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September 16, 2009
Pay Back Mortage or Not?
I would be interested in my fellow brownstoners opinion, particularly if you are renting out your brownstone. I own a 2 family in Park Slope which I have rented out for the past 20 years and I live elsewhere. I have a 210,000, 30 year mortage at 5.75%. There is about 20 years left on it. WOuld you suggest getting rid of the morgage (paying the principal down in lump sums over the next few years) or keeping it? What are the advantages and disadvantages? I appreciate your opinions.
Comments
If you can earn more than 5.75% a year on the money you have then it doesn't make sense to pay it down. That would be a pre-tax calculation. Calculate the return you need after taxes given your own situation.
Posted by: daveinbedstuy at September 16, 2009 11:02 AM
Agreed. Let your renters pay your mortgage and make your money work for you. I'm assuming you are making a nice profit each month with those numbers - continue to bank it.
Posted by: buttermilk channel at September 16, 2009 11:29 AM
Also depends on whether you believe that there will be a significant increase in inflation at some point over the next twenty years.
Posted by: denton at September 16, 2009 11:32 AM
open excel and create spreadsheet with monthly cash flow. each line will represent month of the next twenty years. The rent probably can be factored by inflation. The mortgage interest can be deducted from tax so multiply by your tax bracket. Then calculate NPV.
Then copy the sheet and put the early payment numbers.
I did it for myself and clearly I do not want to pay down mortgage earlier.
Posted by: bobjohn at September 16, 2009 12:19 PM
could someone explain how the potential high inflation would actually translate to more $$$ into us regular folks? if one is big investor in mkt, big banker, owns business,... yeah, understand how they could have more $$$ in pocket in scenario of high inflation. but for regular folks banking on salary, how does inflation translate to more $$$ in pocket? not getting sense employers are that incented to increase our salaries anytime soon - ie most are just glad to be employed vs. expecting a sizeable inflation driven salary increase. For regular folks, I see inflation happening TO US - ie day-day stuff we buy just gets more & more expensive.
anyhow, regarding how to play inflation per this discussion, is inflation going to help the OP via higher ppty appreciation, higher rent roll, or repaymt of mortgage is cheaper (ie paying off balance via cheaper paper $$$) OR was it that inflation is BAD for him
Posted by: more4less at September 16, 2009 12:35 PM
higher inflation equates to higher interest rates rates. so with the money you have from not paying off your mortgage quickly, you'd be earning higher interest. all the while you the mortgage payments, assuming fixed rate, stays the same.
Posted by: dirtyrotten at September 16, 2009 12:41 PM
m4l, in spite of your take on not getting a raise, in inflationary times most people will. Maybe not immediately. Then you will be paying back the same mortgage with more dollars available. Meanwhile hard assets, like the house, will appreciate.
Then, see what DR says.
Posted by: denton at September 16, 2009 1:15 PM
Denton, will post follow-up question in OT vs. taking away OP's thread here
Posted by: more4less at September 16, 2009 1:27 PM
in the world of high inflation you are better off paying the minimal mortgage amount assuming you have a fixed interest rate. However, ultra-high inflation would be catastrophic to our economy as a whole. so your mortgage really wouldn't matter in that scenario. Actually nothing matters in that scenario and we should all revert to bartering
If you can you should always pay down your principle as much as you feel comfortable with. Suddenly a 30 year mortgage would mature in 20 years
Posted by: zberlin at September 16, 2009 1:46 PM
Not sure I understand logic in some of these answers. if inflation is running at 5% and, say, I'm getting 3% on my cash, then how am I better off with cash? My purchasing power erodes more every day.
Even if the hard asset I'm purchasing stays flat, that part's the same regardless of where I put my money, no?
Posted by: Johnny at September 16, 2009 2:46 PM
I say get a HELOC at cheaper rate and pay off 1st.
If rates really go up...then can pay of part or all of the HELOC... and perhaps might want to try invest some of HELOC money for better return than you are borrowing from.
I have line of credit for .5 under prime.
(but of course I don't use - too chicken to invest).
Posted by: Petebklyn at September 16, 2009 3:21 PM
you should get more than 3% on your cash if inflation is running at 5%....
petebklyn raises an interesting point--if you're just going to keep the extra money in a money market it probably makes sense to instead put it towards the mortgage. If you're an Warren Buffet level investment genius then there's almost no question you should invest the cash and not prepay the mortgage.
Everyone must be really bored for this thread to get so many posts.
Posted by: woodys at September 16, 2009 3:56 PM
If there's any lesson from these past 3 years it is that liquidity is imporant. You're mortgage rate and payment are very reasonable. My advice is to keep the cash in a safe investment and to not touch it. If inlfation picks up, you can reinvest into something with higher yield. If inflation deosn't pick up, you can always repay later.
Posted by: Boerum Hill at September 16, 2009 6:20 PM
20 years on the Street and a finance degree-- but it really just comes down to common sense--and there is a little bit of guess work. If you get the guess work wrong, don't kick yourself, no one has a crystal ball.
But I figure off the top of my head that you paying around $11-12k interest a year right now. That's 12k that just goes poof. Naturally, you get some tax write-off, but you also must weigh that against any supposed after tax return you would get on an alternative investment. Let's assume you get 4k of that back, so you are currently giving the bank 8k a year. Right now, if you find a 2 year CD that pays 2%, you're probably lucky. After tax, you're talking about 1.5% or less. That comes out to $2,500 a year. So IT IS GUARANTEED that you will save $5500 a year, or more, by paying off your mortgage.
About alternative investments-- there is no COMPLETELY safe investment currently available on this planet that will earn you better than 5.75% (or some after tax equivalent). Personally, I think the stockmarket will go up another 10% in the next few months and Apple stock over 205 a share-- but these investments have risk. DID WE NOT LEARN ANYTHING last year? On the other hand, think of paying off your mortgage. That is like an investment that is a guaranteed 5.75%. Very hard to beat. Maybe in a year or two 30 year Treasury Bonds MAY get there-- that is a huge MAYBE--but they are not 100% safe UNLESS you hold them for the entire 30-years. You can lose much principal if you have to get out before then. And I would bet dollars to donuts that 30-year rates will go up (and therefore prices down) significantly in the couple of years. That means if you buy 30-years, you could lose a lot of PRINCIPAL. Again, these are NOT 100% safe INVESTMENTS.
But for all intents and purposes, A CD is. Could CD rates eventually get above 5.75%? Sure, but don't hold your breath. Banks are not in a big hurry to move those rates up right now. They're borrowing from the Gov. and doing the carry trade until they get their crap together again. Banks are paying you a miserable 1%, or often less, to hold your savings, and loaning it to new mortgages for 5% plus. Or buying Treasuries and pocketing about 3% (tax free, I think). That's a big fat 3% or 4% spread that no one is in a big hurry (read: Fed Res.) to take away from the banks. the Government just bailed a bunch of them out. It's going to keep rates low for a while longer as an insurance policy on THEIR investment. one of the reasons the stockmarket is flying-- companies are going to make money hand over fist because their borrowing costs are going to be super low for another 6 months to 2 years. What kind of idiots would the government be if they poured billions of dollars into companies like AIG and GM, and then raised interest rates on them? Sure the Fed is independent, but Bernanke is on the team, and he is not an idiot.
Bottom line-- chances are pretty low that another 100% safe alternative investment that earns more than 5.75% is coming around the bend anytime soon. If anything with a maturity of less than 5 years earns 6% in the next 3 years, and maybe even 10, I would be pretty surprised.
ps the one very good reason not to pay the mortgage down is if you think that you will have to borrow money again soon for ANY reason-- (personal loan, credit cards, etc). That rate of 5.75% is very good historically. Don't trade it in for a higher one if you don't have to.
And make sure you keep a year or two of funds in something rock solid safe in case of emergency, pay off credit cards and the like IMMEDIATELY, and any other higher interest debt, and then I would pay off the mortgage. Why give the bank?
So, more often than not, paying down debt, ANY kind of debt, is a no-brainer. That alternative investment crap (marginal returns and so forth) is what they taught us in B-School and I swear by all that is Holy that it is a big chunk of the reason we got into the mess we are/were in-- a generation of MBAs taught to borrow every dollar they could until they stopped making more off the investment than the cost of borrowing. One problem professor-- your borrowing costs are locked in! the returns on your investment (read: biz opportunity) are usually not.
Ok, i'm done with my rant
Posted by: mikez at September 16, 2009 10:35 PM
Thank you to everybody who contributed to this thread. I genuinely feel like I learned something about inflation's effect on home owners and their mortgages.
Posted by: thecomputerguy at September 17, 2009 1:07 AM
Wow! I just came back to this site after posting my original question. Thanks you so much,everyone, for your thoughtful responses. Thanks,especially, mikez for your detailed response. I tend to agree with you! I also liked the idea of a spread sheet. Thank you very,very much everyone!!!
Posted by: momolito at September 17, 2009 8:10 PM
It is not really a bad thing if inflation starts kicking upwards. It will finally push the Federal Reserve Bank to push interest rates higher. Now that would mean trouble for the home owner that is paying off a mortgage with higher interest rates but it would also mean that the middle class american that that is saving does not get pennies for his money in the bank.
Posted by: hannible at September 18, 2009 2:36 PM
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