Tuesday, 6th February 2007 (by J.D.)
This article is about
Spare Change
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“A recent study suggests these households blow more than $1.5 billion a year, or $400 per household, by accelerating their mortgage payments.” I don’t know….
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“Planning ahead with a garden journal can save you time and money. Starting a garden journal now will serve as a reference later on what worked well and what didn’t in your garden.”
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via Dumb Little Man
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via The Consumerist
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February 6th, 2007 at 3:19 am
There’s something about the lady who wrote the “don’t pay your mortgage” article. I don’t think I’d trust taking any sort of financial advice from her, she just doesn’t seem to know much, but instead regurgitates other material popularized elsewhere without really looking at the problem from all angles. A rubbish article i think
February 6th, 2007 at 6:04 am
BigBuddha, I don’t think the article is rubbish, and Liz Pulliam Weston is one of the best of the professional personal finance writers out there (practical, solid advice). I don’t necessarily agree with her conclusions in this case, but I think it’s a good article.
February 6th, 2007 at 6:08 am
She links in her article to the original paper on which her article is based. If you don’t think you trust her, the least you could do is read the article and see if she’s misreporting it.
February 6th, 2007 at 8:48 am
The point of the article is that everyone’s circumstances are different and paying off the mortgage isn’t always the best option. She notes a few minor flaws in the referenced study, but it seems pretty balanced reporting to me. She does however claim that the benefit of paying it off is “way in the future” and then compares that to saving for retirement (also way in the future, Liz!).
The ‘Driving for Dollars’ article could have used the “gross vs. net” comparison, where invoice price is like the gross, but good luck getting a dealer to tell you his net cost for the vehicle.
As for the ThriftyMommy, I stopped reading when she mention even CONSIDERING buying Hunt’s ketchup. No way, totally unrealistic.
February 6th, 2007 at 1:55 pm
I think Liz’s article is right on the money. Accelerating your mortgage is, in many cases, a poor financial decision, especially considering that most people locked in record-low interest rates over the past few years. These rates are made even better when you consider the tax deductions on the interest. If you are paying 4%-5% interest after your tax savings are calculated, why the heck would you hurry up and pay that back?! Don’t you think you could do better? How much risk would you accept to make double that? *cough*Dow*cough*S&P500*cough*
As a student of the value-investing school of thought, I always consider what my money can earn in various investments. But the key I’ve learned is that this also includes my liabilities. Your mortgage does not exist in a vacuum, it is part of your overall portfolio. When you are investing each of your dollars you have to consider where that dollar can work hardest for you.
There are two problems that I can see with this approach though.
1) Most people won’t sit down and do all that hard math to figure out what their mortgage actually costs them versus what they could earn in some other vehicle.
2) The money that is not paid towards the mortgage needs to actually make it to another investment vehicle. If it is spent on vacations and lattes then it is lost.
I think number 2 is the reason why a lot of people advocate paying your mortgage ahead of time. It is an easy way to actually make a guaranteed return and most people simply lack the discipline to do something “better” with the money so why even suggest that they try?
Similarly, when I see PF writers describing a debt-reduction “snowball” and they suggest starting with your “lowest balance” first instead of the “highest interest rate”, I just want to scream, “That is not the most fiscally efficient way…you are wasting money plain and simple!” But their readers aren’t like me. They don’t want to “do the math” and they lack the discipline to stick to the plan that will save them the most money. So instead they have to play psychological games that make them feel good but which ultimately end up costing them more in interest.
-Toby
February 7th, 2007 at 12:08 am
“Your money can earn better returns in the market compared with paying off low-rate debt.”
That’s what they were saying in 1929 and in 1999. Personally, I can’t live in stock certificates and with my investing track record I’d much rather take the 6% sure-thing than go for some pie-in-the-sky mythical stock market returns. A home that’s paid-for is the best way to prepare for retirement. You can play the stock market after you’ve paid off the mortgage. There’s nothing better than the peace-of-mind that comes with being completely debt free (including owning a home free and clear).
February 7th, 2007 at 8:53 am
@UncleOxidant-
Plenty of people (i.e. average investors) survived the historic crashes you cited, and the statistics favor investing. You say your home is a “6% sure-thing” but it’s not 6%, as the article points out. If you’re itemizing, it’s more like 4.5% (your mileage may vary), barely better than historical inflation. (And that’s the national average inflation, not local or regional inflation rates which may be higher in your area.) Add in the very real possibility that someone bought his home at the top of the market (or some other natural disaster) and he could easily be upside-down on the deal.
I can’t argue with whatever brings you peace-of-mind, but “debt free” isn’t necessarily a good thing. The homeless and starving people in Africa are debt-free, after all.
Most of all, you used the words “sure-thing” and “best way to prepare”. The only problem is, there’s no such thing as either of those.
February 7th, 2007 at 10:30 am
Tinyhands:
“If you’re itemizing, it’s more like 4.5% (your mileage may vary), barely better than historical inflation.”
True, but then again back when I had a mortgage it was at 8% (got that mortgage in the early 90’s - paid it off in 1999, haven’t paid a mortgage payment since). Back in the go-go late 90’s people used to tell me all the time that I should invest in the market instead of paying off the mortgage early. I’m glad I didn’t take that advice as it would have taken about 5 years to recoup the losses (actually, the NASDAQ is still 1/2 what it was at it’s peak in 2000). Being mortgage-free was a very good way to survive 2002-2004 when work was scarce in my industry.
I was just talking to someone yesterday who said his ARM was adjusting up to 8.5% (I really can’t understand why anyone who bought a house 3 years ago would get an ARM, but that’s another issue). So there are apparently people still paying higher rates.
“Add in the very real possibility that someone bought his home at the top of the market (or some other natural disaster) and he could easily be upside-down on the deal.”
Can’t argue with that. This is still a bad time to buy - the housing market isn’t finished correcting. Waiting a year or two will likely result in more reasonable prices.
February 8th, 2007 at 10:55 am
I think TinyHands has very valid points, along with the article that Liz wrote.
What I think everyone is saying is simply “risk mitigation”.
- Where am I now?
- Where do I want to be in 5, 10, 15, 20, 40 years?
- How can I get there?
For example:
We have a 15 year mortgage (only 13 years + 2 months left), and the rate is 5.5%. After tax deduction, which we are eligible for, that rate lowers to 4.125%.
We (and anyone else) can presently get a 5.05% at an EmigrantDirect.com savings account.
But, like TinyHands mentioned none of this is in a vaccuum. We also have an HEL (finish basement, pave driveway, car purchase) for 15 years @ 6.99% fixed (or 5.245% after tax deduction).
So, our savings rate is higher than our mortgage rate, but lower than our HEL.
We’re on target to both put money in savings while paying the HEL off at the exact same time as the mortgage (they were taken out a year apart), and that’ll be when I’m 56.
I can honestly say that we wouldn’t want to have a mortgage anywhere near the time that I am ready to retire, unless we had enough in savings (and retirement savings), that we could afford a mortgage, and taxes (living in NJ is costly).
Now, if we could save up $2,500,000 before I was to turn 60, we could offset my current paycheck entirely (assuming that we only took out 4%, and also taxes on the interest), we’d probably do that.