Paying off mortgage

[Llxa]

And who is the seer that knows that the money you borrowed will be on an investment with a positive return? What if, in your example, you borrowed money to make an investment and said investment went negative?

So you have borrowed money to LOSE money, since you lost some of your initial investment, but are still paying interest on the original amount?

It goes both ways. Makes no sense to me carry interest and OWE.

I KNOW. And that's what I illustrated in my math in my 3rd scenario, the prospect of not even making negative returns but just less returns than the borrowing interest rate and it would reduce your overall take-home proceeds so yes borrowing money to invest does mean more risk.

BUT then again everything has to be looked at in its own context. Time has changed. We are NOT living in times where the interest rate is double-digit and you have to take on very risky investment just to beat that high interest rate so since the investment is so risky that if you lose, you can almost lose everything. We are living at a time where the interest rate is so low that is almost zero that you can find investment with guaranteed returns that will easily beat the so low of interest. You can almost get a home equity loan of even less than 2% nowadays. You mean you tell me that you can't even find investment that can beat 2%? That's NOT possible. You can find GIC's with GUARANTEED return rate that's higher than 2% if you are extremely risk averse.

I mean I understand the merit to be risk averse but it also has to be balanced with efficient use of capital especially when the risk of not being risk averse is not that warranted anymore. If you have money sitting there on which you could easily earn safe, guaranteed rate of return that you can see as a seer that you cannot lose that will be higher than your borrowing rate and you don't want to do anything and you just want your money to rot there, then it's not risk averse anymore; it's borderline laziness. Risk averse is just an excuse. I mean I am NOT asking you to take out a home equity loan to invest in junk bonds but on safe GIC's, T-Bills, Government Bonds?

Borrow to invest does NOT always lose money. It just depends on how you manage it, just like everything else in life.

 

[Overnight]

...We are living at a time where the interest rate is so low that is almost zero that you can find investment with guaranteed returns that will easily beat the so low of interest...

This is a fantasy and does not exist. Name something that has a guaranteed return.

 

[Llxa]

This is a fantasy and does not exist. Name something that has a guaranteed return.

Did you read my post to the end? I know it's a bit long but I listed THREE there.

 

[Overnight]

Did you read my post to the end? I know it's a bit long but I listed THREE there.

Yes, I read the WHOLE thing. How do you know they are safe and thus guaranteed?

 

[Sig]

Yes, I read the WHOLE thing. How do you know they are safe and thus guaranteed?

You're right, nothing is guaranteed. Treasuries are pretty safe, but who knows, the U.S. Govt might default. Paying off your house, that's safe right...until you find out the buried fuel oil tank you didn't even know was under your front yard has been leaking into the local groundwater for years and you're personally liable for a cleanup costing 5x what you paid for the house. You could keep your money in cash under your mattress, and then your country could suffer hyperinflation and it's worthless, or it could be stolen. Or put it in a bank that fails along with so many others that FDIC can't pay out....See how you could play this game all day long? Nothing is 100% safe and guaranteed, even what you've been advocating as safe is making a bet on a particular outcome with a nonzero probability of loss. Most successful business people, traders, and investors have an implicit if not explicit grasp of risk adjusted returns and make their financial decisions based on that. The extreme risk aversion you're displaying actually exposes you to more risk and demonstrably suboptimal outcomes.

 

[Overnight]

...The extreme risk aversion you're displaying actually exposes you to more risk and demonstrably suboptimal outcomes.

Hmmm. That is a good point to muse upon. I understand where everyone is coming from.

There is a psychology behind my "extreme risk aversion", because I tried the opposite and it failed. It has taken me a long time to recover from that failure.

It is a good discussion and I have enjoyed it. For now I am biased on "No debt hell no, that path I shant go!" or something, heh. Maybe some day soon I'll come around to your side.

 

[Sig]

Hmmm. That is a good point to muse upon. I understand where everyone is coming from.

There is a psychology behind my "extreme risk aversion", because I tried the opposite and it failed. It has taken me a long time to recover from that failure.

It is a good discussion and I have enjoyed it. For now I am biased on "No debt hell no, that path I shant go!" or something, heh. Maybe some day soon I'll come around to your side.

No side or need to come around if you know what you're doing and why. We all have different utility functions.

 

[beefcaketrade]

Depending on the price of the home, you might be much better off renting.

It comes down to whether or not you can afford to own or not. Obviously not everyone is wealthy enough or make enough money to own property. That's just natural. Obviously rich people can afford to do things that poor people cannot do.

But if someone can afford to buy or rent?

With ownership, what are the costs? Money that you never recoup. Things like property taxes. Wear and tear maintenance upkeep costs. Slightly higher insurance for home owners vs tenant insurance. Interest portion of payment that goes into the bank's pocket. Time value of money of the equity portion of mortgage payment vs a similar risk adjusted market return.

With rental, the costs is 100% of the rent to the renter. Every dollar spent on rent, they don't see back as part of their net worth.

Otherwise, all of the money spent on a mortgage payment that builds equity, stays with you. It is kept as your net worth.

Too many variables in general, but ultimately comparing net present value of option 1 vs NPV of option 2 shows who is the true winner, factoring in opportunity cost. The winner is the one with the highest net worth at the end of the day, whether owning or renting.

Lets say you are spending $2K per month on rent vs $2K per month on mortgage for 20 years. In the rental scenario you lost $480K that is never to be accounted for as your net worth. In the ownership case, after all costs are accounted for, even if you discount asset appreciation, lets say you have retained around 200K equity in a fully paid down property and spent the the 280K in bank interest fees. You're still winning because you're 200K up. Now you factor in appreciating property prices in a hot market? You're totally winning by owning.

Of course, the most likely scenario is having to make the choice of lower rent property with higher investable income for investment, vs a higher mortgage payment with less or no investable income. Then the equation may change, provided the renter truly believes, they can have outsized market returns over the same duration. And this is variable. If this guy is an investing guru and has 40% annualized return for 20 years, then obviously renting a cheaper place and investing beats spending more on mortgages provided the housing market doesn't appreciate at the same level. But if you assume a standard market return of around 5%, then it is not likely the renter is richer at the end of the road by going for a cheaper rent and investing vs buying a house. And most of the time though, rent outflow is comparable on a monthly basis to the actual mortgage payment in dollar terms in many places.

But if you can't afford it you can't afford it. Not everyone can afford to buy. Maybe lifestyle choices, like 'freedom' of movement is important to others. Whatever it is, renting may be the option. But if you're staying in the same place, owning tends to be better. Of course, markets (stock or property) can rise and fall. Who is the real winner at the end of the day? What about the universal fact that rich people can afford to do both. Diversified investment. Own property and invest, vs rent and invest.

 

[luisHK]

Lets say you are spending $2K per month on rent vs $2K per month on mortgage for 20 years. .

That's a huge assumption... A mortgage over twice the rent is common, although maybe not in the US. Over here the mortgage would be several times the rent . Sure many landlords (not all) made plenty of money (on paper at least) due to property apreciation in those same areas.

 

[BlackMouse]

Mortgage payments are usually less than rent the world over