,

[YellowFever]

,

 

[irvinehomeowner]

Scenario 5 is where you still rent out the home but have the mortgage payment. What is the difference between the $2500/mo and the mortgage from year 16-30?

 

[eyephone]

@glad - I like your scenarios. However, I didn't see part of your scenarios where the market value if the home increases or decreases. (The assumption that it will increase)

 

[The Motor Court Company]

This. Take advantage of low interest rates and have renters pay for you, assuming you can break even in PITI.

Scenario 5 is where you still rent out the home but have the mortgage payment. What is the difference between the $2500/mo and the mortgage from year 16-30?

 

[qwerty]

Here's a problem I'm currently facing and it's the age-old beaten to death question of 'Invest the money or pay off mortgage earlier'.  Of course, now I realize, the situation is totally different and is considered to be on a case-by-case basis.  The solution for a 30 year old would be totally different than for a 60 year old.

So basically, here's what my dilemma is.  Should I pay down my 30-year fixed mortgage within 15-years, and immediately become cash-flow positive or invest the extra principal payments in a mutual fund.  I only need to pay down $900 more a month towards principal.

I've done the calculations.  Surprisingly, I find that the first part of my investment math is a no-brainer.  Yet, when I go down and calculate more, it seems like the logic contradicts the answer.

Scenario 1:
Total scheduled mortgage payments currently @ 30 years: $571,547
Total scheduled mortgage payments if paying additional $900, thereby reducing to ~ 15 years:  $423,286
Total savings from not paying mortgage interest:  $571,547 - $423,286 = $148,261

Scenario 2:
Invest $900 / mo. in Mutual Fund - expect a reasonable modest 5% return for the next 15 years on average
Yearly investment: $10,800
Invested Capital: $10,800 x 15 years:  $162,900
Total return including capital and interest: $219,026

Scenario 2 - Scenario 1 = $219,026 - $148,261 = $70,765

your scenario two result is flawed. you correctly stated that by paying the extra 900/month you save 148,261, this amount is all interest as you also correctly pointed out.  The number you should be comparing the 148K in scenario 2 is to 57,026 (219,026 total principal/return -162,900 total principal), which is the actual gain on your principal. So your savings of 148K in interest is larger than your return of 57K.

 

[qwerty]

just pay off your mortgage, you will sleep better at night. by 2030 you will have a house that is paid off free and clear throwing off 30K/year in passive rental income. you wont have to worry about your invested principal when the stock market tanks by 10%,15%, or 20%, eventually it all comes back but the rollercoaster ride can be tough to stomach sometimes and then there could be a situation that forces you to liquidate some or part of your portfolio when you are down.

like SGIP likes to say on the rate lock, do whatever helps you sleep better at night.

 

[zubs]

Since leaving your money in the stock market is more stressful, perhaps you give yourself 2 more years of life by just paying off your mortgage.

 

[YellowFever]

,

 

[bones]

Scenario 5 is where you still rent out the home but have the mortgage payment. What is the difference between the $2500/mo and the mortgage from year 16-30?

Scenario 5 is the fixed-rate 30-yr mortgage is currently $1500 / month, not including today's rate of $280 HOA fees.  I predict with no evidence that HOA fees to be in $350 in the year 2030.  I include HOA because I consider that part of the home owning expense that is not escape-able.  Unlike maintenance, where an owner can put off work or wait until he finds a better deal to do the repairs.

$1500+$350(hoa) + $1850.  $2500 - $1850 = $650.00 cash flow positive.

@glad - I like your scenarios. However, I didn't see part of your scenarios where the market value if the home increases or decreases. (The assumption that it will increase)

Yes, I have not factored increase/decrease in home value.  But I find that it may or may not be pertinent as that could be somewhat tied to whether the mutual fund investment goes up or down too.  Since the whole economy is inter-related.  If housing goes up, mutual fund investments should, and if housing crashes, so would the stock market.

Re taxes?

 

[bones]

Scenario 5 is where you still rent out the home but have the mortgage payment. What is the difference between the $2500/mo and the mortgage from year 16-30?

Scenario 5 is the fixed-rate 30-yr mortgage is currently $1500 / month, not including today's rate of $280 HOA fees.  I predict with no evidence that HOA fees to be in $350 in the year 2030.  I include HOA because I consider that part of the home owning expense that is not escape-able.  Unlike maintenance, where an owner can put off work or wait until he finds a better deal to do the repairs.

$1500+$350(hoa) + $1850.  $2500 - $1850 = $650.00 cash flow positive.

@glad - I like your scenarios. However, I didn't see part of your scenarios where the market value if the home increases or decreases. (The assumption that it will increase)

Yes, I have not factored increase/decrease in home value.  But I find that it may or may not be pertinent as that could be somewhat tied to whether the mutual fund investment goes up or down too.  Since the whole economy is inter-related.  If housing goes up, mutual fund investments should, and if housing crashes, so would the stock market.

Re taxes?

Nvm. I didn't read thru the whole thread.

 

[irvinehomeowner]

I really don't understand paying off your home early with the interest rate so low.

Since the value of the property usually goes up (which it should in 15 years), why bother?

I think this is the only time during my life where mortgage interest rate is less than a conservative return you can get in mutual funds (or ETFs). If it were the other way around, paying off the mortgage would make more sense.

 

[Harajuku]

If you care to check past results.

CNN: Was my home a good investment?http://money.cnn.com/calculator/pf/home-rate-of-return/

 

[rkp]

Yes, currently, if I were to rent it out today, it is practically break-even on the PITI.  The mortgage interest and property tax deduction savings would cover the entire costs of the property tax payments.

you dont get a mortgage deduction for rental properties.  instead its just an expense against the rent.

 

[YellowFever]

.

 

[qwerty]

Yes, currently, if I were to rent it out today, it is practically break-even on the PITI.  The mortgage interest and property tax deduction savings would cover the entire costs of the property tax payments.

you dont get a mortgage deduction for rental properties.  instead its just an expense against the rent.

Question - what if the rental income is "under-the-table" cash ?

then you dont pay any taxes since you dont have income.

 

[rkp]

Yes, currently, if I were to rent it out today, it is practically break-even on the PITI.  The mortgage interest and property tax deduction savings would cover the entire costs of the property tax payments.

you dont get a mortgage deduction for rental properties.  instead its just an expense against the rent.

Question - what if the rental income is "under-the-table" cash ?

i am not CPA but my understanding is that you only get 1 mortgage interest deduction so you would have to claim you are living there.  also you are living somewhere else so assuming you are renting, you would have to pay in cash as well to not create a paper trail there...seems hard to gain a benefit

 

[YellowFever]

.

 

[Ready2Downsize]

I really don't understand paying off your home early with the interest rate so low.

Since the value of the property usually goes up (which it should in 15 years), why bother?

I think this is the only time during my life where mortgage interest rate is less than a conservative return you can get in mutual funds (or ETFs). If it were the other way around, paying off the mortgage would make more sense.

You never know what might happen.

You could get cancer out of the blue, get in a bad car accident and not be able to work or your spouse could suddenly die (car accident, illness) cutting off your income stream, get laid off, have a kid that has extensive medical bills that your insurance won't cover etc. Houses typically go down slower than stocks which can tank 50% over night (mutual funds don't go down that quick but it's easy to see 20% loss in a few months if you're asleep at the wheel) and you have to have somewhere to live, having something with lots of equity or paid off certainly is dead money (unless u r renting the property out) but it's security.

I rather have dead money in a house I live in than see 10-20% losses in stocks. We've gone way too long without a significant market correction and we're due for another recession.

I'll take a house with lots of equity and low payments any day of the week no matter how low interest rates go.

 

[The Motor Court Company]

California is due for a big earthquake so your house value could be wiped off in an instant. It is also easier to break even or make rental money in other states due to lower home prices there.
So rent your CA home from the bank and pay cash for out of state homes to rent out is another good way to go.

 

[Ready2Downsize]

California is due for a big earthquake so your house value could be wiped off in an instant. It is also easier to break even or make rental money in other states due to lower home prices there.
So rent your CA home from the bank and pay cash for out of state homes to rent out is another good way to go.

Lol! I knew someone who told me to get a whole lot of rentals in the Carolinas close to colleges.... low prices and easy money renting them............. till a big hurricane hit and bamm............ there went his house in California cuz he couldn't make the payments on the rentals since they were uninhabitable and eventually the house here.

Earthquakes can happen anywhere. Damage from hurricanes and tornadoes has been more devastating than our earthquakes, fires and mudslides.