Comments on: Why I Lean Towards Repaying Debts Above All – And Why You Might Not Feel The Same

By: Make Friends, Earn Money

Make Friends, Earn Money — Sat, 29 Mar 2008 15:05:15 +0000

I think that it is helpful Trent that you recognise that everybody is different. Personally I follow a similar principle to you as the long term reduction of debt is always the most lucrative in the long term.

By: kitty

kitty — Fri, 13 Jul 2007 17:49:51 +0000

I think it depends on a number of factors in addition to risk tolerance: age, job security high among them.
While stock market return has been high over the long term, there were 20 or so years periods when the return was very low or the market dropped. If you happen to need or want to retire within a year following market crash, you don’t want to be stuck with mortgage. Similarly if you loose your job right after the market crash, you’d appreciate a paid-off home.

So I think if you are in your 20s and have a secure job, it makes sense to invest the money. If you are in your 40s or 50s or if your job is not very secure, it makes sense to compare the mortgage rate with guaranteed investments rather than stock market return. For example, I wouldn’t pay off 4.5% mortgage (provided the interest is tax deductible) if I keep an equivalent amount in 5.5% CD or high interest saving (in addition to whatever money I have in the stock market), whereas I’d pay off a 7% mortgage.

I was burned by the way by counting too much on stock market returns. At the height of the internet boom a friend of mine suggested I sold some stock and paid off my mortgage using my gains. I said that I was earning higher percentage on the stock market. Then internet bubble burst, all of my gains evaporated, but I still had my mortgage. OK, maybe my investments weren’t sufficiently diversified, but even with diversified portfolio there are no guarantees.

when a couple of years ago I had a windfall from the sale of my old condo I was renting out, I decided to pay off my mortgage (taken in late 90s, so it was around 7% for 30 year fixed). If my mortgage had been 4.5%, I’d just put the money on a CD. Maybe I should’ve refinanced, but the idea of not having a mortgage seemed very appealing to me. But… Had I listened to my friend and paid off my mortgage using gains from stock market, I’d be considerably richer now as my stocks are still below where they were at the height of internet boom.

By the way, it feels really good not to have mortgage.

By: Celeste

Celeste — Fri, 13 Jul 2007 15:36:27 +0000

Four years ago I refinanced my house to a 4.25% fixed 15 year mortgage. While I want to pay off the balance and be debt free, for now I am putting the extra dollars at least in a money market account that earns 4.5%. If I can earn more than the interest I pay, I feel that making the money is better than paying off the mortgage. I am also fortunate in that I am contributing the maximum I can into retirement and also have about 4 months of emergency money tucked away. Besides, I have been paying a little extra and now have only 10 years to go.

By: Angie Hartford

Angie Hartford — Fri, 13 Jul 2007 14:20:40 +0000

I’m not a fan of debt, even a mortgage. Remember, the origins of the word mortgage mean “death pledge.”

By: Fred

Fred — Fri, 13 Jul 2007 02:45:25 +0000

It does not say in the post whether he is contributing to any type of retirement. I think that before looking toward principal reduction you should be maxing out 401k and IRA accounts. I would also look at a refinance to lock in a fixed rate. My loan moves to an adjustable in 2 years, so I’m looking at refinancing or selling before then.

By: Leo

Leo — Fri, 13 Jul 2007 00:42:56 +0000

Great post. I tend to be at around the same areas as you are, Trent, along the acceptable-risk spectrum. Perhaps it’s a commonality among people like us who have been burned by debt problems in the past and know how difficult it is to eliminate it once you’re deep in debt? Excellent job as always, Trent.

By: Minimum Wage

Minimum Wage — Thu, 12 Jul 2007 23:19:46 +0000

My low earnings and high debt are keeping me up at night. Can’t resolve the debt until my earnings improve but can’t afford training or education.

By: j2r

j2r — Thu, 12 Jul 2007 22:28:43 +0000

Agree with FamilyFinanceBlog.
It doesn’t have to be either or.

You can put 50/50 or 25/75 or 75/25.

By: Lynnae

Lynnae — Thu, 12 Jul 2007 21:57:05 +0000

I absolutely agree with you. I’m a “low-risk tolerance” type person, and I can’t wait until the day I’m completely debt free. I don’t want to bank on the future to pay off my debts. Too much can happen to change a person’s financial situation in a heartbeat.

By: FamilyFinanceBlog

FamilyFinanceBlog — Thu, 12 Jul 2007 21:42:04 +0000

I think I will tend towards a medium risk situation. I don’t see my mortgage as a huge liability at this point (but I may see it different in three years when the rate adjusts, but I also may have moved by then!) Once we have enough money securely sacked away for emergencies (6 months worth), then I’ll mostly put money into investing. I may pay off a good chunk of our higher rate mortgage (we have two, one smaller one at 8%!), but it will perhaps be 25%/75%, heavier on investing.

By: Chris

Chris — Thu, 12 Jul 2007 21:01:02 +0000

I find it ironic that on the same day you post this article, you also posted “The Ten Biggest Money Mistakes I’ve Made Since My Financial Meltdown” where #10 stated that you focused too much on eliminating debt.

I believe that one should invest the extra money until the interest on the mortgage no longer meets to minimum standard deduction. Even then, as long as one has a comfortable emergency fund, I would advocate investing.

However, with the nature of some ARMs (explosive/interest only), perhaps the individual should instead examine a fixed mortgage and ensure relative stability in his housing budget.

As always, personal finance is just that…personal.

By: Robert

Robert — Thu, 12 Jul 2007 19:59:55 +0000

I think many times the problem is goals. Someone with goal A takes advice from someone whose goal is goal B.

I agree with Trent in that I tend to pay off debt. But, I now have paid my house down a good bit and have eliminated all other debt. My long term goal is for my wife to quit work when we have kids (about 2 years away). To do this, I need to know that I have enough liquid cash to cope with a disaster.

With that in mind, my goal is to get about 20 thousand dollars in the bank making 6% interest. Once I get to that point, my goals will change again. I will probably then begin focusing on the house again.

I believe Trent said something to this effect in an earlier writing. Figure out what your goal is first, then plan accordingly.

By: dong

dong — Thu, 12 Jul 2007 18:50:38 +0000

I agree wholeheartedly that it’s matter of personal preference towards risk. However, I think the issues are actually more complicated. By paying the house down instead of investing, you could expose yourself to other risks. For example the housing market might be stagnant, but inflation elsewhere goes rampant effectively generating a negative return on the money you’ve plunked down in the house. Investing in the house exposes yourself to this risk. Again, I think generally paying down debt is the “safer” thing to do, but sometimes you’re trading some risk for other types of risk. Personally if I were in the letter writer’s situation, and planned on staying my house, I’d refinance to a fix rate – effectively making my immune to interest moves and inflation, and invest elsewhere….