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Should I pay off my house?

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A house is usually one of the biggest assets a family has.  We are in a society were a family needs debt, a mortgage, to obtain their house they live in.  We are also in a society that says we want to pay off all our debt so we have full rights to everything we own.  Some debt is debt we don’t want to pay off!

 

Let me explain, lets say if your paying 6.875% on the mortgage and on average you can get 11% in the stock market, you would be better off in the stock market because you would essentially be making 4.125% (11% - 6.875 = 4.125%) on that money. Let me explain: If you take the money that you were going to use to put down on your house (an extra X amount, lets say $2000 a year) then you will have to pay less in interest, and more will be going on the principle of the loan. So essentially you would be saving an extra 6.875% per year on $2000.  On the other hand, you can make on average 11% in the stock market per year.  So what we will do is take the 11% you make in the stock market and subtract the opportunity cost savings of 6.875% to figure out how much you will actually be making. So you’re better off putting it in the stock market.  Remember when investing make sure you diversify your portfolio, so you should invest in either electronically traded funds (ETFs) or mutual funds.

 

With this scenario, I would say don’t put anything down on your house (well, in reality as little as possible) and pay interest only.  You would actually want to weigh out the cost and benefits of an interest only loan and a PMI loan.  One might be a better deal in the long run.  Remember, people tend to live in a new house every seven years. This means if you fall in this category you could get a 7/1 arm and not have to worry about the interest rate changing until you move. When you move it doesn't matter what interest rate you are at before because you have to get a new loan anyways and you will get the most up to date rates. If you do the 7/1 arm you can keep the interest rate down and invest more into the stock market.

 

All and all, you only want to put as little as possible down on your house as you can. Why do I say that?  There are many benefits that come from paying interest and keeping your principle payments on your house low.  The first, as easiest to understand, you can do better in the stock market as described above.

 

The second benefit from putting the money in the stock market is you can write off the interest paid on the mortgage on your taxes.  What this essentially does is reduces the amount of taxes you pay.  So you can look at this as a reduction in the price you pay in interest.  The way you can calculate the After-Tax interest rate paid on the house is by taking the rate and multiply by (1 - your tax rate).  This essentially means that your money is making you more money in the stock market then it would be on the principle of your mortgage.

 

The third benefit from putting money in the stock market is you could get high returns on your house. How do I figure? Well if you put a little down on the principle on your house (lets say $20,000 total) over the time you owned it. Now let’s say you bought this house for $120,000 and sold it for $150,000 5 years later. That means (not including Realtor fees and everything) you made $30,000 in capital gains. You just made 150% (30k / 20k = 1.5) on your investment when the house has increased only 25%. What this shows is the more you have paid on the principle of your house the less your return on your investment will be.  It would be to your benefit to use the banks money to support your investment activities.

 

In combination of all the benefits, its like your borrowing the banks money and not paying it off, but instead using your excess cash to invest in the stock market. You can’t find cheaper loans then a house loan, so take advantage of it. Make the high returns on all of your investments.  Ultimately, secure your future by investing in the stock market.

 

Please do note that paying off your house completely does have other psychological advantages. This course of actions isn’t for everyone, it does matter case by case basis.  Example:  If your are nearing retirement age, you wouldn’t want to risk most of your money in the stock market because it can fluctuate a lot.  Instead it might be a better idea to have your house paid off.

 

well i have talked about this

well i have talked about this on feedtheorange.com before.. but that was the old layout and all the information got deleted.. so i decided to repost it..

I thought we have already

I thought we have already talked about this back on poreia?

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