jay santos
06-13-2007, 03:33 PM
Bottom line is ...
Is your expected return greater than your effective mortgage interest rate?
Effective interest rate can be 3-5% based on recent years interest rates, with your tax savings applied.
Stock market returns average 11% over last 50 years. Apply capital gains tax to lower it a bit.
There is no NPV analysis you can do with today's numbers on these assumptions to show paying off mortgage is right thing to do (ignoring risk).
Financially (excluding moral issues like GBH's counsel), there are two more issues to be aware of.
1. Stock market returns the next 20 or 30 years may not match the 11%. The pessimists claim the 11% is due to a. normal returns of 3-5% above inflation + b. a growth in PE ratios which will not endure. So if you're conservative you might use something like 7-8% for future stock market returns.
2. Risk. 11% or 8% or whatever is an AVERAGE. That means it could be 14 and it could be 2. You might be five years into it and your return might be -30% and you need some cash. If it's in your home, a home equity loan pulls it out. If it's in the stock market it might be gone.
Personally, I'm young and can handle risk and I maximize my home loan as much as possible and invest in the stock market.
Is your expected return greater than your effective mortgage interest rate?
Effective interest rate can be 3-5% based on recent years interest rates, with your tax savings applied.
Stock market returns average 11% over last 50 years. Apply capital gains tax to lower it a bit.
There is no NPV analysis you can do with today's numbers on these assumptions to show paying off mortgage is right thing to do (ignoring risk).
Financially (excluding moral issues like GBH's counsel), there are two more issues to be aware of.
1. Stock market returns the next 20 or 30 years may not match the 11%. The pessimists claim the 11% is due to a. normal returns of 3-5% above inflation + b. a growth in PE ratios which will not endure. So if you're conservative you might use something like 7-8% for future stock market returns.
2. Risk. 11% or 8% or whatever is an AVERAGE. That means it could be 14 and it could be 2. You might be five years into it and your return might be -30% and you need some cash. If it's in your home, a home equity loan pulls it out. If it's in the stock market it might be gone.
Personally, I'm young and can handle risk and I maximize my home loan as much as possible and invest in the stock market.