Friday, August 20, 2010

Pay Off House Or Invest?

Fuckin' taxesImage by blmurch via Flickr
Pay off your house first or invest. I am trying to figure out what would be best. I've been doing the math on this problem and I have the figures. I have started with just adding $100 to my principle every month. If I do that it takes 5 years off my 30 year mortgage. If I add $200 it takes 9 years off. If I add $300 it takes 11 years off. That's some great results but that's still 19 years away at best. The $300 would be the the money I would have used to invest. So in 19 years I would have a paid off house and no retirement. 
 
Now here's where real life enters the situation. I have a plan to sell my house in 10 years. All the kids will be gone and I can downsize. So wouldn't it be better to use the extra $300 payment and invest it? I did the math and found that the $300 @ 8% would be over $50,000 at the ten year point. This would make sense for me because I have very little saved. If I had a decent amount in retirement then paying it off would make sense. 
 
Generally the results of paying extra on mortgage: 
 
  • Less Stress
  • No debt
  • Money free to invest
  • Security
  • Never be foreclosed
  • Lose tax deduction
  • Cash poor
  • Less risk
 
To put the money toward investing: 
 


  • Always have the cash to access in emergency 
  • Greater tax deduction 
  • Market may crash and you would lose the investment 
  • You could lose your house to foreclosure 
  • More risk 

 
There are so many factors to consider. Its not just the math deciding what to do. The math works either way. The decision must go along with your goals. It also depends on where you are in life. Your income either rising or declining. Your age and how much savings you have. 

 
For me the benefits to a paid off house are to far away. My timeline of selling in ten years makes it impractical. My lack of savings makes it impractical. It makes sense for me to invest the money in a retirement account. Saving for ten years then selling my home, buying a smaller home for cash makes sense. No two situations are the same. You should run the numbers first to get the the facts then decide. 
 

7 comments:

  1. I did both at the same time. My house is paid off now, so extra money goes towards savings. However, the danger in paying off the house is that you might not have enough savings if bad things happen. So I advise making sure you have an emergency fund before you apply any extra cash toward principle payments. The tax deduction aspect of mortgages is overrated and Congress will be trying to take that away soon because they can't control their spending.

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  2. Hi David, I just did the same calculation (several different scenarios). My conclusion, Hedge, by making large principal payments over the next few years. I'll pay off the mortgage earlier and put cash to use that would ordinarily get a paltry return in money market.

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  3. Thanks Barb, Your so right about the return on the money market. My head was spinning trying to figure out what to do when your time frame is only 10 years.

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  4. Grouch, I'd like to be where you are. But with 3 in college its moneys tight.

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  5. I've got three kids in college too. It's a lot easier to pay those bills without a mortgage.

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  6. It is a tough call. The problem is --- what will our larger houses be worth in 10 years? Will the bubble burst again? I am beginning to value my "larger house" the price it was ten years ago in my mind.
    We sold our last house at the height of the bubble and bought this one for cash. Worked out well- but the house has depreciated quite a bit- about the level that we would have had if we had sold the first house for the price we built it at.
    I certainly don't see 8% ANYWHERE. I don't think we will in the next five years. So...pay off the house or make 1-2% interest over 5 and maybe 3-6% over the next five. At least with the house I have a roof over my head????

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  7. Janette, I was really counting on my house financing my retirement in the years ahead. In ten years I hope it will have appreciated enough to sell, give some cash and buy me a small one for cash. I'm hoping, well thats the plan.

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