What are your guys' thoughts on paying down mortgage vs investing? I currently contribute to RRSPs and RESPs but I havn't put much extra towards my mortgage principal. My wife is back to work this year from Maternity leave so we will have more money to invest.
My current mortgage rate is 5.05% (5 yr term contract for 25yr mortgage, in Canada). I figure that extra principal payments would be gauranteed to get 5.05% return (as interest NOT paid) which would be more like 7% considering I'll never have to pay taxes on this "investment." Given the unstable ecomony, this may be a decent return. I am only 27yrs, is this too conservative of a long term investment, or would I be better off in a mutual fund or an index fund?
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What are your guys' thoughts on paying down mortgage vs investing? I currently contribute to RRSPs and RESPs but I havn't put much extra towards my mortgage principal. My wife is back to work this year from Maternity leave so we will have more money to invest.
My current mortgage rate is 5.05% (5 yr term contract for 25yr mortgage, in Canada). I figure that extra principal payments would be gauranteed to get 5.05% return (as interest NOT paid) which would be more like 7% considering I'll never have to pay taxes on this "investment." Given the unstable ecomony, this may be a decent return. I am only 27yrs, is this too conservative of a long term investment, or would I be better off in a mutual fund or an index fund?
Technically investing it will probably give you a better return, but a lot can be said for the "piece of mind factor" of paying down the house. I guess in theory if you do the math it could make sense to never pay of the house but not for me or many for that matter.
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Technically investing it will probably give you a better return, but a lot can be said for the "piece of mind factor" of paying down the house. I guess in theory if you do the math it could make sense to never pay of the house but not for me or many for that matter.
To me paying down the mortgage should be the priority. All of the financial guys will tell you to invest it as when you do the math, it comes out that you will make more by investing. I personally feel that paying off debt should be the priority. And not to say that being in debt on a house is a bad thing, but i would at least try to get the mortgage paid down so that you are at a 70% loan to value. This ensures that you can sell if you have to and be able to get out of the house without being upside down. But on the upside, if you really want to invest, you could always split the amount of money you were going to pay per month and invest a little and pay down the mortgage some.
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To me paying down the mortgage should be the priority. All of the financial guys will tell you to invest it as when you do the math, it comes out that you will make more by investing. I personally feel that paying off debt should be the priority. And not to say that being in debt on a house is a bad thing, but i would at least try to get the mortgage paid down so that you are at a 70% loan to value. This ensures that you can sell if you have to and be able to get out of the house without being upside down. But on the upside, if you really want to invest, you could always split the amount of money you were going to pay per month and invest a little and pay down the mortgage some.
Say your loan rate is 6%. The REAL rate of interest is to factor out the tax benefit from the interest deduction. If your tax bracket is 20%, then that would bring the real rate down to below 5%, plus if you do OWN, unless you own but dont have a mortgage, you are renting..and in owning you also get the property tax deduction..so that would also reduce that "real" rate..since renting means you dont get that deduction.
So if you can beat the ROR of that, then you invest the money..if you cannot beat 5% investing, then the money is better used elsewhere.
That analysis is how you should consider it..but if you are going to spend the money vs invest/pay down, then pay down for sure.
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Here is the reasoning for my explanation-
Say your loan rate is 6%. The REAL rate of interest is to factor out the tax benefit from the interest deduction. If your tax bracket is 20%, then that would bring the real rate down to below 5%, plus if you do OWN, unless you own but dont have a mortgage, you are renting..and in owning you also get the property tax deduction..so that would also reduce that "real" rate..since renting means you dont get that deduction.
So if you can beat the ROR of that, then you invest the money..if you cannot beat 5% investing, then the money is better used elsewhere.
That analysis is how you should consider it..but if you are going to spend the money vs invest/pay down, then pay down for sure.
Say your loan rate is 6%. The REAL rate of interest is to factor out the tax benefit from the interest deduction. If your tax bracket is 20%, then that would bring the real rate down to below 5%, plus if you do OWN, unless you own but dont have a mortgage, you are renting..and in owning you also get the property tax deduction..so that would also reduce that "real" rate..since renting means you dont get that deduction.
That's actually the wrong way to look at it.
If your loan rate is 6%, your ROR is 6% x (1-tax rate) for Paying down Prinicipal early (which is what BountyHunt was referring to).
If you can find an AFTER-TAX investment that is higher than 6%*(1-tax rate), then you should (in theory). Note the emphasis on After-tax. If you do the math out... basically, that investment has to yield roughly 6% = 6%*(1-tax rate)*(tax rate).
There's also the issue of compounding impact from taxes but I wont bore you.
Quick Summary: So basically, forget the tax part... if your loan is 6%, then u need an investment that yields above 6% (pre-tax).
Real-Life Summary: Have enough liquid cash (i.e. savings account) for typical emergency crap. Put the rest into paying down Debt, especially in this environment. Dont buy into this crap that in the long run, stock will generate 11% returns, etc. Those "historical numbers" are based on "history" and a relatively healthy and young economy. Look at Japan, look how their stock market has perform.
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Quote Originally Posted by wallstreetcappers:
Here is the reasoning for my explanation-
Say your loan rate is 6%. The REAL rate of interest is to factor out the tax benefit from the interest deduction. If your tax bracket is 20%, then that would bring the real rate down to below 5%, plus if you do OWN, unless you own but dont have a mortgage, you are renting..and in owning you also get the property tax deduction..so that would also reduce that "real" rate..since renting means you dont get that deduction.
That's actually the wrong way to look at it.
If your loan rate is 6%, your ROR is 6% x (1-tax rate) for Paying down Prinicipal early (which is what BountyHunt was referring to).
If you can find an AFTER-TAX investment that is higher than 6%*(1-tax rate), then you should (in theory). Note the emphasis on After-tax. If you do the math out... basically, that investment has to yield roughly 6% = 6%*(1-tax rate)*(tax rate).
There's also the issue of compounding impact from taxes but I wont bore you.
Quick Summary: So basically, forget the tax part... if your loan is 6%, then u need an investment that yields above 6% (pre-tax).
Real-Life Summary: Have enough liquid cash (i.e. savings account) for typical emergency crap. Put the rest into paying down Debt, especially in this environment. Dont buy into this crap that in the long run, stock will generate 11% returns, etc. Those "historical numbers" are based on "history" and a relatively healthy and young economy. Look at Japan, look how their stock market has perform.
The response was what will my money be better suited for, paying down a 6% loan (or more like 4 and change as I explained) OR investing.
I understand what you are saying if you are insinuating an appreciating asset in a house (meaning the investment in the house will gain more than the loan ammt) but in this environment it is probably the reverse..I have lost from the tip tops about 150k on the house I own..so in the last 3 yrs my house has been a DEPRECIATING asset..so that even compounds the argument more.
The assumption that you pay taxes on a stock market investment was a given assumption, as you could also say in the past (pre-Bush) you paid taxes on any gain on sale of property.
The real point is if you can beat even the base interest rate in investing, you should invest the money, especially in a retirement asset, like an Roth IRA etc.
The average length of time in a house is less than 10 yrs, thus what are you really gaining in interest reduction longer term on a 30 yr loan? Paying down principal on a 30 yr loan 20k wont eliminate much of the interest because you dont start "making the turn" on the loan until well past the 12th year on the loan...especially if the ammt of principal reduction is small relative to the loan.
The way I see it is "opportunity cost" what am I forgoing opportunity wise by paying down the principal on my mortgage when I could use the funds to invest? And to me the answer is an easy one..I feel confident that investing in the stock market SHOULD yield a better ROR opportunity cost wise than paying down a 4 and change loan.
You have to factor in the tax savings when you calculate the real interest rate on a loan..that is a gimmie.
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Auts,
You are looking at it inverted.
The response was what will my money be better suited for, paying down a 6% loan (or more like 4 and change as I explained) OR investing.
I understand what you are saying if you are insinuating an appreciating asset in a house (meaning the investment in the house will gain more than the loan ammt) but in this environment it is probably the reverse..I have lost from the tip tops about 150k on the house I own..so in the last 3 yrs my house has been a DEPRECIATING asset..so that even compounds the argument more.
The assumption that you pay taxes on a stock market investment was a given assumption, as you could also say in the past (pre-Bush) you paid taxes on any gain on sale of property.
The real point is if you can beat even the base interest rate in investing, you should invest the money, especially in a retirement asset, like an Roth IRA etc.
The average length of time in a house is less than 10 yrs, thus what are you really gaining in interest reduction longer term on a 30 yr loan? Paying down principal on a 30 yr loan 20k wont eliminate much of the interest because you dont start "making the turn" on the loan until well past the 12th year on the loan...especially if the ammt of principal reduction is small relative to the loan.
The way I see it is "opportunity cost" what am I forgoing opportunity wise by paying down the principal on my mortgage when I could use the funds to invest? And to me the answer is an easy one..I feel confident that investing in the stock market SHOULD yield a better ROR opportunity cost wise than paying down a 4 and change loan.
You have to factor in the tax savings when you calculate the real interest rate on a loan..that is a gimmie.
I'll be in the same boat maybe next year and will likely do a combination of the two. Pay my approximate $450k mortgage down to about $175k to keep some deduction and invest the rest of the cash which should be about $450k total.
Planning on killing my grandmother, maybe next June or July.
Just kidding.
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I'll be in the same boat maybe next year and will likely do a combination of the two. Pay my approximate $450k mortgage down to about $175k to keep some deduction and invest the rest of the cash which should be about $450k total.
Planning on killing my grandmother, maybe next June or July.
I see your point on depreciating assets. I did not factor that into my analysis. But to the more pertinent point: I would clearly pay down debt (in any form), rather than invest in this market. Again, we're talking about excess cash. There are very few opportunity to make 6% on your money or ~4%-5% after tax return.
Remember, paying down mortgage debt = riskfree. Yes, a home can depreciate but remember Your personal loan level will always be fixed (i.e. principal on balance will not decline if the housing market continues to tank). I dont know many opportunities out there that are riskfree and yielding 6%.
Now, if you feel like the equity market will yield above 6% (pre-tax) in the coming years and you are quite confident in this assumption, then you would invest in the stock market.
So the question is what would you rather have: 1. riskless 6% or 2. volatile stock market. If you have a high risk tolerance then the latter might be something to consider.
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wallstreetcappers,
I see your point on depreciating assets. I did not factor that into my analysis. But to the more pertinent point: I would clearly pay down debt (in any form), rather than invest in this market. Again, we're talking about excess cash. There are very few opportunity to make 6% on your money or ~4%-5% after tax return.
Remember, paying down mortgage debt = riskfree. Yes, a home can depreciate but remember Your personal loan level will always be fixed (i.e. principal on balance will not decline if the housing market continues to tank). I dont know many opportunities out there that are riskfree and yielding 6%.
Now, if you feel like the equity market will yield above 6% (pre-tax) in the coming years and you are quite confident in this assumption, then you would invest in the stock market.
So the question is what would you rather have: 1. riskless 6% or 2. volatile stock market. If you have a high risk tolerance then the latter might be something to consider.
Based on my market experience I would go with the later..but you are right about risk, there is definately more risk in the market, but any buyer in the last 5 yrs or so probably has MORE risk in depreciation than you might in the market generally speaking.
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auts,
Based on my market experience I would go with the later..but you are right about risk, there is definately more risk in the market, but any buyer in the last 5 yrs or so probably has MORE risk in depreciation than you might in the market generally speaking.
if i were 27 i would be putting as much in the market as possible....hell man....you have 30 years of growth ahead of you....that said i am the least expert here....gl
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if i were 27 i would be putting as much in the market as possible....hell man....you have 30 years of growth ahead of you....that said i am the least expert here....gl
historically, you should invest it...b/c the ROR for the s&p should be higher than any mortgage rate you are paying
however...this market sucks and may trade sideways for a long time IMO
so, paying down debt may be the wiser choice until the mkt turns around in a year or two...however real estate equity is falling in the US so you are paying down an asset which is declining in value
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historically, you should invest it...b/c the ROR for the s&p should be higher than any mortgage rate you are paying
however...this market sucks and may trade sideways for a long time IMO
so, paying down debt may be the wiser choice until the mkt turns around in a year or two...however real estate equity is falling in the US so you are paying down an asset which is declining in value
You should have a good "rainy day fund" before paying down the mortgage. Paying down principal is not going to reduce your monthly payment except shorten it at the end. What happens if you run into a rough patch where it's tough to pay the regular payment? You might then wish you had saved the extra money for help at that point rather than helping you years down the road pay it off a few years earlier. Not to say no one should ever pay down earlier, but there are many higher priorities. If you have a good rainy day savings and are saving well for retirement and have some regular investments and still have some left, then go ahead and pay some down, but it shouldn't be at the top of priorities. A 5% long-term loan is not a bad thing.
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You should have a good "rainy day fund" before paying down the mortgage. Paying down principal is not going to reduce your monthly payment except shorten it at the end. What happens if you run into a rough patch where it's tough to pay the regular payment? You might then wish you had saved the extra money for help at that point rather than helping you years down the road pay it off a few years earlier. Not to say no one should ever pay down earlier, but there are many higher priorities. If you have a good rainy day savings and are saving well for retirement and have some regular investments and still have some left, then go ahead and pay some down, but it shouldn't be at the top of priorities. A 5% long-term loan is not a bad thing.
Dude, I'm only 18, but I say pay down the mortgage.
Obviously, in the past you could get better returns by investing the cash, but why take that risk? You're definitely going to be happy knowing that some of that debt is off your shoulders even if the market gets 10% annualized returns over the next 5 years. But will it?
Here's the thing: CD's and T-Bills (the safest of the safe) are not giving you 6% right now. But paying down your house is giving you 6%?! No brainer: even with depreciation (which, given the current inflation climate may not be much), the 6% return (in essence) for no principal risk greatly outweighs CD's and T-Bills. Thus, I would say put 70% of your capital in paying down the house and 30% into a diversified mutual fund with an exceptional long-term track record, such as Longleaf Partners Fund. Or, go international with one of Vanguard's low-expense international funds.
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Dude, I'm only 18, but I say pay down the mortgage.
Obviously, in the past you could get better returns by investing the cash, but why take that risk? You're definitely going to be happy knowing that some of that debt is off your shoulders even if the market gets 10% annualized returns over the next 5 years. But will it?
Here's the thing: CD's and T-Bills (the safest of the safe) are not giving you 6% right now. But paying down your house is giving you 6%?! No brainer: even with depreciation (which, given the current inflation climate may not be much), the 6% return (in essence) for no principal risk greatly outweighs CD's and T-Bills. Thus, I would say put 70% of your capital in paying down the house and 30% into a diversified mutual fund with an exceptional long-term track record, such as Longleaf Partners Fund. Or, go international with one of Vanguard's low-expense international funds.
Money merge account will pay your house off in 1/2 the time, if you want to go that route. Worry about tax deductions is nothing, when thinking about the total money you save in interest over the years to paying back your bank in half the time and money for your mortgage loan.
Would you rather worry about the 20-30k tax deductions or worry about 100k-200k saving in interest? The American dream has been taught to be, to own a mortgage, but the real American dream is to own 3-4 properties free in clear and taking the renters revenue every two weeks or month. Everyone has different beliefs, for I damn sure I am not a financial planner.
I just don't like to see my money being taken by the bank every month. I rather utilize a creative new financial program to save me 280k in exact over the life of my loan and I will have my loan paid off in 13 years. While using the banks money the whole time to do so. Didn't change my lifestyle at all, the true American dream.
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Money merge account will pay your house off in 1/2 the time, if you want to go that route. Worry about tax deductions is nothing, when thinking about the total money you save in interest over the years to paying back your bank in half the time and money for your mortgage loan.
Would you rather worry about the 20-30k tax deductions or worry about 100k-200k saving in interest? The American dream has been taught to be, to own a mortgage, but the real American dream is to own 3-4 properties free in clear and taking the renters revenue every two weeks or month. Everyone has different beliefs, for I damn sure I am not a financial planner.
I just don't like to see my money being taken by the bank every month. I rather utilize a creative new financial program to save me 280k in exact over the life of my loan and I will have my loan paid off in 13 years. While using the banks money the whole time to do so. Didn't change my lifestyle at all, the true American dream.
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