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Post by Deleted on Feb 19, 2011 18:52:50 GMT -5
In large part, this post is directed toward Phil and people like him.
I am thinking of adding $300 a month to my mortgage payment to pay it off in 10 years. This isn't a 15 year mortgage. It is just accelerating my payment schedule so that it will be paid off close to when I retire. I plan to retire in 9 years (age 66).
I think of how great it would be to retire with my mortgage paid for (currently $ 820 a month including taxes/insurance and that includes $35 a month extra for no good reason except the payment seemed so low). On the other hand, if there is mega-inflation, that will seem like nothing. When I got divorced in 1998, our house payment was maybe $500 a month. I paid more in rent.
So should I just increase my 403b or my Roth by $300? Or should I actively try to pay off the mortgage?
I am confused. By the way, Phil, I changed my sharebuilder to every four months to reduce what I was paying in fees.
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Post by Savoir Faire-Demogague in NJ on Feb 19, 2011 19:12:10 GMT -5
You gain nothing by pre-paying your mortgage. You are taking liquidity and tying it up in a fixed asset that you cannot get access to it.
If you are not maxing out your retirement savings plan put the money towards that. If you are already maxing out, invest the cash into a stock index fund like an S&P500 Index for example.
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SVT
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Post by SVT on Feb 19, 2011 19:26:01 GMT -5
I agree with SF. Increase your Roth and/or 403b by $300.
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Peace77
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Post by Peace77 on Feb 19, 2011 19:46:39 GMT -5
I say go ahead and pay off the mortgage.
No amount of money can buy the peace of mind that comes from having a paid off house.
As one nears retirement, risk should be decreased. Investing in the stock market is not risk free but paying off the home is risk free.
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SVT
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Post by SVT on Feb 19, 2011 19:52:24 GMT -5
I say go ahead and pay off the mortgage. No amount of money can buy the peace of mind that comes from having a paid off house. As one nears retirement, risk should be decreased. Investing in the stock market is not risk free but paying off the home is risk free. Just because you're contributing to retirement accounts doesn't mean you have to invest in stocks.
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blackcard
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Post by blackcard on Feb 19, 2011 20:44:25 GMT -5
We hope to have our 30yr mortgage paid off in 2 or 3 more years. That will be about 24 years early. What all these other's don't realize is how much in interest payments you will save. We will save about $210K in interest on a $250K loan at 5%, and be totally entirely debt free.
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blackcard
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Post by blackcard on Feb 19, 2011 20:51:11 GMT -5
And to add, I will be about 32, and DH 34, when mortgage is finally paid off.
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busymom
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Post by busymom on Feb 19, 2011 21:01:29 GMT -5
Great work blackcard! Having no mortgage after 6 years of payments is awesome! Karma for you!
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busymom
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Post by busymom on Feb 19, 2011 21:02:33 GMT -5
And yes, given the unpredictability of the current market, paying off the mortgage early seems like a smart move.
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SVT
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Post by SVT on Feb 19, 2011 21:11:20 GMT -5
We hope to have our 30yr mortgage paid off in 2 or 3 more years. That will be about 24 years early. What all these other's don't realize is how much in interest payments you will save. We will save about $210K in interest on a $250K loan at 5%, and be totally entirely debt free. What you don't realize is that all that extra money you used to pay the mortgage early could be used to invest in broad based indexes and return an average of 10% per year over that 30 year time frame. The younger you are, the better idea it'd be to take on the risk of investing in equities. If you're older and close to retirement, then you may not want to take on too much risk but instead pay the mortgage off early. You're obviously doing well (didn't you say your net worth was $450k and you're 30?) but as far as building wealth, the best, fastest, but also riskier way is to not prepay cheap debt but instead invest in equities. You'll come out way more ahead. Again, with your high incomes and living below your means, you're doing very well, but it's not the best use of your capital.
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blackcard
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Post by blackcard on Feb 19, 2011 21:14:25 GMT -5
Who said we were not investing? Our investments are about equal to our mortgage pre-payments. BTW absolutely nothing has returned 10% over the past 10 yrs, except precious metals. We have those also. Thank you Duffminster, we listened carefully.
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phil5185
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Post by phil5185 on Feb 19, 2011 21:18:25 GMT -5
We will save about $210K in interest on a $250K loan at 5%, and be totally entirely debt free. Yes, you would have paid a total of about $485,000 over 360 months. Which is what I do with my rental houses. I would retain the use of the $250k (rather than lock it into a house) for the next 24 yrs and invest it. At 10%/yr for 24 yrs it would be $2,500,000. And I would happily pay the extra $210k in interest. In your case, after the house is paid-off, you can invest that $1342/m into a 10%/yr fund for 24 yrs, it will be about $1,500,000. Not as good as the $2.5M but certainly worth doing. And, even tho you invest in the same 10%/yr fund as above, the risk is lower because you have less money out at 10% at any given time. (A good return always requires a good risk).
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blackcard
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Post by blackcard on Feb 19, 2011 21:19:25 GMT -5
Or as another poster said, from one I read long ago on the old MSN board. "Pease show me how to sleep in my 401K"
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blackcard
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Post by blackcard on Feb 19, 2011 21:25:01 GMT -5
You are calculating a future hypothetical 10% return. We are calculating real property, with real savings and a real physical asset. Past performance does not guarentee future returns. I would rather have a bird in the hand. Thanks Phil but we will pass on your plan, for now.
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schildi
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Post by schildi on Feb 19, 2011 21:27:49 GMT -5
I would say max out the retirement accounts first, and after that split any leftovers 50/50 between mortgage prepayment and investing / additional after tax savings.
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blackcard
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Post by blackcard on Feb 19, 2011 21:28:11 GMT -5
Maybe when mortgage is paid off we will splurge and get cable or Direct TV. Knowing us though, probably not.
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SVT
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Post by SVT on Feb 19, 2011 21:29:16 GMT -5
Who said we were not investing? Our investments are about equal to our mortgage pre-payments. BTW absolutely nothing has returned 10% over the past 10 yrs, except precious metals. We have those also. Thank you Duffminster, we listened carefully. I didn't say you weren't investing. I'm just saying you could end up being better off taking the money you're using to prepay the mortgage and direct it to equities. REITs, Energy, and Emerging markets have returned at least 10% the past 10 years as well. But either way, 10 years is not a long enough of a time period. Precious metals could go way down over the next 20 years, as well as the others I just mentioned above and equities could soar just like the 80s and 90s and average 10%/year over 30 years while precious metals end up earning 3%/year over 30 years. At a young age, I wouldn't be happy with risk-free by prepaying the mortgage. However, with you and your husband's presumably very high incomes (is that correct?), maybe I would do the same thing, even though I would know that it may not be the best way to build wealth. Risk and return are highly correlated.
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blackcard
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Post by blackcard on Feb 19, 2011 21:30:44 GMT -5
Imagine that you had no mortgage payment. What would or could you do with the extra money? Liquidity is the new black. And I love to wear black.
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formerexpat
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Post by formerexpat on Feb 19, 2011 21:32:47 GMT -5
Liquidity risk and not having sufficient cash flow in retirement is very dangerous.
This is the entire concept wrapped up in a nutshell. Does the inflation over the past 13 years seem like "mega" inflation? In another 13 years, the $820 you pay now will FEEL like $525 in today's dollar, using 3.5% inflation per annum. What's "mega" inflation? For several years in the 70's, we had inflation in excess of 8%.
If the next 6 years has a 3.5% inflation rate and the following 7 years have an 8% inflation rate, the $820 you pay will FEEL like $390 a month.
Whether normal, or "mega", inflation happens. You've got to be adequately diversified, even in retirement, so that some of your assets grow faster than the rate of inflation - and so you can keep liquidity in retirement.
I'd recommend increasing your Roth contributions by the $300 a month.
By my math, it looks like your monthly mortgage payment is $1,340 but you are paying down approximately $4,025 a month to have it paid down in 72 months instead of 360?
This method will save you approximately $193k in interest payments based on a $250k mortgage @ 5%.
You could pay the minimum and put nearly $2.7k a month in a low cost, broad based index fund and have roughly $6.1m in 30 years using 10% returns.
Alternatively, if you put the full $4,025 in the same index fund starting in month 73 when your mortgage is paid off and in 30 years, you will have just $4.8m.
So, your plan to save yourself just under $200k in interest has / or will cost you about $1.3m over the next 30 year period.
Spread management is invaluable to a person when trying to build your net worth in your working years. I'd also rather pay those last 4 years of mortgage payments of $1,340 that feel like less than $600 in today's dollars. [/size]
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SVT
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Post by SVT on Feb 19, 2011 21:36:07 GMT -5
You are calculating a future hypothetical 10% return. We are calculating real property, with real savings and a real physical asset. Past performance does not guarentee future returns. I would rather have a bird in the hand. Thanks Phil but we will pass on your plan, for now. Risk and return are highly correlated. You're taking on the sure thing...no risk by prepaying your mortgage.
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blackcard
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Post by blackcard on Feb 19, 2011 21:37:00 GMT -5
Our portfolio is balanced, most stock holdings are in utilities, oil, gas, food, consumer essentials and bonds. EF about 7 or 8 months of living expenses
We both have nice incomes and we both supplement those with contract work and a small business on the side.
FINK Four Incomes No Kids No kids yet.
We both still despise debt. Don't think that will ever change. Thanks for your tips though.
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phil5185
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Post by phil5185 on Feb 19, 2011 21:37:19 GMT -5
In large part, this post is directed toward Phil and people like him. I am thinking of adding $300 a month to my mortgage payment to pay it off in 10 years. This isn't a 15 year mortgage. It is just accelerating my payment schedule so that it will be paid off close to when I retire. I plan to retire in 9 years (age 66). southern - I use a longterm concept, it is based on the statistical averaging of the stock market index over a 25 to 30 yr period. Over that period, the average market return converges on about 11%/yr with a reasonable confidence level. But w/o a 25 to 30 yr period, the answer is way more variable, eg, for a single yr the market should be anything between -30% and +40% except in an outlier yr when it is even more extreme. The convergence is much better at 5 yrs and even better at 10 yrs - but still not good enough to form the basis for a reliable projection. So - probably a coin toss on whether you could do better with a 9 yr horizon - probably better to pay off the house.
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SVT
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Post by SVT on Feb 19, 2011 21:37:23 GMT -5
Imagine that you had no mortgage payment. What would or could you do with the extra money? Liquidity is the new black. And I love to wear black. It would be paid off in 30 years, or in your case 24 years.
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blackcard
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Post by blackcard on Feb 19, 2011 21:41:33 GMT -5
No formerexpat, our total loan payment will be about 6 or 7 yrs. We got it in 2006. We put a large amount down every time DH gets a nice bonus check and add an extra $2K every month at the principal. Did this since day one of the loan.
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blackcard
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Post by blackcard on Feb 19, 2011 21:43:58 GMT -5
Thanks busymom, some karma for U !
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blackcard
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Post by blackcard on Feb 19, 2011 21:50:15 GMT -5
We will have another mortgage BTW, but it will be for a rental fourplex or duplex, and will be carried with our business credit, not personal.
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phil5185
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Post by phil5185 on Feb 19, 2011 21:52:31 GMT -5
Risk and return are highly correlated. You're taking on the sure thing...no risk by prepaying your mortgage. And that is pretty much the whole story. Prepaying a 5% longterm loan is the same as buying a 5% CD - ie a sure thing, no risk. And borrowing at 5% and investing the capital at 11%/yr carries risk. Both have a useful function. If you are age 30, you need to invest at 10% to 12% to build wealth and outpace inflation, most wage earners cannot 'save' their way to wealth. If you are age 60 and entering your wealth preservation years, a 5% CD is just the ticket. We both still despise debt. Don't think that will ever change. Well, OK - but it is probably better to base financial decisions on math rather than on emotion. I've made a lot of money over the past 35 yrs by purposely taking on of debt and building on the arbitrage - so I guess 'despise' doesn't work for me.
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formerexpat
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Post by formerexpat on Feb 19, 2011 22:04:39 GMT -5
I'm quite happy with my mortgage payment. Happy enough to keep the entire value of my mortgage in the stock market right now [I'm 30] and keep it there for a full 30 year cycle.
You said 24 years in advance - that was my assumption in the post above. Again, you're saving $200k in interest at the cost of $1.3m. It's okay if you're not a fan of taking the risk but pre-paying a mortgage is mathematically and financially a bad decision for a 30 year cycle. No 30 year period has performed less than your mortgage.
This doesn't seem all that balanced. A lot of sectors missing in this portfolio. I'd suggest a supplemental broad based index fund to diversify yourself if you must absolutely be heavily weighted in utilities, oil, gas, food, CE's and real estate. [/size]
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blackcard
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Post by blackcard on Feb 19, 2011 22:05:35 GMT -5
Thanks for your input Phil. We just feel the need to be "anchored" with a paid off home, a lot of savings, and fully funded retirement plans, before moving our hard earned money into other investments.
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SVT
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Post by SVT on Feb 19, 2011 22:06:12 GMT -5
You are calculating a future hypothetical 10% return. We are calculating real property, with real savings and a real physical asset. Past performance does not guarentee future returns.I would rather have a bird in the hand. Thanks Phil but we will pass on your plan, for now. When I read that, I think 2 things: - The last 30 year return for the S&P 500 was 10.79%, reinvesting dividends. The next 30 year period could be 10.02%, or 11%, or 9.25%. - That expression holds true less and less the broader you invest and the more diversified you are. For instance, you are more likely to get the historical 10%/year in a 30 year time period in the S&P 500 than for a sector fund, like technology or precious metals, or an individual stock, like Microsoft. ETA: The risk and deviation is greater with sector funds and individual stocks so the return is much less certain.
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