Lesson 16: To pay off your house or not....
LESSON 16: I'M ON A ROLL: DO NOT PAY OFF YOUR HOUSE! THAT'S DUMB!
I read all these people write, "Pay off your house, blah blah blah." If they had a calculator they'd know that this could be a dumb idea.
First of all, if you haven't refinanced already, get off your ass and do it! Your interest rate should be below 5.5% on your house right now. If it's not, you need to open the front door, go outside, kick yourself in the face and then go refinance first thing Monday.
Secondly, you get a tax write off for all of the interest you pay on your mortgage every year. This lowers your interest rate even more because you're saving money on taxes by paying for your house monthly. So that 5.5% rate is now like 5%. (In retrospect, this isn't a huge savings at all and is really a bad arguement as to why to have a mortgage.)
Third, lets say you have $50,000 you owe on your house and you win $50,000 in the lottery. You could pay off the house and lose your tax write off, or you could invest it. At the average S&P gain of 11% per year in 5 years you'd have $84,252. Your house would have only cost you around $60,832 if you include your tax break, so you would have profited $24,000 roughly by NOT paying off your house!
If you could have had an unbelievable year like I had making 40%, in one year that $50,000 would have been $70,000, or more than you will pay on your house for the next FIVE YEARS and you'd still have $10,000 in the bank!
So, don't pay off your house, pay DOWN your house. In other words, pick an amount that you could easily afford if you had to work at McDonalds forever. Say, $400. Get a home loan that makes you pay $400 a month and pay that off over the longest term possible (30 years for me.)
15 year Mortgages suck. Avoid these. Get a 30 year mortgage so that your monthly cost is lower and pay it down as quickly as possible. You want your mortgage no higher than about $60,000.
Using that extra money to invest COULD be great if you are getting a 10% or greater return a year. And, don't forget, if something horrible happens and you can't work, YOU STILL HAVE THE MONEY TO PAY OFF THE HOUSE! It's invested. :)
(In retrospect, reading this in 2006 as opposed to 2004 when I wrote this, I still believe it's good advice, however, I think for a 'normal person' you're better off paying off your house and then investing the monthly payment over your lifetime. Simply because less bills is such a relief to stress and the greater income you are retaining on a monthly basis gives you more options.)
I read all these people write, "Pay off your house, blah blah blah." If they had a calculator they'd know that this could be a dumb idea.
First of all, if you haven't refinanced already, get off your ass and do it! Your interest rate should be below 5.5% on your house right now. If it's not, you need to open the front door, go outside, kick yourself in the face and then go refinance first thing Monday.
Secondly, you get a tax write off for all of the interest you pay on your mortgage every year. This lowers your interest rate even more because you're saving money on taxes by paying for your house monthly. So that 5.5% rate is now like 5%. (In retrospect, this isn't a huge savings at all and is really a bad arguement as to why to have a mortgage.)
Third, lets say you have $50,000 you owe on your house and you win $50,000 in the lottery. You could pay off the house and lose your tax write off, or you could invest it. At the average S&P gain of 11% per year in 5 years you'd have $84,252. Your house would have only cost you around $60,832 if you include your tax break, so you would have profited $24,000 roughly by NOT paying off your house!
If you could have had an unbelievable year like I had making 40%, in one year that $50,000 would have been $70,000, or more than you will pay on your house for the next FIVE YEARS and you'd still have $10,000 in the bank!
So, don't pay off your house, pay DOWN your house. In other words, pick an amount that you could easily afford if you had to work at McDonalds forever. Say, $400. Get a home loan that makes you pay $400 a month and pay that off over the longest term possible (30 years for me.)
15 year Mortgages suck. Avoid these. Get a 30 year mortgage so that your monthly cost is lower and pay it down as quickly as possible. You want your mortgage no higher than about $60,000.
Using that extra money to invest COULD be great if you are getting a 10% or greater return a year. And, don't forget, if something horrible happens and you can't work, YOU STILL HAVE THE MONEY TO PAY OFF THE HOUSE! It's invested. :)
(In retrospect, reading this in 2006 as opposed to 2004 when I wrote this, I still believe it's good advice, however, I think for a 'normal person' you're better off paying off your house and then investing the monthly payment over your lifetime. Simply because less bills is such a relief to stress and the greater income you are retaining on a monthly basis gives you more options.)
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