Pay off the house or save for retirement?

Liberec · #1 (**permalink**) 12-13-2006, 08:06 AM

If you have a personal homeloan (ignoring IP's for now) are you pumping every spare dollar into reducing that debt, or are you putting some of it into other investments (e.g. managed funds etc) as retrement savings?

I'm interested in what other forumites are doing and why.Personally, I'm working hard on my homeloan because the cost of that is higher than the benefit of most retirement schemes. However I recognise that starting early with some kind of retirement savings is good for building it up (the compound benefit), and I'm wary of having all my investments in property.

So, for those who have made a concious decision to pay off the home loan first, or are also working on some non-property investments at the same time, why have you decided to go down these paths?"

florida man · #2 (**permalink**) 12-13-2006, 01:22 PM

Here is my take on this :

We believe that paying off the mortgage is the only way to go. I dont believe in rolling the dice with our home. Many many people keep their home leveraged and invest it elsewhere.

The only thing i am prepared to do is put up a giant home equity loan against it when its paid off -to build another house.

But thats just me.

midas · #3 (**permalink**) 12-19-2006, 06:50 PM

here is a decission maker for you. two brothers buy identical homes side by side for $220,000. they grow in value over the last 4 years by 100% and they appraise for $440,000 in 2006. the one brother decides to refinance to 90% on a option arm fixed for 5 years at 3% and he invests $175,000 into a mutual fund and he gets a disability policy insuring that if he loses his job or becomes disabled his payment is made for him. the other brother decides to keep his original 30 year fixed and save the equity in his home for security. two weeks later they both get fired along with 1400 other employees in their town and the house values drop by 50% bringing their value down to $220,000. they are both out of work but only one of them will lose their home and their equity, the other will be sleeping on his brothers couch. which route will you be taking now?????? i have the connection for mutual funds and insurance if anyone is intrested lol!

florida man · #4 (**permalink**) 12-19-2006, 10:25 PM

midas

i know a lot of people would agree. I also know lenders would MUCH rather foreclose on the property that only has 220k owed on it , than the one that has the option arm owing 395k.

This is assuming of course that you could get a waiver on the deficiency balance , and they just take the house, not the mutual fund as well.

I believe that high leverage is a risky.

What happens if the market collapses as well as home prices. One brother has 220k loan and no fund, and the mutual fund guy has a 390k loan -but his mutual fund is now worth 100 grand only. Not to mention the extra principal he has been adding to his original mortgage due to the option arm.

which one could sell the house? I assume they would both have to so they could go find work in another town.

I would rather be the guy in the position to just sell his house and break even or take a small loss, rather than be upside down a hundred grand -even if my payment was being made for me.

Lets say they both find another job in the same town. The first brother then just goes on his merry way like before, but the other brother now is UPSIDE DOWN and how will he refi once the option period ends?

It really all comes down to risk.

I agree with your theory when the day comes i can start purchasing properties under an LLC and start monkeying around that way. I would feel much better about it that way.

NetBranchReview.com · #5 (**permalink**) 12-20-2006, 01:27 PM

I have to agree with florida man here. Maybe I'm old fashioned but I think home equity isn't something you take risks with. Get your mortgage paid off as soon as you can and then start "investing". Or buy a second home in Aspen.

florida man · #6 (**permalink**) 12-20-2006, 04:10 PM

netbranch

I have had a lot of realtors and experts tell me about yield on high leverage. I think midas is bang on with the advise, but it is really under bull market conditions for the short term in my opinion.

I am of the opinion that my house that my wife and children live in is not an equitable piece of money. I know that i owe my living to homeowners who think it is, but i believe refinancing your house to be a last resort way to improve your situation.

the question is - if you do not wish to sell your house or borrower against it -how much is it worth?

ZERO. It has no value. You live in it. It doesnt matter if it is worth 300k or 2 million if you never sell it or borrow against it. Once you have the homestead exemption, the value of your home is irrellivant for tax purposes. They can only increase it 3% a year.

So the only thing that matters is that you OWE on the house. So if you pay that off, you dont have a monthly payment anymore. This is why paying off your house is the best financial decision you can make. Its GUARANTEED to work no matter what any market disaster is.

Does it matter if interest rates are 18% if you have no mortgage and could care less if you ever borrowed on it? Does it matter if your house PLUMMETS in value if you own it outright?

Not unless u plan to sell. Even so - you cant be 'upside down' in a house you own outright. Besides, if your home dumps in value, so probably does the house you want to buy, so its still trading apples for apples.

In my opinion, high leverage on your personal property causes more DISASTERS than we can every imagine. Now all of a sudden we are HELD HOSTAGE by all kinds of market forces beyond our control.

we owe our whole financial outlook based on the fed raises rates, calling inflation too high, realtors dumping prices to try to maintain their 500k per year commissions and on and on. We get up every morning on our knees praying that the market doesnt go into the toilet so we arent underneath our high leveraged house.

Do you want to be at the mercy of all that? Not me.

Pay off the house, then start investing under an LLC .

Greg · #7 (**permalink**) 12-20-2006, 07:08 PM

User was banned. They cannot hear you

Erik · #8 (**permalink**) 12-21-2006, 02:31 PM

Quote:

Originally Posted by florida man

the question is - if you do not wish to sell your house or borrower against it -how much is it worth?

Not to be nitpicky, but I'd say your house is still worth however much someone else would be willing to pay for it, should you decide to put it on the market.

However, I agree with you in principle, Tom. A house isn't really an "asset" unless it's generating income for you (rent, office space, etc). And as long as you have a mortgage on it, it really should be thought of as a liability because it is a monthly expense.

That's not typically how the industry likes to think of financing a home - as a liability - but that really is the truth.

The difference between a regular liability and financing a home is that it can viewed as a good liability whereas others maybe not so much.

Anyway, that's my $0.02.

jaybird · #9 (**permalink**) 12-22-2006, 08:28 AM

I am a believer in making your money work for you. Example, my dad has a 15yr. mortgage on his house at 4.50% tax deductible interest. He owes about $129,000 on it and it is located in a highly desirable neighborhood where it would easily sell for $275,000. It doesn't make sense for him to pull money out of his investments which have netted him an average of 10-12% for the last 15 years to pay off a 4.50% mortgage that is tax deductible.

I recommend people make use of the equity in their home to fund their retirement. Not all of their equity, but at least enough to insure that they can retire in the way they want to. It is a fact that 76% of people aged 55-64 in this country have less than $50,000 in savings and the average SS wage is $964 per month. People need to get more serious about funding their retirement and home equity is a great way to do this. If you are putting enough money into your retirement funds for enough years you can always pay off the house with your savings if you like. We call this the "freedom" point.

florida man · #10 (**permalink**) 12-22-2006, 11:27 AM

jay

your dad is in a great situation. However, i contend that your story is under specific market conditiions.

Life is a long time. Things change. The average person doesnt have a 4.5% mortgage 15 year fixed, and 50% equity in their home.

The average person doesnt make 10 -12 % on their investments.

You dad would be in a BETTER situation if he sold his house for 275k, downsized to a home for 140k and kept that money in his pocket instead.

Instead of making this mortgage payment every month, he can now invest that same payment into this cant fail 10 -12% return on investsment scheme he already has.

Houses and the market cant keep yielding all this money permanently. There is always corrections. I contend that paying off your house gives you a cant lose scenerio with your livelihood.

Everyone thinks they can chuck a bunch of money at a hedge fund or something else, and it will AUTOMATICALLY make them a bunch of money.
MORE than they are paying in mortgage interest. I think it is a myth that its some kind of cant lose investment -in fact i think we may be heading for suicide.

lots of people LOSE their money in markets.