small mortgage if they miss making a payment than the person with the large mortgage.

The bank will be more willing to work with them in hopes that persons situation will improve and that they will be able to start making their payments again.

The advice your parents and friends are giving you is incorrect, because they don’t know what they don’t know.

There clearly is no advantage. It would be better to pay off a mortgage in 15 years and continue putting your mortgage payment, after it is paid off in savings at that point.

If you were earning 10-15% then of course it would be advantageous to save the money and prolong your debt.

IMO

I built my own home with the equity of my previous home and cash on hand. I thought of taking out a mortage to invest but resisted.
Instead I max out my Roth and make a $20,500 401K
(this offsets the loss of mortage deduct)
annual contribution. The house was built on water front property I purchased in 1980 and this is my future retirement home. I have zero debt-keep trying to figure out what to do with my growing bank account balance. Could I use some of my equity to invest – sure – but its nice to not worry about it – or a monthly payment.

As said before – different answers for different folk.

15-yr mortgage is definitely the way to go since you automatically get a lower interest rate. Invest the rest for a few years so that your available funds are increased and you can use that to tide you over any rough times… then consider paying off the mortgage early (or moving). Yes, it’s worthwhile to pay the points if you’re staying in the home more than a couple years.

One question that comes to mind is what happens to your argument if you make the assumption that at the 15-year mark you put the money you otherwise would have paid in mortgage into a savings account for the next 15 years (the term of your previous 30-year loan)? Your $90,459.22 figure for the pre-payment would be a great deal higher if that assumption is made. Would your choice be different with that change?

John

If we took out a $500k loan (which is what we have now) and use the $500k and diversified it in the market (money market, stocks, foreign, etc..). I still suspect even in bad markets that we will ‘average’ 10%. If we wait 18 months before liquidating any money, we only be taxed at ‘Capital Gains taxes’ of 15%. I haven’t run the numbers yet, but it seems if our mortgage payments are $3.5k/month and the investment would make ($500k base + 75k (after 18 months averaging 10% return with no withdrawl) = $575k * (10% return – 1.5% taxes) = $48.8k a year or $4k a month. I’m still ahead with my mortgage being paid by my investment. This doesn’t even include the mortgage deduction and the fact my loan is paid down. I just have to work an additional 18 months before i could official retire if i choose too.

Yes there’s a lot of variables, but overall i think i’m not taking advantage that interest of 6% is much lower then my average investments after taxes.

This article comes close to my idea but does not discuss the idea behind using your low interest rate mortgage to jump start your retirement.

All of the math aside (both for and against your perspective), I hope you do not discount your wife’s emotions and views on paying off the mortgage. It’s good to educate her with your numbers, but don’t pound the math over her head or use math/economics to minimize her sensitivities and fears. It’s not all about math. People’s relationships with money are very psychological and personal. Maybe for her, it’s worth having less risk and more financial PEACE to pay off the mortgage early even if this means earning a little less in interest savings. I imagine that a completely paid off house feels pretty nice and secure, and this is worth something to people like your wife. In a case like this where neither choice is stupid or irresponsible, it makes sense to take her needs into account.

If you want (need) a tax deduction, there are better ways than by giving it to a bank.

My question is if you really do have this much extra cash a month (after fully funding retirement and college etc) then why do you have a 30 year mortgage instead of 15 year?

Furthermore, isn’t this counterintuitive to your recent post about paying for all those points? If you can do better in the market, then why did you throw that money on an interest rate and throw away all that potential tax deduction???????

It works both ways. The mortgage is compounding as well, so the less he pays off the more interest is going to compound at the outset of the loan. This is why paying a small amount extra on your mortgage easily knocks years off of it. The 6% I referenced was the after-tax spread between the optimistic 12% stock market versus the 5.75% mortgage not the entire return on the investment. Furthermore it’s “easy” to earn the 6% spread when the markets up. What if we hit a large bear market?