Paying Down Mortgage Or Invest
I have heard 3 sides from professionals. Some say pay down mortgage first, then invest. Others say to pay minimum on the mortgage and put the extra money in investments. Others say to do a little of both. Is there one way that works better or is this a matter of personal interest (Do I want less debt or more money saved)? Any opinions would be appreciated.
The answer lies here: can you get a better return on your money than what you are paying in interest on your mortgage?
If you're house mortgage is 8% and you can get 15%, I'd say do the investment.
If you're going to put the money in a savings account or such getting 2%, I feel it is better to pay down the mortgage.
I'm sure you can find more out on this site on how to calculate return on investment and such for real estate deals if you do not already know.
it's a matter of cash vs. credit. in my eyes, "cash is king" holds its weight BUT credit gives you what seems like limitless bounds ... so, if you pay your mortgage down and have less to invest, you'll have (theoretically, at least) more credit. paying off minimum payments only and ivesting rest would yield (theoretically, again) more cash.
so, i think of this. if i had $100k in cash, that would be great. BUT i could use that $100k in cash to probably qualify for $1mil in credit - assuming that if i had $100k in cash, i MUST have settled all my debts and that's what is left.
just my opinion but if i hadda choose, i'd take credit anyday - pay off the mortgage sooner and you have more everything!
i let my creditors worry about my debt. Get all the investment debt you can now. Rates have never been lower. Even use short term high rates to buy and fix and sell but I would put everything now in some type real estate. In most markets no where but up and sooner than I will be able to buy another million in assets at 5% interest.
Just a few thoughts
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
I have no idea of your level of investing or your ability to source deals but keep this in mind.
If your mortgage is costing you 7% a year and your cash on cash return in greater than 15%, then the answer is obvious. By investing you gain appreciation, equity build up, cash flow and tax favoritism.
You have to do the entire math. I have no idea how cash you are talking about $50, $500, $1,000 a month?
There are too many variables on your side to make an absolute solid statement for "your" specific" situation.
Phil
In my opinon there is a little more to the 'Can you make more on your money than the % interest you are paying on your current mortgage' question which is asked so often..
There are MANY things to take into considerations such as what tax bracket are you in since interest paid on your primary residence is deductable on your taxes.
How many years is your mort and how many years do you have left to pay since a 1 year old mort of course more of your payment is interest while if you are in the 28th year you are getting almost no tax benifits.
Also what taxes will you be paying on that 15% return you get from your investing in real estate. Depending on what you are doing will the IRS consider you a real estate pro and considerably BUMP the rate at which you are taxed?
Do you live in a state which has income tax?
The question seems very easy on the casual analysis but when you start digging you are apt to hit some rocks.
Mike
Quote:
On 2003-12-06 17:47, Tedjr wrote:
i let my creditors worry about my debt. Get all the investment debt you can now. Rates have never been lower. Even use short term high rates to buy and fix and sell but I would put everything now in some type real estate. In most markets no where but up and sooner than I will be able to buy another million in assets at 5% interest.
Just a few thoughts
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
Hi Ted,
Just curious if you have been investing in real estate long enough to have weathered either of the past HUGE real estate down falls of the past 25 years?
Mike[ Edited by MrMike on Date 12/06/2003 ]
I recently refinanced. I went from 8 to 5.625%. It is a 30 year for 65600. This is my only debt.
The other thing to look at is your risk tollerance.
Obviously, highly leveraged = more risk (and potentially greater wealth).
If you are less leveraged you will be able to withstand fluxuations in the market much better.
My you have received some good advice I wish these charming persons had been around when I started. The only advice I got was remember to stick the end of your toga in your belt before hammering or sawing. Damn, I have dated myself.
To make choices such as you are being faced requires you to once more look forward in time.
Simple rule, if you think things are getting ready to shut down economicaly then you pull back, reduce expenses stop your expansion, pay down debt and pull the covers over your head.
If you buy the trip, this is but the beginning of the american dream all will be expanding as we assume the position of dominate power in the 21st Century. Then you go out as far as you can in leveridge.
You check history to see what happened. To those who over expanded. McCarthy in Texas. lots of short term debt and boom suddenly no more long term refinance available and he was back to throwing chains around drilling pipe on oil wells. One more time.
John Kennedy, got tired of running booze over the border so he went way out on a limb and bought the Chicago Board of Trade Building and in the buy also picked up an extra $1,000,000 in borrowed cash from the bank.
Now thats rolling for a guy whose prior early life had been dedicated to laying brick in threes instead of the traditional one and set.
Here we go again, story time.
When I was little I asked my Grandfather who had just gone short in the crash of 1929, how best to look into the future so that I would know what to do.
He smiled, shook his head, reached into his desk drawer and handed me a device with which to tell the future. A pair of Dice.
He then gave me the punch speech. "Kid, use these until you get educated. Then you have all the examples of history to draw on. If you can't get educated, then most of the time just take a path 180 degrees removed from the common road."
In my lifetime I have been way up and way down. As I look back on it, the major difference was that the women I met while up had a tendency towards overbite and a desire to spend time on the back of horses. Which at the time was not my wish. I had other plans. Of course the ones I met at the end of the downward curve, were much more interesting and their interest in horsies consisted in putting $2 on the nose of some nag with a great fear of crowds. Its all a matter of choice.
Perhaps the Dice were best.
Historicaly challenged Lucius
Regardless of your mortgage interest rate or the potential return on other investments, you must first determine your investment timeline.
If you will need the cash in the near future, then put it in something that will be liquid and preserve your principle. If you need money in three years for your child's college tuition, then don't use the money to pay down the mortgage and don't invest it in the stock market. Your investment vehicle should probably be CDs.
If you have serious health issues and may need the money for major medical expenses, then don't spend your money on other investments. If you don't have an emergency reserve fund, then don't put all your available cash where you might not be able to get all of it out quickly and easily.
If you are in an industry that is experiencing a contraction at the moment, then you need to guard against being caught in a corporate restructuring. If your job is vulnerable to downsizing, realignment, restructuring, or foreign outsourcing, then you need to be putting all your available cash into liquid savings vehicles where you can get it quickly without risking loss of principle.