Darn reverse psychology!
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Sorry, can't help. But you got my attention, for sure.
It does if you are not half way to paying the mortgage. For the first 15 years you can get a tax credit on the mortage you are paying since you are paying off the intrest part of it, saving the intrest in the bonds to pay off the last 15 years of it while still having the princple at your desposial when you cash them in. At least its one option.......
I believe you are correct. You need to compare your interest rates, factoring in your tax rate if you sell the investment (bonds).
The kicker is: to realize your gain you can sell the investmen with the real estate
you either sell or re-mortgage. But the money you save on the interest you can reinvest, eventually.
It always made sense to me.
you need to
Lotto Tickets. Nuff said.
Once you've paid for your house, it's paid for - money in savings accounts has a way of getting spent, when disaster strikes, you loose your house.
A bit like been convinced your combination is beautifully winning, then been floored by a killer move you didn't see. It's all about how much risk and doubt you can comfortably live with - like chess??
To put it another way if your still upset at the times you've resigned in a drawn position or missed a mate in one, then pay off the mortgage - if you continue to mightily smite your opponants with good humour, then stick to savings.
I'm sure thats no help at all, but thought the way you started the thread was amusing and has cheared me up immensely
Sincerely Amateur Psycologist
I was just stopping by to let you know I didn't click here.
IMO it always makes sense to have some investments in bonds, whether you have a mortgage or not. Bonds are like savings accounts without taxes on the interest. You cash them in after you retire and you're in a lower tax bracket. No matter what happens (outside of complete government failure) you'll always have those bonds, which are as good as cash. We've all seen what can happen to stocks and mortgages.
A good investment portfolio will have a mix of high risk stocks, low risk stocks, and bonds. You should adjust the ratios as you age. When you're young you can have a larger percentage of investments in high risk stocks. If they tank you still have many years to recover. As you get older you should put more into low risk stocks and bonds. You want less risk when you're older because you don't have as many years to make up for any losses.
I suppose if you're young, say under 30 - 35, you could skip the bonds but I always like having some guaranteed cash sitting somewhere.
@Gomer_Pyle I was talking about all types of bonds. Your point about complete government failure is in reference specifically to US Govt Bonds. I have guaranteed cash in a FDIC-insured savings account. That's more like the emergency fund. But out of the context of an EF, I'm not a huge fan of any type of bond, especially given the mortgage, which is basically a short bond position. Why not cover that one first? (After you have a fully-funded EF of course).
knightspawn5 wrote:
It does if you are not half way to paying the mortgage. For the first 15 years you can get a tax credit on the mortage you are paying since you are paying off the intrest part of it, saving the intrest in the bonds to pay off the last 15 years of it while still having the princple at your desposial when you cash them in. At least its one option.......
Two things.
1. I have no idea what this means. Can you (or someone else) translate?
2. I have the sneaking suspicion that after translation this will be wrong.
ozzie_c_cobblepot wrote:
knightspawn5 wrote:
It does if you are not half way to paying the mortgage. For the first 15 years you can get a tax credit on the mortage you are paying since you are paying off the intrest part of it, saving the intrest in the bonds to pay off the last 15 years of it while still having the princple at your desposial when you cash them in. At least its one option.......
Two things.
1. I have no idea what this means. Can you (or someone else) translate?
2. I have the sneaking suspicion that after translation this will be wrong.
That is tranlated. It is correct, I know, I did it. But to try and break it down, for the first 15 years, you are paying almost total intrest on the loan, about 2% of the money paid is for the principal of the loan. The rest is for intrest. If you put bonds away equal to the mortgage and let it mature, then you will have the money to pay off the other 15 years plus still have the princpal of the bonds left to spend anyway you want. In the meantime you still get all the money back on taxes as its from paying the intrest off on the mortage for the first 15 years....
I think it helps if you look at the question differently: Assume you have a paid for house - would you take out a mortage to buy investments (of most any type, bonds or not)? For the vast majority of people, the answer is probably no. Thus conversely, if you have a mortgage and non-retirement investments you could use to pay off the mortgage, then doing so would put you in the initial position (no mortgage, no non-retirement investments). Since it is possible to move in either direction, you generally should get rid of the mortgage first, and then work on non-retirement investments (retirement account investments are a bit different because of the tax protections).
The reason I explain it this way it that it helps to illustrate the risk factor. Your mortgage is the equivalent of a 100% guaranteed (because you ALWAYS have to pay) bond paying whatever percent your rate is. It is basically not possible to get a paying investment at the same or better rate than your mortgage that is 100% guaranteed, so it will always include some sort of risk component, while paying off your mortgage is guaranteed to save you money on interest. In addition, once your mortgage goes away, you will have a significant increase in free cash flow that you can use to build up whatever investments you might like.
@derek2468 You have the right conclusion, but your reasons are all wrong.
@knightspawn5 You're not right. If you have the money to pay off the mortgage (haha wouldn't that be nice) and you instead choose to invest in US govt bonds, you're not going to make more money on the bonds than you're paying in interest. Unless, after your fixed mortgage is created, interest rates skyrocket.
@nola2172 Yes, this is exactly along the lines that I approach the problem too. The closest counter arguments I can come up with are these:
Liquidity has value, so the actual break-even indifference point is at a rate a little bit lower than your mortgage interest rate. The value is different to different people, and likely changes the more dollars you get.
If you're upside down in your mortgage (or even close), the prepayment logic does not apply at all.
The retirement accounts are different, you're right. I think one should add college savings accounts as well, because they are also tax-protected.
I came to the same basic conclusion, that in a world where you have no other loans (car, student, credit card, payday, etc) and you have a fully-funded emergency fund, and you are fully funding your retirement, and you are fully funding a college savings account if applicable... then you should prepay your mortgage prior to building up any sort of investment account.
One more thing. If you do prepay the entire thing, you can actually get a version of liquidity by setting up a HELOC, and have it as a stand-in for an emergency fund. I wouldn't do that personally, because there's no guarantee that the bank will not take it away, but it's a possibility. One could therefore argue for a lower-than-typically-required EF if you're in that situation.
@nola2172 So then if you're the type of person where liquidity has enough value that you do not prepay, does it make any sense at all to have any fixed-income financial instruments in one's portfolio?
derek2468 Absolutely right. That being said, it's possible to get a mortgage, and chug along paying it, and then rates slowly go up, and then poof! You get a bunch of money and realize that you can make more money in interest than what you're paying. But obviously this is the exception.
The kicker for me is this: You can earn a guaranteed percent by paying down your mortgage. You can earn a higher expected value by putting it in stocks, or a combination of stocks/bonds... but that higher return comes along with it's evil cousin the variance. "Guaranteed" == variance of zero. Zero is a very powerful number.
@Ozzie - Yes, there is some value to the liquidity of the investments, but that is pretty much what the emergency fund is supposed to be for (and why I also keep one around). As far as having fixed income/interest rate assets (in whatever flavor they may be), that is a bit more complicated and depends on your situation. If you are younger and don't need the money any time soon, probably not (much) - market investments will (or at least should) perform better over time, though be more volatile. For people looking for more stablity, fixed-income investments can make a lot of sense, but even bonds can go down in value (if interest rates go up). However, for cash-flow income, especially in retirement, if you buy a $100,000 bond at 5%, you are getting the $5,000/year no matter what, so if you are happy with that, it does not matter if rates go to 6% and your bond value goes down since you aren't selling anyway. To me, that is really the only reason to have true "fixed-interest" investments, unless you can manage to find one that pays really well with low risk, though that should technically not be possible (since nobody would be willing to pay you that much).
Otherwise, though I risk sounding a lot like the typical retirement planner, I would just build in lower risk things like bonds as part of a more complete portfolio if that is what you want. As a note, though, bonds are in my opinion a horrible investment right now (though some muni-bonds could be interesting in the 5% range from what I hear) because interest rates have nowhere to go but up.
In general though, I agree with your thoughts on your last (long) post and that is pretty much what I do with my finances personally as well.
Sorry, I don't often comment without reading all of the responses, but this one was so easy, I just read the OP.
Answer: No!
I'll admit I clicked
Now that I have your attention... here is an interesting non-chess-related question.
Q: For a family which owns a house and has a mortgage, does it ever make sense to have fixed-income investments (such as bonds) in your investment portfolio?
Background: I have demonstrated [to myself] that prepayment on a mortgage is equivalent to investing those dollars in a savings account which pays a rate exactly equal to the rate on the mortgage.
Note: This is rather a USA-specific question.