…“Where is the optimal place to put my money – in my house or the stock market?” It’s about opportunity cost, but there’s no “right” answer, just decisions with their own benefits and drawbacks.”
Prepared by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money!
[Editor’s Note: This version* of the original article by Chris Reining has been edited ([ ]), restructured and abridged (…) by 53% for a FASTER – and easier – read. Please note: This complete paragraph must be included in any re-posting to avoid copyright infringement.]
“For most people, paying off a mortgage early means sleeping better at night, but sleeping better at night means giving up the potential gains from investing in stocks….
That reminds me of a story about a guy who wrote a check to pay off his $165,000 mortgage back in 2009.
- If he’d invested the $165,000 in some boring S&P 500 index fund it’d be worth about half a million today, much more than his house is worth.
- Plus, half a million can generate $20,000 per year forever based on the 4% retirement rule whereas a paid-off house forever costs money. Like Vicki Robin once told me, “A house is a place of consumption not production.”
Of course, it’d be irresponsible if I didn’t tell you the story is cherry picked. There’s been a historic bull market since 2009, and so every investor has made boatloads of money since then – and that’s the thing: you won’t know if it was better to pre-pay your mortgage or invest in stocks until you look back 30 years from now, but we have some clues to make a logical guess.
- Since 1926 the average return of the S&P 500 for all rolling 30-year periods was about 10%, with the worst being 8% so
- if you believe the future won’t be significantly different than the past, then even the worst market return will be about 4% higher than a 4% mortgage. Make sense?
This is where someone inevitably says, “Pre-paying a 4% mortgage is a guaranteed return, and 8% stock returns are anything but.” True,
- there’s no guaranteed market return,
- and no guarantee you won’t buy stocks during the good times and sell them during the bad…
In fact, that’s a great reason to pay off your mortgage early.
- If…you aren’t very good at buying stocks
- and…you aren’t a long-term investor
then , maybe it’s smarter putting money into your house. You get the peace of mind that comes from sleeping in a paid-off house, from being debt free.
If all that makes sense, here’s what the decision comes down to: you believe the market will earn a higher return than 4% and so you invest long term, or you want a guaranteed return and be debt free and so you pay off the mortgage.
One more thing…
- For a financial crisis — a job loss — you can momentarily stop contributing to retirement accounts to free up cash to pay the bills
- but if both of you lose your jobs…that’s another argument against pre-paying your mortgage…you can’t withdraw all those prepayments to make the mortgage payment, and if the bank doesn’t get their monthly check they foreclose.
- In order to access the house equity you’d have to sell the house, and [that could be] problematic if it happens to be in the middle of a housing crisis. It will always be harder to get money out of a house, an illiquid asset, than out of the stock market.
Putting money into stocks means you’re able to keep making mortgage payments for a few months — if not years — even if those investments drop by 50% or so.
People arguing whether to pay off a mortgage early or invest in stocks is probably as old as time itself. There’s no right decision, because it comes down to what you believe and value. Some people value the liquidity and higher gains that come from investing, others value being debt free and hate owing money. To each their own.”
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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In this article I highlight 10 ways to pay off your house early. You can pick out the one that suits you best, or find a way to combine multiple tips to pay off your mortgage in as little as half the time! Imagine not having a mortgage payment any longer. What would that enable you to do?…What are you waiting for?
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A note from Lorimer Wilson, owner/editor of munKNEE.com – Your KEY to Making Money!:
“Illness necessitates that I spend less time on this unique & successful site so: