Mortgage Amortization

[apenland01]

There is a thread in the lounge that seems to pop up every now and again about whether to pay off a mortgage or invest. People constantly compare a 3% mortgage against making 7% investing. I don't believe you can make a direct comparison between an amortized loan and a consistent rate of return on an investment.

My argument is that early in the mortgage, you are paying 90% interest and at the end, you are paying 5%. If you have already paid for 20+ years, there is no advantage to paying off the mortgage, because you can generally make more than the 5% you would be paying on the mortgage. However, if the mortgage is newer and only say 5-10 years have been paid, then paying off the mortgage makes sense because you are still paying 60-70% interest on the mortgage.

Thoughts???

[NitroZ7]

There is a thread in the lounge that seems to pop up every now and again about whether to pay off a mortgage or invest. People constantly compare a 3% mortgage against making 7% investing. I don't believe you can make a direct comparison between an amortized loan and a consistent rate of return on an investment.

My argument is that early in the mortgage, you are paying 90% interest and at the end, you are paying 5%. If you have already paid for 20+ years, there is no advantage to paying off the mortgage, because you can generally make more than the 5% you would be paying on the mortgage. However, if the mortgage is newer and only say 5-10 years have been paid, then paying off the mortgage makes sense because you are still paying 60-70% interest on the mortgage.

Thoughts???

First I think people always make a big assumption on what they can make investing the money. Even if they do make that return there could be taxes depending on how they are investing. Then there is always the chance that they lose money investing that could have cut an expense they had. Then you do get a tax deduction, with limits, on the mortgage interest. It depends on what a person's situation is but for me paying off a mortgage early is more about financial freedom than an arbitrage opportunity. But if you are in the beginning of a mortgage you definitely would save more in interest, but at these interest rate levels, if interest rates rise dramatically a few years from now and inflation ramps up you would be paying it back with cheaper dollars and you could potentially arbitrage. Too many variables to really determine over the long term. Given where the market is now I would pay it off and dollar cost average my mortgage payment savings rather than lump sum it hoping to earn 7% a year from here. I guess it really depends on the person and what they want to accomplish and where they think all the variables line up. Too complicated for me to arbitrage something like that.

[apenland01]

First I think people always make a big assumption on what they can make investing the money. Even if they do make that return there could be taxes depending on how they are investing. Then there is always the chance that they lose money investing that could have cut an expense they had. Then you do get a tax deduction, with limits, on the mortgage interest. It depends on what a person's situation is but for me paying off a mortgage early is more about financial freedom than an arbitrage opportunity. But if you are in the beginning of a mortgage you definitely would save more in interest, but at these interest rate levels, if interest rates rise dramatically a few years from now and inflation ramps up you would be paying it back with cheaper dollars and you could potentially arbitrage. Too many variables to really determine over the long term. Given where the market is now I would pay it off and dollar cost average my mortgage payment savings rather than lump sum it hoping to earn 7% a year from here. I guess it really depends on the person and what they want to accomplish and where they think all the variables line up. Too complicated for me to arbitrage something like that.

Agreed, especially the part of DCA into the market with your mortgage payment. Not only do you have the freedom of knowing your roof is paid off, but you take a chance right now of catching some down drafts in the market using DCA.

[boneil]

I don't see anything wrong with what you said. I think we also need to add, is the house the house you plan on living in for the rest of your life. We plan on getting out of our current home sometime in the near future. We started to pay it off early, but after looking at the mortgage calculator, we felt it was best to use that money elsewhere. Our next house, I think we plan to pay off early and only invest at good prices.