If you can borrow for less than what you would earn on a six month CD then you are ahead of the game.
Current yield over 5%
Current yield over 5%
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Investment VS Debt
- Thread starter myminitrading
- Start date
Quote from myminitrading:
If you can borrow for less than what you would earn on a six month CD then you are ahead of the game.
Current yield over 5%
If your tax bracket is over 25%, paying down a typical 30-year mortgage makes no sense right now. Your cost of capital after taxes is less than 5% on the note. You'd pay less than 75% of a rate of 6.375% which clocks in at less than 5% net. But if you put those funds in CDs, you'd make your 5+% yield on the CD and then pay tax on the gain, so you'd only get to keep 75% of that 5+%. The break even is really something like the 20% tax bracket, but I don't have a calculator on me.
Quote from vanhelsing:
What about education? If a person gets into medical school, should they not go because they will incur a debt of 150 - 200k even though this will pay for itself many times over in the long run? The same goes for business too. I just think your view is too simplistic. The reason the american consumer has large amounts of credit card debt and zero savings is due to their own poor choices. There is a difference between using a credit card to buy a new music system and taking out a business or student loan. I have actually seen people use high-interest credit cards to purchase candy bars and soft drinks. Stupid people will always be poor and have nothing to show for it. That doesn't mean that all debt is bad.
Your education is no doubt an investment in your future. However choosing the right education is the trick.
I think folks should be happy at what they do, they will live longer have fewer health problems.
Rising health care and lack of health care along with zero savings and high debt levels for 80% of the population is an ugly picture.
Our current leaders have set an awful example driving our nation into debt and spending like drunken sailors.
Quote from myminitrading:
Why would you put extra cash into stocks, mutual funds or any other investment that has no guaranteed return, and carries such a rick of loss. When you could just pay down the principal on your mortgage and save big bucks.
I guess if you have paid off your home and carry no debt stock investments is ok. But to take extra cash and speculate in the financial markets when you are carrying a 30 year mortgage @7.00% seems foolish. Paying down your mortgage is guaranteed savings.
wow. you are kidding right? i disagree 200%...and then some.
Your house (the one you live in vs. an investment property) is an EXPENSE.
you think a house has a guaranteed return? hardly..it is almost a guaranteed loss if you keep it less that 30 years at the average rate of real estate appreciation (in line with inflation..lnot much more). this is due to interest on the loan, taxes, maintenance insurance etc, etc, etc.
lets also talk about liquidity risk as well. if you have an unseen expense (a sick family member...fir instance) and you need quick access to cash...you can cash out of the market and have your money in 2 days. if all that is wrapped up in your house...you are up a creek.
as far as risk of loss...again you can limit your downside very easiy in the financial markets...simply set a stop loss. in real estate..well, you know where i am going...again up a creek.
short selling? lets say you have a $500k house in the US...market gets soft...value drops $100k (a very real possibility at this point in time)...and you have pretty tough situation. same situation in the markets...you have the ability to sell short and MAKE rather than lose on the way down.
i understand your argument for the average person who doesnt understand either realestate or finincial markets very well. But for me...put me in the smallest house possible, with cheap used cars...and 80% of my wealth in the markets ANYDAY. As far as savings and retirement...i will do far, far better then the guy who just pays off his mortgage.
Quote from dac8555:
wow. you are kidding right? i disagree 200%...and then some.
Your house (the one you live in vs. an investment property) is an EXPENSE.
you think a house has a guaranteed return? hardly..it is almost a guaranteed loss if you keep it less that 30 years at the average rate of real estate appreciation (in line with inflation..lnot much more). this is due to interest on the loan, taxes, maintenance insurance etc, etc, etc.
lets also talk about liquidity risk as well. if you have an unseen expense (a sick family member...fir instance) and you need quick access to cash...you can cash out of the market and have your money in 2 days. if all that is wrapped up in your house...you are up a creek.
as far as risk of loss...again you can limit your downside very easily in the financial markets...simply set a stop loss. in real estate..well, you know where i am going...again up a creek.
short selling? lets say you have a $500k house in the US...market gets soft...value drops $100k (a very real possibility at this point in time)...and you have pretty tough situation. same situation in the markets...you have the ability to sell short and MAKE rather than lose on the way down.
i understand your argument for the average person who doesn't understand either realestate or financial markets very well. But for me...put me in the smallest house possible, with cheap used cars...and 80% of my wealth in the markets ANYDAY. As far as savings and retirement...i will do far, far better then the guy who just pays off his mortgage.
Their thats it you got it "interest on the loan" thats why applying as much extra cash to the principal you can cut that down.
on a 400,000 mortgage, by doubling you monthly;y payment you cut a 30 year mortgage down to 8 years and save over 200k in interest over the life of the original loan.
Consider what you pay for margin loans from your broker, consider what you pay in commissions, consider what your pay for equipment, consider what you pay for software etc etc etc.
consider you may even loose money from trading :eek:
Quote from dac8555:
wow. you are kidding right? i disagree 200%...and then some.
Your house (the one you live in vs. an investment property) is an EXPENSE.
you think a house has a guaranteed return? hardly..it is almost a guaranteed loss if you keep it less that 30 years at the average rate of real estate appreciation (in line with inflation..lnot much more). this is due to interest on the loan, taxes, maintenance insurance etc, etc, etc.
lets also talk about liquidity risk as well. if you have an unseen expense (a sick family member...fir instance) and you need quick access to cash...you can cash out of the market and have your money in 2 days. if all that is wrapped up in your house...you are up a creek.
as far as risk of loss...again you can limit your downside very easily in the financial markets...simply set a stop loss. in real estate..well, you know where i am going...again up a creek.
short selling? lets say you have a $500k house in the US...market gets soft...value drops $100k (a very real possibility at this point in time)...and you have pretty tough situation. same situation in the markets...you have the ability to sell short and MAKE rather than lose on the way down.
i understand your argument for the average person who doesn't understand either realestate or financial markets very well. But for me...put me in the smallest house possible, with cheap used cars...and 80% of my wealth in the markets ANYDAY. As far as savings and retirement...i will do far, far better then the guy who just pays off his mortgage.
You mention liquidity, what if your position is loosing money when you need to liquidate for cash. I am just pointing out a scenario, it could also be a winning position.
Your tax bracket has nothing to do with it as long as you're investing the money in CDs, short-term capital gains, or short-term dividends (and aren't subject to AMT). Someone in a low tax bracket pays less on the gains AND gets less benefit from the mortgage deduction. Someone in a high tax bracket pays more on the gains AND gets a greater benefit from the mortgage deduction. As long as the interest rate on the mortgage is less than the effective interest rate on the CD ( or trading gains), you get a net gain by borrowing on the house and investing the money. Thus the after-tax cost of a 6% mortgage exactly cancels the after-tax gain on a 6% CD regardless of tax bracket.Quote from Smart Money:
If your tax bracket is over 25%, paying down a typical 30-year mortgage makes no sense right now. Your cost of capital after taxes is less than 5% on the note. You'd pay less than 75% of a rate of 6.375% which clocks in at less than 5% net. But if you put those funds in CDs, you'd make your 5+% yield on the CD and then pay tax on the gain, so you'd only get to keep 75% of that 5+%. The break even is really something like the 20% tax bracket, but I don't have a calculator on me.
True unless you take the money that you would have used to paydown your mortgage and put it in tax-free investment like an IRA or 401k.Quote from Traden4Alpha:
Your tax bracket has nothing to do with it as long as you're investing the money in CDs, short-term capital gains, or short-term dividends (and aren't subject to AMT). Someone in a low tax bracket pays less on the gains AND gets less benefit from the mortgage deduction. Someone in a high tax bracket pays more on the gains AND gets a greater benefit from the mortgage deduction. As long as the interest rate on the mortgage is less than the effective interest rate on the CD ( or trading gains), you get a net gain by borrowing on the house and investing the money. Thus the after-tax cost of a 6% mortgage exactly cancels the after-tax gain on a 6% CD regardless of tax bracket.
Another alternative is to invest for the long-term; as long as you buy and hold until much later in life (retirement) you pay no taxes on your investments until you sell them. This would apply to stocks/mutual funds, not CD's as mentioned though.
I agree with all the posters that have taken a position opposite the OP. Myminitrading your analysis and comments are not well thought out and seem to be more based on emotions and gut-feel rather than sound logical financial analysis.
Of course you can find people who would squander their money if they didnt payoff their mortgage early but that shouldn't be the basis for your argument about which is the better choice.
Stupid people do lots of stupid things. Don't be one of them.
Quote from Traden4Alpha:
Your tax bracket has nothing to do with it as long as you're investing the money in CDs, short-term capital gains, or short-term dividends (and aren't subject to AMT). Someone in a low tax bracket pays less on the gains AND gets less benefit from the mortgage deduction. Someone in a high tax bracket pays more on the gains AND gets a greater benefit from the mortgage deduction. As long as the interest rate on the mortgage is less than the effective interest rate on the CD ( or trading gains), you get a net gain by borrowing on the house and investing the money. Thus the after-tax cost of a 6% mortgage exactly cancels the after-tax gain on a 6% CD regardless of tax bracket.
I think you're saying that the capital gains rate is lower so the gain on the CD might not apply? If so, thats a good point. But if you pay down the mortgage, you're paying with earned income, so I think its appropriate to look at the discounted interest rate.
Quote from GTS:
True unless you take the money that you would have used to paydown your mortgage and put it in tax-free investment like an IRA or 401k.
Another alternative is to invest for the long-term; as long as you buy and hold until much later in life (retirement) you pay no taxes on your investments until you sell them. This would apply to stocks/mutual funds, not CD's as mentioned though.
I agree with all the posters that have taken a position opposite the OP. Myminitrading your analysis and comments are not well thought out and seem to be more based on emotions and gut-feel rather than sound logical financial analysis.
401k please stop, Roth IRA now your talking. I know its not very appropriate to talk like this on a forum designed for speculators and the vendors who lurk here.
Perhaps I should use some mathematical formulas, along with some option hedging strategies, mix in some credit default swaps. Now thats some sound financial advise.