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[scooterbug44]

Yes, the idea was that you should pay off your long term lingering debts (you know, the ones w/ the high interest rates) and your bills before you splurge and ADD more to your debts.

IMO investing should be done w/ your extra money, not the money you can get by playing a financial shell game.

Conservative yes, going to bite you in the arse on a rainy day, no. ;-)

I am sure there are people w/ the financial savvy and resources to pull off what you describe, but the average debt ridden American doesn't need more ways to play the system and avoid paying their bills.

 

[Smiling JOe]

I see, but student loans and 5.5% loans for homes are not high interest rates. They are about the cheapest thing going. Some people feel more comfortable having them paid off, but when you can make more money by investing in alternatives, there is nothing financially wrong with leaving them be.

I fully agree with your last paragraph, pertaining to the average American playing the system.

 

[scooterbug44]

Credit cards do not have low interest rates, and these people are not delaying the payment of their mortgages etc. to make money at a higher rate - they are spending the $ on items w/ no investment return and racking up MORE debt.

I understand what you're saying, but these are not paragons of financial savvy, but examples of what is wrong w/ how americans look at finances.

 

[TreeFrog]

That Ipod and dinner are fully 65-70 percent of our economy.

And don't forget that even though the iPod says Apple on the box, it is made in China, same as the cheap toaster.

 

[fisher]

In some cases, paying off one's house may not be as financially sound as paying the mortgage. If you can borrow the money at let's say a rate of 5.5% (today's rate), and write off 25% of that, the actual cost to borrow the money is 3.75%. There are other investments which should yield a greater net than 3.75%. So, one would need to do the math to decide which is better, paying off the house, or investing the money into something else. While buying a purse or leasing a car is not an investment, those are lifestyle choices and some people have no problem being able to afford the luxuries even though their home is not paid off. Of course, in your example, you are probably referring to the people who cannot afford the luxuries, and are living beyond their means.

Joe--Please point me toward a RISK FREE investment that will yield 5.5% and I will agree with you that it would be better to invest than to pay down your mortgage.

Paying off the mortgage gives you a risk free rate of return of exactly your mortgage rate. So, if you can't get a GUARANTEED rate of return on your investments that is higher than your mortgage rate, pay the mortgage off.

 

[beachmouse]

Though not everyone gets to effectively write down their mortgage rate come tax time. If you bought a median priced home in Florida prior in about 2003 or earlier, and were conservative in borrowing (fixed rate, no house as ATM) then a lot of people are better off claiming standard deduction for married-jointly than by itemizing.

Married-jointly standard deduction this year is something like $17K this year. We bought the average Okaloosa County house in 2001 and interest and taxes aren't half of that. (Granted we're on year 5 of a 15 year note, but even on a 30 year, the math will work out in favor of standard for a lot of people.

 

[Mango]

In some cases, paying off one's house may not be as financially sound as paying the mortgage. If you can borrow the money at let's say a rate of 5.5% (today's rate), and write off 25% of that, the actual cost to borrow the money is 3.75%. There are other investments which should yield a greater net than 3.75%. So, one would need to do the math to decide which is better, paying off the house, or investing the money into something else.

SJ, you're right on the money. Even my clients who had the ability to pay cash for a house got a mortgage. They were very conservative people and also financially savvy about investing for the long term. Consider that every 10 years or so the stock market averages 10% and you're not a day trader, having a mortgage makes sense with low rates. I do want to add they did not do 100% financing or any tricky or liar loans.
Full doc, good debt ratios, low loan to values and excellent credit.

 

[fisher]

SJ, you're right on the money. Even my clients who had the ability to pay cash for a house got a mortgage. They were very conservative people and also financially savvy about investing for the long term. Consider that every 10 years or so the stock market averages 10% and you're not a day trader, having a mortgage makes sense with low rates. I do want to add they did not do 100% financing or any tricky or liar loans.
Full doc, good debt ratios, low loan to values and excellent credit.

Not so conservative if they chose to invest versus payoff their mortgage. Nearly every conservative financial planner will advise clients to payoff the mortgage.

And, your statement about investing in the average stock market versus paying off the mortgage is dead wrong.

Here are some examples (mortgage rates are from Freddie Mac website)--

1972-- Market reaches 1000. Average return from 1972 through 2002 (length of a 30 year mortgage) when market was around 8400 is about 7.4%. In 1972, mortgage rates were running in the range of 8.5%. Paying off the mortgage would have been a much better deal.

1977 --Market at about 1000. Average return since then is about 9.4%. Average mortgage rate in 1977 was about 9.1%. A better deal to pay off the mortgage especially considering the return is risk free and the stock market is fairly risky.

End of 1982--Market around 1000. Return since 1982 to today at 12000 is about 10.5%. Mortgage rates were around 14% at the end of 1987. Again, definitely payoff the mortgage.

End of 1987--Market around 2000. Return since 1987 to today at 12000 is about 9.5%. Mortgage rates were around 10.5% at the end of 1987. Again, a much better deal to payoff the mortgage.

End of 1997--Market around 7800. Return since 1997 is about 4.5%. Average 30 year mortgage was around 7.1%. Paying off the mortgage would have been a smoking deal.

Also, the market does not average 10% growth per year. I always hear that number quoted, but it just isn't true. In 1940, the market was around 100. If you had invested in the Dow in 1940 at 100, your average annual return would have been around 7.4% through yesterday. Go back to 1920, and the average return drops to under 6%.

The moral of the story--always, always payoff the mortgage. I'm not sure who started the myth regarding keeping a mortgage if you have the wherewithal to pay it off (probably a mortgage broker;-)just kidding), but it is an urban legend.

 

[Sandcastle]

I agree with Fisher. Pay off your mortgage and then invest in stocks. If you did the opposite and the economy tanks, you could lose both your house and your investment in the market. I love stocks and I still strongly feel this way.

 

[Mango]

Also, the market does not average 10% growth per year. I always hear that number quoted, but it just isn't true. In 1940, the market was around 100. If you had invested in the Dow in 1940 at 100, your average annual return would have been around 7.4% through yesterday. Go back to 1920, and the average return drops to under 6%.

The moral of the story--always, always payoff the mortgage. I'm not sure who started the myth regarding keeping a mortgage if you have the wherewithal to pay it off (probably a mortgage broker;-)just kidding), but it is an urban legend.

I guess you glanced over my post and missed words like "not being a day trader" or when "mortgage rates are low". My definition of conservative is they did not have any credit debt or car payments. They took fixed rate mortgages, usually 15 year terms.
In full disclosure, I am a mortgage broker by referral only with a large percentage of those referrals coming from Financial Planners.
I am not sure where you are getting your numbers from but also they do not appear to be taking into account the mortgage tax deduction.

Since 1927, the S&P 500 stock index has gained 10.4% a year on average. But in any given year it could be up 29.9% or down 9.0% or somewhere in between, says IFA.com. The trick is understanding that risk is a fact of investing. And it's also knowing you can manage risk intelligently by deciding how much risk you want to take and tailoring your portfolio to generate the top return for your level of acceptable risk.
To do that, it's important to understand the power of diversification and the benefits of owning many types of stocks, from large value-priced stocks to small value-priced stocks. Diversification lets you minimize the risk posed by a single stock or type of stock and lets you still get your share of the market's return. You must also understand that to claim your 10% return, you need to be invested for a number of years and ignore short-term stock movements.

The Borrowers I had take mortgages who didn't need to understood these principles, were not overweighted in anyone one investment and also had cash reserves. They also had low loan to values on their homes, so no risk of losing it if the economy tanks.

The decision to do such is obviously not for everyone. A good financial planner obviously would not recommend this to people reaching retirement where risk should be lessened or those who will do the freak out everytime the market blips. Some people also just like to know they have no mortgage, that's cool, but there are those who have proven themselves to be financially savvy and it has worked out well for them.

You wouldn't also have a screen name of Little Fish too would you Fisher?