Why a long-term loan makes sense
A fixed-rate mortgage at today's low interest rates may give you flexibility.
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When it comes to home loans, we're a nation of debt-phobes. It's easy to understand why — we're still digging out from a credit crisis caused by too much (or mismanaged) mortgage debt. It's not surprising, then, that borrowers are choosing shorter-term loans when they can. Of those who refinanced a 30-year fixed-rate loan in the third quarter of 2011, 40% chose a 15- or 20-year loan, the largest percentage since 2003. With high volatility and uncertain returns in the stock market, paying down your mortgage delivers a relatively generous, guaranteed return.
But many financial experts say the mortgage burners are misguided.
"The 30-year fixed-rate mortgage is one of the great gifts to the American middle class," says Mark Helm, a planner at Helm Financial Advisors in Falls Church, Va. No one is suggesting that you load up on debt you can't afford, but a long-term mortgage at a fixed rate so low you're unlikely to see it again in your lifetime can work to your advantage. (Bing: How low are interest rates right now?)
A mortgage keeps your assets diversified, says Debra Morrison, a financial planner at Trovena, a wealth-management firm in Roseland, N.J. "I don't recommend that clients prepay principal because I don't want a disproportionate amount of their net worth tied up in their homes," she says.
Next, consider the tax break. Someone in the 28% tax bracket with a 30-year mortgage at 4% will average more than $1,300 a year in tax savings over the life of the loan, according to Bankrate.com, whittling the after-tax mortgage rate to 2.9%. Nothing in the stock or bond markets is guaranteed, but a well-balanced portfolio has a good shot of beating that rate of return in the long term, especially in a tax-advantaged account.
You can save a lot of interest by choosing a 15-year loan over a 30-year — about $63,000 after taxes on a $200,000 loan for someone in the 28% tax bracket. But ask yourself whether you can really afford the higher monthly payment — in this case, $1,420 versus $955. Have you maxed out your 401(k) and built up an emergency fund? Paid off credit cards? Funded insurance policies and, if you desire, college savings? If you haven't, choose the 30-year loan. And if you have, choose the 30-year loan anyway and put the difference between the two payments in a savings or investment account. You'll build up a nest egg that might keep you afloat — and in your house — if you lose your job or get sick. The strategy requires discipline; setting up automatic payments helps.
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Few hedges against inflation are better than a mortgage. If inflation rises, so will interest rates. But you'll have borrowed at a low, fixed rate while savings rates climb and you'll pay the loan back with increasingly cheaper dollars. It's a deal even retirees can embrace, says Bert Whitehead, a Cambridge Connection adviser. But he concedes that a mortgage is a tough sell with that group.
- On our blog, 'Listed': Obama pushes Congress to OK refinancing plan
That's because the decision to pay down a mortgage is 80% emotion and 20% math, says Jerry Verseput of Veripax Financial Management, in El Dorado Hills, Calif. "The peace of mind that comes with being mortgage-free trumps the math. And the goal of financial planning is to reach a point where you're not worried about money anymore."
You should probably not buy a house if you cannot afford the payments on a 15 yr fixed loan with 20 percent down. this is one reason that so many are in foreclosure now, they borrowed more than they could pay. Even those that are under water are not in too bad of shape if they can afford their mortgage.
I agree with the author. What this article tells us is that if you have money to pay more monthly mortgage payment, you would rather keep the extra money and invest it somewhere than pay more monthly mortgage payment because the mortgage interest rate is so low (say 4%) now, you have a very good change to get a higher return (say above 4% return by buying mutual funds) on the extac money if you invest it. The article does not suggest you not to pay more monthly mortgage payment and then spend the extac money. The key point in this article is that you invest the extra money rather than use this extra money to pay more mortgage. Seems not many people get this.
HMMMMMMMMMM, lost what, 50%....................DUMBBBBBBBBBBBBBBBBBBBB
If you want a house, buy one you can afford. Pay it off as fast as you can. Don't get into debt for car loans or installment loans. I had a choice; I could live high on the hog and pay bankers a million dollars in interest over the past 35 years, or I could live within my means and pay myself a million dollars. I chose the latter, and retired at 48 with a million dollars in the bank and no debt.
You only get one chance at this. Think about it and choose what's best for you.
The only thing bad after you pay off your house is the tax you pay on december 31 st
Pay off your house and you will not regret it .
This article is bull. Using the numbers that they suggest it breaks down to this. $ 200,000 loan for 30 years at 4% total interest paid $ 143,739.00. $ 200,000 loan for 15 years at 4% total interest paid $ 66,287. Thats a $ 77,452 savings in interest ! They say that you will average a $1300 a year savings in tax's with your 30 year loan. Well that equals a $ 39,000 in tax savings over a 30 year period. Um, that still isn't saving you money in the long run. Not to mention 15 more years of paying for something that is not going to gain enough value to cover the total price paid for your $ 200,000 house.( $343,739 ) It will take a good 15 years for the value of homes to reach their original loan value let alone the total cost paid. 15 year loan is better but still not really that good, at least you don't have such a hugh difference in value to make up. So I am not seeing how this is a good idea. We refinanced a 30 year 6.25% $ 125,000 home to a 15 year 4.125 % Total interest saved 15 year vs. 30 year. $ 110,000. These articles are written to get the masses to spend money and keep themselves in debt. Don't do it, pay everything off as soon as possible and live a better life.
I heard this same line from my investment advisor 7-8 years ago, "don't pay off your house, invest instead". That's just bull... My loan was at 6% back then, which was a good rate, and fortunately I ignored his advice. Obviously, the stock market didn't provided a consistent return during that time, so paying off the house was a much better move.
I paid my house off in 8 years, and saved about $70K in interest (on a 100K loan). Now, I can save the money that I would have been spending on my mortgage, and invest that. I'm only 43 years old, so I've got time.
The key to remember is that all of these 'investment advisors' are basically just 'historians'. That is, they look at the historical returns of the market and compare that to your real-world guaranteed interest rate, which is a bogus comparison. The only way they can say for sure which is a better investment is to offer you a guaranteed-return on your money, which none of them do.
Greece near default and threatening to bring down the Euro.
Italy and Portugal in not much better shape.
Iran threatening everyone and Israel about to take them up on it (imagine the rise in gas with an Israeli bombing of Iran).
Practically every Muslim state in some level of Turmoil or out right war (Oil/Gas again)
A China facing a housing bubble.
etc, etc, etc
With this in mind, how can anyone bet on a stock market that will average over 5%. Especially when most people have no clue how to really invest properly
Take the guaranteed return on the 15 yr fixed (on my 300k home it saves us 150k to take a 15 yr fixed than a 30 yr fixed)
Then when you have a paid off home in 15 yrs your only cost to keep a roof over your head is Taxes and Maintenance. A paid off home may not be a great "investment" but it is one heck of a hedge against inflation.