Pay Back Mortage or Not?

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!!!

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

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.

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?