pay off mortgage?

[Ludi]

What is the wiser investment - pay off the home mortgage or invest in the stock market?

:worried:

[remilard]

depends if your annual yield in the stock market is greater than the annual interest rate on your home. Unless you have unusually home mortgage rate you should expect to be able to beat that with a sound investment plan.

[Ludi]

The socially conscious funds we've invested in haven't been returning much lately....

[remilard]

The socially conscious funds we've invested in haven't been returning much lately....

They never do, you can probably beat your mortgage rate in the bond market over the next 3-5 years easily, if you are picky about which corporations you invest in.

[MsRuthieB]

The home investment is almost a guarenteed return on your investments. As you know, the stock market isn't. I'd say pay off the mortgage and invest too .

By paying off your mortgage, you'll have extra pocket change to invest. Why not do both? Invest what you would have been paying to the mortgage company? Maybe start a savings and sock away 6 months worth of mortgage payments at a time. Then, take the bulk of that and invest. It's a win win.

[Joe]

What is the wiser investment - pay off the home mortgage or invest in the stock market?


Depends on how you would do each. If you mean adding extra principal to each payment you send in, this will shorten the term of your mortgage, but you won't really see any benefits except way down the road.

An alternative approach would be to save up a particular figure--say $20,000 or $40,000--then refinance the mortgage "paying down" the principal by $20K or 40K. The disadvantage to this are the transaction costs.

You can probably do better by prudent investment in the stock market over the long run.

Another thing you need to take into account is that paying down the mortgage is essentially investing (more) in your house, and your house is a highly illiquid investment. Stocks have much greater liquidity. Inadequate liquidity can get you into trouble. Some alternatives might be to arrange a home equity line of credit (this would seem paradoxical) or to invest in real estate stocks (homebuilders, RE management companies, etc.)

[Ludi]

Whew, wildly conflicting advice here! Thank you for your thoughts. I've had my investments in the stock market plummet by something like 50% in the past ($5000 = $2500 for instance) so I'm not a huge believer in the stock market.

Oh, I should mention the funds to pay off the mortgage are available as a lump sum of the total mortgage, or for part of it, whichever we decide...currently we're not deciding but I feel this needs to change

[Hansbos]

I think a balanced approach is best. I pay down my mortgage more quickly so that I'll be debt free in 15 rather than 30 years, but I also put money in the stock market, even if it doesn't always pay off in the short run. I agree with the warning about lack of liquidity. You don't want all your money to be tied up in real estate (especially in the current bubble market).

[Ludi]

I think a balanced approach is best.

That's probably what we'll do...

[kirkjobsluder]

I think it also depends on how long you plan on staying in your current home. Paying down the principal makes a lot more sense if you plan to stay there 30 years than if you plan on moving in 5.

Also, you need to think in terms of your goals, your time frame, and your tolerance for risk. For example, the stock market is extremely risky in the short term but tends to be a safe bet averaged out over a long period of time. Savings type investments tend to be safer in a short period of time, but riskier over a long period of time (inflation can outpace interest rates).

[Ludi]

We intend to live here for the foreseeable future.

[MisaLady]

I used to work for a mortgage company and I'd HIGHLY recommend paying that off as quickly as possible. Most people don't realize exactly how much of their mortgage goes to pay interest... look at it this way: if you have a home worth $250k and you started with $20k down, each year for 30 years, if you figured in just the cost of the home, you'd only be paying $7667 - remember, that's per year. Anything above and beyond that is taxes and money into your mortgage company's pocket. :dizzy: Also, remember that the interest you pay is based on the amount you still owe the company.

Now, it doesn't work out EXACTLY like that, because of the way they divide up payments and the fact that you'll still have taxes to pay, etc., but... the point is, a lot of your money is not going to your house.

[colorful]

PAY OFF THE MORTGAGE!!!!!

Paying off debts should ALWAYS take precedence over savings. As long as you have enough savings tucked away for an emergency situation, PAY OFF THE MORTGAGE!

I like Ruthie's idea. Pay off the mortgage with the big lump sum. Then each month, invest what would have been your mortgage payment into the stock market. Or a portion of that, or whatever you chooose.

Did I mention that I think you should PAY OFF THE MORTGAGE?!!! :lol:

[remilard]

PAY OFF THE MORTGAGE!!!!!

Paying off debts should ALWAYS take precedence over savings. As long as you have enough savings tucked away for an emergency situation, PAY OFF THE MORTGAGE!

I like Ruthie's idea. Pay off the mortgage with the big lump sum. Then each month, invest what would have been your mortgage payment into the stock market. Or a portion of that, or whatever you chooose.

Did I mention that I think you should PAY OFF THE MORTGAGE?!!! :lol:

I disagree, if the annual mortgage rate is X, paying of the mortgage is equivalent to an investment with an annual return of X, if there is another investment with higher return, you should put your money there. Moreover you don't pay taxes on interest on mortgages (provided the interest is being paid on principal which is not in excess of the value of the home) which provides another incentive to keep the mortgage.

[spud]

I'm in the Uk, so maybe it's a different ball game. But I have always paid off the mortgage ASAP. So that's £200,000 that didn't go on interest payments. Over that time the few shares we hold have gone down in value from a peak of £20 to currently £2.50.
Most importantly to me is that when the mortgage is gone, I don't have to work fulltime anymore. The monthly payment was equal to a low paid monthly salary.
However, I have an arrangement with the building society (loan company) that I owe them £1 so technically the mortgage is still alive. So in case of dire need, I simply phone them up and ask them to send me a cheque for mega bucks and the repayments start up again.

[remilard]

I'm in the Uk, so maybe it's a different ball game. But I have always paid off the mortgage ASAP. So that's £200,000 that didn't go on interest payments. Over that time the few shares we hold have gone down in value from a peak of £20 to currently £2.50.
Most importantly to me is that when the mortgage is gone, I don't have to work fulltime anymore. The monthly payment was equal to a low paid monthly salary.
However, I have an arrangement with the building society (loan company) that I owe them £1 so technically the mortgage is still alive. So in case of dire need, I simply phone them up and ask them to send me a cheque for mega bucks and the repayments start up again.

In your case you were not able to invest at returns higher than your mortgage rate (or positive returns at all) so per my guidelines above you did that right thing.

[Thalia]

Paying off debt with interest is almost always better than saving with no interest. But we are talking about savings that earn interest. I agree with Kirk and Rem. Considering how low most mortgage rates are, and that interest on them can be deducted from taxes, there are tons of investments that will yield higher rates of return with lower risk than just straight stocks. But like Kirk said, you have to weigh your risk tolerance and think about how long until you retire/move. The point about liquidity is also important. If you need the savings you put into paying off the mortgage you'd have to apply for an equity line of credit.

Have you maxed out your IRAs (especially if you have any sort of employer match?) Do that first. My employer matches 50% up to the first 4% of my income. So by deducting 4% each month and getting it matched, it's like an easy 2% raise. I set it and forget it. (Readjust the distribution of the funds within the IRA if needed.)

Ever listen to Motley Fool radio on NPR? They recommend index funds with a (price ratio?) of under 1%. Check out their website for calculators, quizes, and good basic articles on investing.

[remilard]

I want to add that while I hope you have gotten some good ideas here none of us are giving particularly qualified advice, depending on the amount of money we're talking about a visit to a financial planner is probably not a bad idea.

[kirkjobsluder]

Thalia brings up the other thing you need to consider with investing. What would be the tax status of your investment?

[remilard]

Thalia brings up the other thing you need to consider with investing. What would be the tax status of your investment?

I would wait a while before making any big investment decisions assuming that tax deferred investments are superior in the US. If Bush is successful in eliminating capital gains from the tax base, and capital gains in IRAs and 401ks are not excluded (possible) then tax deferred investments suddenly suck.

Obviously if you aren't taking advantage of any employer matching, I think that is a no-brainer.

[MsRuthieB]

Capital gains are taxable at various rates..depending if they are long term or short term gains. There was a proposal on the table during the fall that if passed, would have provided a 50 percent exclusion for capital gains. Not sure if this went through or not (I don't have time this morning to look it up). It was considered by most to be another tax break for the wealthy. But this would actually be good for investers in that they wouldn't have to pay as much in taxes. Another note: Investors don't pay on unrealized capital gains. In order for the capital gains (realized) to be taxed investment(s) have to be sold. It's also worth noting that it is possible to have a taxable capital gain on the sale of items outside of stocks, bonds, mutual funds, etc. The sale of real estate is a perfect example of an investment that could be subject to capital gains tax.

[Ludi]

None of our investments are currently paying more interest than our mortgage costs. It's a fixed rate mortgage at 8.25% :eek:

[Thalia]

None of our investments are currently paying more interest than our mortgage costs. It's a fixed rate mortgage at 8.25% :eek:
Maybe refinancing before it's too late is the answer. Be sure to know your credit score and get out the calculator.
http://www.fool.com/homecenter/refinance/refinance.htm

[remilard]

Capital gains are taxable at various rates..depending if they are long term or short term gains. There was a proposal on the table during the fall that if passed, would have provided a 50 percent exclusion for capital gains. Not sure if this went through or not (I don't have time this morning to look it up). It was considered by most to be another tax break for the wealthy. But this would actually be good for investers in that they wouldn't have to pay as much in taxes. Another note: Investors don't pay on unrealized capital gains. In order for the capital gains (realized) to be taxed investment(s) have to be sold. It's also worth noting that it is possible to have a taxable capital gain on the sale of items outside of stocks, bonds, mutual funds, etc. The sale of real estate is a perfect example of an investment that could be subject to capital gains tax.

Bush wants to rewrite the tax code and exclude (100%) capital gains taxes from the tax base.

[MsRuthieB]

He already has cut them once. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) cut the top tax rate on long-term capital gains from 20 percent to 15 percent, the lowest level since World War II. This after the 1986 Tax Reform Act increased the maximum tax rate on capital gains income from 20 percent to 28 percent. This 40 percent tax hike deduced government revenues, discouraged entrepreneurship and caused many investors to hold on to assets they would prefer to sell.

Tax reform has been governments priority for a long time. Unlocking invested assets, some believe, is key to growing the economy. It's a true balancing act though. I highly doubt that a 100% cut in the tax will pass. Government isn't going to let go of that income unless they can replace is with something else. And personal income tax rates have already been lowered and are set to be lower ever year until 2006 I believe.