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Erik88

Pay extra on mortgage or no?

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Pay extra.   The stock market is pretty frustrating right now (theres money to be made, always, but when one person makes money, another loses it!)

The scenario you are describing is called a "zero-sum game", and that is true for options trading. However, investing in individual stocks (and most equity based mutual funds) is not a zero-sum game. If a stock goes up, wealth is created. Everyone that owns that stock makes money. If a stock goes down, everyone that owns that stock loses money (and wealth is destroyed).
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Oh gosh, this has gone way far off the deep end. :wall:

 

Every option contract has a buyer and a seller. The buyer of the contract hits zero-sum if it expires Out-the-money, and the contract seller... they're rather happy about it! I've been doing both for the last 10-years.

 

Money made on the retail-side of the market is usually accumulated over the long-term by market appreciation, but invariably reversion to the mean cap's you somewhere's around 7% per annum.... And right now is most certainly one of the worst times to be putting cash into stocks in the last 8-years! Unless you're trading some of the inverse ETF's, however due to the decay inherent in these products, timing market moves is more critical.

 

If you've got debt charging you more than 7% interest, you're better off putting the money there. Unless you are putting that money into the market for the long-term, it's not the best place to put it (will that stock be lower or higher in 1 year, 2, years, 5 years... what's your timeline? Suggesting that 'markets will always appreciate' is repeating the mistakes made during the real estate crisis in 2008. Over the long-term perhaps, but that's dependent on your timeline! Paying off debt is not dependent on timing, it's instantaneous.)

 

If you've got some extra cake in the budget there are some great suggestions on how to allocate it in this thread. The market is NOT one of them.

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The scenario you are describing is called a "zero-sum game", and that is true for options trading. However, investing in individual stocks (and most equity based mutual funds) is not a zero-sum game. If a stock goes up, wealth is created. Everyone that owns that stock makes money. If a stock goes down, everyone that owns that stock loses money (and wealth is destroyed).

 

Agreed.   But there is a big element of the zero sum in there too.   The market itself creates a bit of this, as people see the price drop so they sell to cut losses or keep what profit they earned,  more sell and price drops and drops...  then they buy something else and that price goes up ... all the artificial variation created by the act of trading is truly a zero sum.   The real wealth of a company going up due to inventing something or whatever performance  / profits / etc is outside of that, so its 2 dynamic systems, the real values and the trading effects, all in one place.    When the economy is in a slump, the zero sum bit dominates...

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I work with New Home Buyer Education classes almost every weekend. Every loan officer that speaks to these classes says the same thing. Take your principle only divide by 12 and make a separate payment on your mortgage each month. That makes one extra mortgage payment a year. This will turn your 30 year into 22 years. Now because you own a home you will probably be getting a tax refund. Take the amount of 1 principle payment and sent that in. Now you pay off the mortgage in about 17 years. This does not break your bank account for other items you need to put money into. Anything above that does not really help reduce the time on the mortgage.

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The market itself creates a bit of this, as people see the price drop so they sell to cut losses or keep what profit they earned,  more sell and price drops and drops...  then they buy something else and that price goes up ...

 

Only about 15% of trades made today are made by humans. We have very little direct influence on market direction.

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Only about 15% of trades made today are made by humans. We have very little direct influence on market direction.


Reading 'Flash Boys' made me realize how out of control computerized trading is.

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We started doing the Dave Ramsey plan many years ago and it has worked very well for us:

 

1. $1,000 to Start an Emergency Fund
2. Pay Off All Debt but the House
3. 3 to 6 Months of Expenses in Savings
4. Invest 15% of Household Income Into Retirement
5. College Funding for Children
6. Pay Off Home Early
7. Build Wealth and Give. 
 
According to that plan, the house is the last thing to pay off. Your vehicles and credit cards should be what you are focusing on, if you have an emergency fund of a couple grand put away.
 
If you got the mortgage recently, it's probably a fairly low interest rate, and almost certainly higher than your other debt, so the other debt just makes sense to pay off. Plus the other debt is a smaller chunk, so it will pay off quicker. The satisfaction of knowing you have no debt but the house is amazing. Then use what you were paying on the debt to pay down the mortgage. It'll be more than $100 a month, so you'll get caught right up to where you would have been if you started on the mortgage first.
 
If you look into how paying off early works, you'll find that it pays off the tail end of the mortgage. If you look at an amortization schedule you'll see that the portion of your mortgage that goes toward principal increases over time. So, a $1000 mortgage payment in the first month pays maybe $5 of principal, and $995 of interest. The opposite is true of the end of the mortgage: your last payment will be $995 of principal and $5 interest. So paying $100 a month extra will take 9 months just to save one mortgage payment. (I made up these numbers because I am too lazy to go look them up, but the point remains, and I'm probably not too far off)
 
Now I'm not saying you shouldn't pay early, but you definitely should take care of the earlier baby steps first. If you have not read any of Dave Ramsey's books, you owe it to yourself to go get one.The Total Money Makeover is one that I read, and it changed the way we look at money. It's taken a while, but we are on step 6. All debt is paid, including two cars, and we are paying down the house as fast as we can. I'm 15 years away from retirement, and I want the house paid for way before that. I can't imagine making a mortgage payment on retirement income.

 

This is how we did it.  No debt at all and we were under 50.  And I count my blessings every day.  

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I have a financial question for the more knowledagble here. I was speaking to my boss last week who is big info personal finance and he told me he doesn't recommend paying exra on my house. His reasoning is that he would much rather have that money in a bank account or invested in something. He pointed out that the housing market could crash again and that I could always "walk away" from the house.
 
My logic for paying $50-150 extra each month towards the principle of my mortgage is that if I pay it off early the amount of money I will save in interest is pretty significant. Clark Howard says that extra $100 a month can save tens of thousands in interest.
 
The stock market isn't doing too hot. If I leave that $100 in my savings account it's really not earning any interest. I could put it in my Roth IRA I suppose. To me it just makes more sense to try and get my 30 year note reduced to 15-20.
 
Thoughts?
 
Also, I should add that we currently live off my income and save 100% of my wife's income so it's not like we are not putting money aside.


Here's what I did I began paying my house payment bi monthly that alone will cut a 30 yr mortgage down to 22-23 yrs. pay off your vehicles that's costing you more on interest and depreciation. Any left over stick it in a Roth but also keep a nest egg in the bank.

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Dave Ramsey's baby steps really do work. Some like to trash his ideas saying that the math doesn't work, that you should pay off debt based on the higher interest rates, keep the house payments for the mortgage deduction, etc... Those people confuse personal finance with math. Personal finance is rarely more complicated than 8th grade math. How often have you had to do anything more complicated than simple addition, subtraction, multiplication, division, and the occasional percentage? I don't expect anyone to be using calculus to balance the checking account.

 

It's about human behavior far more than it's about math. The smallest-to-largest gives people a sense of accomplishment by paying off that small debt. That gives encouragement to keep going and get the next one. As each one falls, it frees up more money each month to attack the next one in line. This gives a double sense of winning because the person sees both the debts disappearing and their cash flow growing. If you take on the one with the biggest interest rate and that happens to be a big nut to crack, you can lose hope when after years of effort it seems like you're going nowhere and those little (lower interest rate) debts keep sucking more of your blood along the way.

 

If it was all about math, we wouldn't have a debt problem.

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Dave Ramsey's baby steps really do work. Some like to trash his ideas saying that the math doesn't work, that you should pay off debt based on the higher interest rates, keep the house payments for the mortgage deduction, etc... Those people confuse personal finance with math. Personal finance is rarely more complicated than 8th grade math. How often have you had to do anything more complicated than simple addition, subtraction, multiplication, division, and the occasional percentage? I don't expect anyone to be using calculus to balance the checking account.

 

It's about human behavior far more than it's about math. The smallest-to-largest gives people a sense of accomplishment by paying off that small debt. That gives encouragement to keep going and get the next one. As each one falls, it frees up more money each month to attack the next one in line. This gives a double sense of winning because the person sees both the debts disappearing and their cash flow growing. If you take on the one with the biggest interest rate and that happens to be a big nut to crack, you can lose hope when after years of effort it seems like you're going nowhere and those little (lower interest rate) debts keep sucking more of your blood along the way.

 

If it was all about math, we wouldn't have a debt problem.

 

Until I moved to TN I was debt free.  We had paid thing down attacking the smallest charge first and here is the key not getting a balance on the card after it is paid off.  In Maryland we had paid off the Mobile Home we were living in.  When we moved to TN we bought an actual house.  Even after selling our Mobile Home we are sitting on a Mortgage and that is the only debt we have at this point.  It is going to take a few years to pay the new place off but that is the next major goal.

 

Thanks

Robert

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I'll jump in here and ramble because I have been there done that.  My wife and I began doing the "Dave Ramsey" plan before there was a Dave Ramsey Plan.  Kudos to Ramsey though for what he says makes sense and he learned it the hard way.  One big thing, and I mean "BIG" thing is you and your spouse together must be committed to the end goal and have self-discipline.  Financial discipline is not for the faint of heart.  You must be willing to tell yourself no when you see, want and think you must have the new shiny.  When we financed our last house we asked for a printout of the amortization chart.  Each month we used highliters and paid each standard payment and then added up the next 4 to five months principle only amounts and added that.  This essentially shaved off 4 to 5 months of the mortgage each month.  It gets harder as the principle amounts grow and near the end we could only swing one extra month of principle.  We also applied lump sums as available such as tax returns.  We had a 15 yr. note we paid off in 3.5 years, and no we were not making a lot of money.  Lower middle class at the time.  Drove used cars we paid for in full at purchase and I did all my own home and auto repairs.  We were completely debt free for about 10 years with 800 plus fico scores.   We sold out and elected to bank a chunk and bought our current home with half down.  We had two kids at the time which we did not have going into the other house.  It took us 5 years to pay off a 15 year note in the same fashion a few years back.  We maintain an emergency fund, have two kids in college (that hurts) are debt free and have been for a good while.  23 % of my gross goes to 401k stable value until the market corrects from the unsupported highs it is currently riding.  When / if the market corrects and gets realistic I will dump into funds for growth. Still have 800 plus fico scores and still drive used vehicles and do my own repairs.  Dad always said, "Son, you can make a lot of repairs for the cost of one car payment".  In the beginning I had a work supervisor tell me I was "not smart" for paying extra on my first house.  He felt it was smarter to use the mortgage interest as a tax deduction.  He filed for bankruptcy the very next year.  I've never had enough deductions to justify itemizing. 

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People who say you have to keep a mortgage for the tax deduction have not thought it through, and are uninformed. Using round numbers, lets say you are in the 25% tax bracket, you earned $100,000 and you paid $10,000 interest on your home last year. With no deductions, you will pay $25,000 in taxes. If you deduct your $10,000 in interest, your taxable income is $90,000, which means you'll pay $22,500 in taxes. So by keeping the mortgage deduction, you are paying $10,000 in interest each year to get $2,500 worth of tax savings. The math does not work. You would be better off, paying yourself $2,500 in a savings account than paying the mortgage company $10,000.

 

If you just really want that deduction, donate to a charity. You get the same exact tax benefit, and you help out an organization that needs it as opposed to a bank.

 

Plus, I don't know about everyone else, but I have not been able to use itemized deductions in years, even with the interest I pay on my shiny new mortgage. The standard deduction the IRS offers is better for me than itemizing. Check your tax records and see if that is the case for you as well. That being the case, mortgage interest does NOTHING for me at all. I get the standard deduction whether I have a mortgage or not.

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People who say you have to keep a mortgage for the tax deduction have not thought it through, and are uninformed. Using round numbers, lets say you are in the 25% tax bracket, you earned $100,000 and you paid $10,000 interest on your home last year. With no deductions, you will pay $25,000 in taxes. If you deduct your $10,000 in interest, your taxable income is $90,000, which means you'll pay $22,500 in taxes. So by keeping the mortgage deduction, you are paying $10,000 in interest each year to get $2,500 worth of tax savings. The math does not work. You would be better off, paying yourself $2,500 in a savings account than paying the mortgage company $10,000.

 

If you just really want that deduction, donate to a charity. You get the same exact tax benefit, and you help out an organization that needs it as opposed to a bank.

 

Plus, I don't know about everyone else, but I have not been able to use itemized deductions in years, even with the interest I pay on my shiny new mortgage. The standard deduction the IRS offers is better for me than itemizing. Check your tax records and see if that is the case for you as well. That being the case, mortgage interest does NOTHING for me at all. I get the standard deduction whether I have a mortgage or not.

 

The Mortgage deduction is better then nothing.  But it is always better to not pay anything.

 

Thanks

Robert

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The Mortgage deduction is better then nothing.  But it is always better to not pay anything.

 

Thanks

Robert

If you have no other choice, I guess you are right.  

 

But, as analog_kidd pointed out, you are essentially trading a dollar for a quarter.  I'll be glad to make that trade any day.  

Edited by quietguy

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