Thanks,
Samantha

sounds like you have it backwards. If you want to pay of a mortgage as soon as possible, why don’t you save up now so you can “pay it off” the day you buy it…i.e. pay cash. I think it’s so funny how no one will even dare to consider paying cash because of “I can make more in stocks and deduct the interest so a mortgage is a good investment” and then as soon as they get a mortgage, these very same people dump all they have into it to get rid of it ASAP. Both theories have merit, but I just think the disparity is funny.

For those of you who say investing is more important, in one way you are correct. But you obviously don’t know what it feels like to be completely debt free. If you have your house paid off, your living expenses now and in retirement could decrease by 20% or more which gives you so much peace of mind and flexibility.

I don’t think that Trent necessarily thinks of his dream home as a large luxury “McMansion” (although I could be wrong) but more like a comfortable house with more acerage and a nice yard. My “dream/retirement house” is going to be about half the value of our current house, just because of the property values in the area where I want to live once I don’t have to be in the city close to work.

plenty of our parents’ families raised 4 kids just fine in a 1000 sq. ft., 3 bedroom, 1 bath home.

now we seem to want 1000 sq. ft. per person.

those “McMansions” don’t come cheap!

i was raised in my family of 4 in a 6,000+ sq.ft. home (many rooms not visited except to dust them) – huge utility bills, expensive upkeep

but we’re raising our family of 4 in 1,400 sq.ft.

our home is paid off (we’re 40), no debt, one stay at home mom

mostly because we’ve not been spending the extra $2,000 to $3,000/month other families have to own space they will almost never use (except to dust)

remember, residential real estate is a poor investment, with a long term real returns of 1-2% annually

it is easy to get so emotionally involved with the idea of “home” that one makes poor decisions (think of prices paid at the top of the current bubble)

As I’ve probably mentioned before, the rule of thumb I like to use is that if you can pay the mortgage off in 5 years, then go ahead. But if it will take longer (esp. 10+ years) then I would invest the money instead as the power of compounding will most likely outstrip the interest costs over the life of the loan.

Consider this. Say you had a 200k mortgage that was fixed at 7% for 30 years. Now, consider if you had $500 extra a month to put towards a long-term investment or to pay down the mortgage.

Scenario 1: If you took that $500 a month and invested it and earned an 8% after-tax return (not outlandish at all), you would end up with roughly $680k after 30 years. Your mortgage will take the full 30 years to pay off.

Scenario 2: Now, if you took the same $500 a month and put it towards the mortgage instead, you would pay off the mortgage early in the 16th year. If you then plowed the entire mortgage payment (including the extra $500 a month) into a long-term investment account for the next 14+ years, you would end up with roughly $570k. You’ve lost over 100k in compounded returns!

I didn’t even factor in the tax break you get on the mortgage which lowers the effective tax rate on the mortgage (especially in the early years). So for those who will argue that 8% after-tax returns are outlandish, let’s just say the tax break and the taxes on the investments effectively cancel each other out.

Oh, one additional point. In Scenario 1, by the 15th year you are sitting on a nest egg that is greater than your mortgage. So by the time Scenario 2 pays off their mortgage, Scenario 1 is in a position to do the same if the mood strikes.

And what about all the extra interest paid on the mortgage in Scenario 1?!? It doesn’t matter! If you can put your dollars to work making a higher return than you are paying on your mortgage, then you will always come out ahead.

Note that I kept my scenario simple by compounding interest on both the investment account and the mortgage yearly. If you really want to get technical, you can calculate it out monthly, add in inflation and adjust for taxes and tax breaks on captital gains and mortgage interest, respectively.

Best of luck wrapping your head around that…

Meanwhile, Trent’s blog does read like a brain dump sometimes. That’s fine. It’s still pretty good. :)

As I have said before, your site is one of my favorites and I enjoy and appreciate what you cause us all to think about. The dialogues/comments bring out so many ideas and differing viewpoints that can expand all of our minds in dealing with being good stewards.

Thanks!!!

Implying that his simplistic financial plans somehow made him a multi-millionaire is just plain wrong.

Are you?

Property taxes in our town are very high (about 50% of my mortgage payments per year), so even if (when?) I pay off the mortgage, that only lowers my monthly payment by 2/3, rather than eliminating it entirely.

If there are any burgeoning filmmakers out there, don’t make a film on your credit cards, it’s not worth it. The stories about Spike Lee make it sound glamorous – it’s not, and how many of us are Spike Lee?

@Matt – if you think Trent is making it up, why read it? Even if he making it up, what’s wrong with that? If you read the line under the copyright (the very bottom of the page) you will see it says “This site is for entertainment purposes only. Trent is not a financial advisor and no information found on this site should be construed as financial advice.”

Personally, I find what Trent has to say interesting, it’s not necessarily going to influence what I do financially but a good way to learn is to listen to others, regardless of whether they are “experts” or not.

Trent’s Aussie Subscriber
Karen