I wrote a post a long while ago … actually, it was my 5th-ever post – some say that I should have stopped there 😉 – about the classic Rent or Buy dilemma for your own home … and, I just (!) received an interesting comment to that Post from Joy:
That’s the silliest thing I’ve ever heard – borrow against your house (aquire more debt) to invest??? Paying off your house early and being debt-free allows you to do whatever you want with your income, THAT’s truly the way to wealth.
Now, Joy is not alone: I recently read a post by Boston Gal on her blog that talks about Suze Orman’s advice which also is to pay off your home loan early:
Believe me, I have thought about trying to pay off my mortgage early. But since I have an investment condo which is mortgage free (yeah! paid that one off in 2007) I have been a bit hesitant to use my current excess cash to pay extra toward my primary home’s principal.
Now, this sparked a whole series of comments, including this comment from ‘Chris in Boston’ who said:
This is interesting. Usually you hear from personal finance people that its best to take on the longest fixed rate mortgage you can afford. This allows you to tie up as little cash in a non liquid asset as possible (slowly building equity). Also allows you to protect that pile of cash from the effects of inflation. The house is bought in today’s dollars and paid off over 30 years in today’s dollars.
Sure, when you own a property you have to compare it to owning any other investment – cost/benefit; risk/reward; all the usual stuff. You also need to compare the costs of holding it (including interest) against the costs of investing elsewhere.
But, this last piece in Chris’ comment is THE critical point: “the house is bought in today’s dollars and paid off over 30 years in today’s dollars”.
You see, the one thing that makes owing a property, even your own home, very different to any other investment is that it can be easily financed … almost completely (remember the sub-prime crisis?).
This leads to a whole swag of benefits that I don’t think that you can get anywhere else … benefits that simply cannot be ignored by the typical saver / investor.
Here’s why …
When you mortgage a house, you and the bank enter into a partnership (typically the bank is an 80% partner and you are a 20% partner going in), but you are not in the same position:
1. You have access to ALL of the upside … so as inflation and market conditions push the value of the property upward over time, you gain 100% of the increase, the bank gets none of it.
Let’s say you buy a property for $100,000 today; you put in $20,000 deposit and the bank puts in $80,000 as an interest-only loan (forget closing costs for now) … in 20 years, if it doubles to $200,000, your share of the ‘partnership’ is now $120,000 and the bank’s is still $80,000.
You are now 60/40 majority owner of the real-estate venture! In fact, even as 20% ‘owner’ you have total control over all the decisions related to the real-estate – as long as you pay the bank on time.
2. Sure you pay the bank interest on their $80,000 share … but this is fixed (you did take out a fixed interest rate, didn’t you?!).
At 8% interest rate that’s approximately $6,400 per year … this year.
Why only this year? Because the same inflation that is increasing the value of the house (and you get to keep 100% of that increase) also decreases the effective amount that you pay to the bank; as each year goes by, the bank gets less and less in real dollars and your salary goes up.
The price of bread, milk and gas may go up, but the bank’s interest rate never will because it’s fixed!
3. You either get 100% of the value for the payments that you make to the bank (call it ‘rent avoidance’ if you live in the property) or you take 100% of the income if you decide to rent it out … all as 20% minority ‘partner’ going in. The bank on the other hand, gets their $6,400 and ONLY their $6,400.
4. The government gives you tax breaks and incentives to do all of this!
Here is my advice …
Look at everything that you own as a business: if it’s your own home, separate the ownership of the property in your mind from it’s use …
… for example, even if it’s your own home, treat yourself as your own tenant and figure the rent that you would otherwise had to pay when doing the sums.
Then evaluate the investment against any other investment or ‘business’ … and ask yourself:
– What ‘business’ gives you pretty damn close to 100% control for only 20% initial investment?
– What ‘business’ lets you in for only 20% initial investment, but then gives you all of the upside?
– What ‘business’ gives you only one-time multiplier on your initial investment on the downside but a five-time multiplier on the upside?
– What ‘business’ grows in your favor (and not your “partner’s” favor) merely by the effects of inflation?
By all means, pay off you mortgage and your lines of credit as you reach your financial goals and are set to retire …. you have plenty of money and just don’t need the stress, right?
But, if you’re still trying to get rich(er) quick(er)?
If you own a home, don’t pay it off … use the upside to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ‘businesses’ …
If you have other sources of income (businesses, investments) don’t spend it or reinvest all of it … use some of the spare cash to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ‘businesses’ …
That’s my advice to you, and to Joy, but only take it if you want to be rich!
Of course this is good advice in principle as mortgage interest in the US and student loan interest are low and often tax advantaged sources of finance (how about a post on paying off student loans? :)). The question is how much to pay down before slowing or stopping the repayment. Is a 20% cushion enough or would a 50% LVR be better and more comfortable for most people when investing in other risky things? And then there is the whole question of discipline and knowledge. A large proportion of people out there would be better off to pay down their mortgage than invest the money in dumb bad investments or end up spending it due to lack of discipline. If you are reasonably investment savvy and disciplined, of course it is usually the right way to go.
@ Moom – Thoughtful response … thanks! My point is that you are either in GROWTH phase or in INCOME phase. In Growth Phase, for most educated investors, the optimum strategy is to leverage as much as you can … I don’t, but then again, I am no longer in Growth Phase (when I was, I was always a couple of steps from broke … that’s the risk of super-high leverage).
AJC, if you borrow 80,000 for a 100,000 dollar house, would it be correct to wait until you only owed 60,000 to borrow against the house or should it be sooner?
I found this post a thought provoking, and I agree that there are a lot of incentives for home ownership – tax breaks, available leverage, etc. I had already decided not to pre-pay my mortgage and this post reinforced that decision.
I would like to learn more about investing in real estate, but from my limited knowledge I see several reasons to not invest in real estate vs. investing in a Real Estate Investment Trust (REIT).
#1> My understanding is that the tax benefits for investment properties are not as good as one’s primary residence. Is there any way to purchase investment real estate in a tax sheltered account?
#2> My understanding is that the interest rates on loans are generally higher (1-2 %?).
#3> Potential Cash flow problems- If you can’t get tenants, repairs, etc.
#4> A single house isn’t very diversified and requires a large minimum investment- while a REIT is diversified and can be purchased with relatively small amounts.
#5> Liquidity- It’s VERY expensive to buy or sell a house and is all or nothing prospect.
I would love to see a post that discusses these issues.
-Rick Francis
@ Joshua – if the house is to live in, then consider my 20% Rule:
http://7million7years.com/2008/04/11/applying-the-20-rule-part-i-your-house/
If an investment, the general principle is to borrow more, not less IF you can stand the heat … if not, get out of the kitchen 😉
@ Rick – A professional (perhaps an accountant) can help you with #1, but tax advantages should be BETTER with an investment (e.g. no cap on tax-deduction on loan amount). #4 are different investments (I will post on this) – one is a business (you can borrow, etc.), the other is a passive investment; #2, #3, #5 are all correct and may be reasons why YOU should / should not invest in real-estate.
AJC – I completely understand and agree with your concept. I think the reason why you and Suze Orman differ is because you target a different group, or have a different approach.
You talk much more about leverage. Suze Orman wants to get people to stop buying frivolous things and instead pay down debt (because most people are buying junk and creating more of it).
While anybody can start a business, a rental, etc. There are people who don’t have the ambition or the stomach for it. The concept of leverage and more involved ways of wealth appreciation get lost on those people.
The point that needs to be made is, if you aren’t going to leverage that debt properly to grow wealth, then paying it off is better than buying useless things. Perhaps for some people we need to focus on getting them to be frugal spenders first, and then wealth builders later.
I would also note that I think paying off mortgage debt should rank much lower than other investments in reducing higher cost debt, a business (including rentals) or retirement accounts. But for some people, putting an extra $100 towards a mortgage is a great way for them to start being more financial considerate.
@ Chris – I have a different view: NOT doing what I suggest is the most risky thing that anyone who wants at least some semblance of a comfortable retirement can do … I will do a f/u post to explain why.
Hello- New reader here (just subscribed to RSS feed) so please don’t roast me too hard for not getting the angle.
The *security* of owning your home has to count for something… surely we should put a value on that? I’m not suggesting that people pay off their house at the expense of saving for retirement but paying off the house (primary residence) doesn’t seem like a bad idea to me. Being a couple steps from broke seems like a very scarey place to be if you should have cash flow problems (ie, you lose your primary job).
Re: Tax deductions- I’d rather avoid the interest because the interest is more than you’d save with tax deductions on a yearly basis. If you really want the tax deduction, give the money you would pay in interest to the bank to a charity. At least you’re helping somebody and it doesn’t involve them buying a new boat.
Hi AJC,
Your post is thought provoking. I actually used my entire cash savings to 100% buy an overseas property where I’ve been living and working the last 3 years- it was about $180K USD and this was the preferred option as it’s hard for foreigners to get a loan and overseas the interest is not tax deductible. Well that accidentally turned out to be the best financial decision of my life. Why? Because the property value went up in the last 3 years while the US dollar fell hard against several Asian currencies… so the place is now about $290K. Also the last 3 years I saved all my disposable income (but held the majority in cash for looking for bargain) and the cash flow situation was just fantastic.
Some things to consider- a mortgage payment doesn’t increase over time but things like property tax and insurance have been increasing… a lot. HOA fees (if applicable) can go up the same way.
Also in many places in the West a mortgage payment plus taxes and insurance is 2-3 times the value of renting even if you put down a 20% payment. This tells me the fundamentals are really out of order. For my condo the equivalent monthly rent is $1700 USD, a fair value for a $180K purchase price and this represents a solid return on investment.
The one argument for paying off your mortgage is if you earn enough money you don’t get the interest deduction tax break (AMT eats this up). So if your mortgage is about 7% paying this off early is as good as an after tax return of 7% in your pocket. The fact that we just went through a huge asset bubble in housing further complicates the analysis.
-BC
@ Obsolete – LOL … I HOPE that I don’t come across as a ‘roaster’ 🙂
Great comments: owning your own home is not a smart FINANCIAL decision, yet it’s one that I actively encourage people to make for exactly the EMOTIONAL reasons that you state:
http://7million7years.com/2008/01/28/should-you-rent-or-buy/
But, that does NOT mean that you should own the property outright … there is far more REAL SECURITY in knowing that you will retire with enough to live off than there is in the FALSE SECURITY of having ‘just’ $1 Mill net worth in, say, 20 years (usually wrapped up in your home ownership):
http://7million7years.com/2008/02/28/is-your-home-an-asset-a-simple-question-with-a-not-so-simple-answer/
But, I’m not out to change EVERYBODY’s view … only SOME people’s: those who want to become Rich(er) Quick(er) 😉
@ Cheese – You are the exception that proves the rule 🙂 Well done! Now, how will you leverage that $290k … it won’t buy that many enchiladas if you don’t find a way to rapidly 9but, safely) grow it!
BTW: we borrow for the leverage it gives us i.e. it multiplies our winnings (unfortunately, also our losses!); any potential tax deduction is a BONUS, it should NEVER be the REASON to invest.
I think it all depends on a person risk tolerance.
Some people just love the security of a paid for home. I just think either way is OK.
I just would not suggest someone scraping by just to pay off their mortgage. Forcing themselves to live frugally
@ MoneyMonk – Excellent observation … ever read Catch 22?
The ‘catch 22’ here is that the very thing that these people THINK will make them secure (e.g. paying off their home loan) actually makes them much less so, in the long-term.
If it wasn’t counterintuitive EVERYBODY would be rich and I’d be sipping Pina Coladas on the beach instead of writing my blog … not AS WELL AS 😉
This video was suggested from one of my posts and I think it gives a pretty good example of your premise. This is Douglas Andrew, author of Missed Fortune…
[youtube=http://www.youtube.com/watch?v=xvckL1VMGe8&hl=en]
Hi AJC,
Believe it or not I’m following your rule- the $290 K value of my property is only about 20 – 25% of my entire net worth. Most of this was earned over the last 2-3 years with the great cash flow. Only thing is that I’m not leveraging that money right now – not yet anyway. Just looking for a business or venture or investment that seems right. I’m nearly 35 so a net worth of 1.3M isn’t too bad right? I am stuck with Warren Buffett’s rule #1… don’t lose money. And therefore I’m pretty conservative in my investments.
I forgot to mention the best part of the overseas condo. In my job as an ex-pat in a senior mgmt role I was receiving a housing allowance of nearly $4K/month on top of my salary… and this was extra cash coming in as I fully owned the place! Sadly the 2 year assignment that brought me here is ending (nothing good lasts forever!) so I’m looking for another job in the area, or will sell the place and move on. The one thing I appreciate is that through full real ownership (no property taxes out here) my monthly expenses are really rock bottom. About $1000 per month all in. Granted it’s just the wife and I but still that’s comforting to have a low burn rate. In theory I have more than 1000 months living expenses but I’m too young to hang it up just yet… want to enjoy some more career challenges.
-BC
@ Jim – Tx for video, Jim. I presume that they cut a heap out …coz I spotted a couple of doozies!
@ Cheese – Sounds like you are doing well … what is your next target ($ by when)? That will tell you if u’r on track or not.
I, too own a house outright, but I took a 80% HELOC to invest in stocks. I’ll tell you about my new, even more brazen attempt to break my 20% Rule in an upcoming post …
nice blog i agree with you too. its nice to have someone sharing same thoughts
[link removed]
thanks
AJC,
Would like to read your next post on your 80% HELOC – your blog is very inspiring to me.
Strangely I haven’t put out a goal in writing but I really should. I’d like to hit a net worth of $3 Million by age 40 and then 6 million by age 45 and 12 million by age 50. That means I have to get cracking at investing at a higher rate of return or simply earning more or a combination thereof. Now I’m looking for another job and realize income may not be realized for some time. I do think being an owner of a successful business would be the next step to serious wealth accumulation. I’ve had plenty of experience making my employer rich as I was the Managing Director of a $40 million dollar operation and delivered growth & profits well above expectations. If that would have been personally banked I’d be telling a much sweeter story.
-BC
@ Big Cheese – when you’re working as CEO of YOU Inc. it’s Same Pain More Gain 😉 Have you checked out 7m7y.com?
AJC… I know. I just need the wherewithal to find a business I can handle and take it on. So far nothing found but I’m looking. 🙂
Today’s historically low interest rates make it far less beneficial to pre-pay mortgages than it ever was anyway. I two mortgages right at 6%, and they’re tax advantaged on top of that! It is almost laughable for me to prepay those loans, especially given my young age and the fact that I’m not even maxing tax-advantaged retirement accounts. You probably won’t even beat inflation with that “investment” over the next decade or so.
On another note, my goal has long been to reach $1MM (net worth, not assets) by age 30 – which is under 6 years away for me. I’ve been working actively towards the goal for over a year now, so if I reach it it will have been $1MM in 7yrs. Not nearly as impressive as 7MM in 7 yrs, but that’s if I do it the most conservative way possible with minimal risk and leverage. If all goes according to that plan (which primarily involves utilizing real estate leverage) I will reach $2MM by 35 and then more than double it again by 40…of course that’s almost 2 decades away. Maybe I should look into ramping up my plan with some risk!
@ Meg – Sounds great! Suggest that you work backwards: how much income do you need (forget inflation for now, just use today’s dollars) and by when (figure costs of family, college, travel, etc.) … no more work for you OR hubbie from then on!
OK, then double that amount for every 20 years until The Date (that accounts for 4% inflation) … and, multiply by 20 to get The Number – that’s your Net Worth target (assuming that you also obey the 20% Rule).
Now, do you need to ramp up your plan with some risk, or not?!
Retirement Planning Made Easy! 🙂
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Strikes me that this is true for certain kinds of real estate but not all real estate–it really only applies to houses whose value realistically can be expected to appreciate significantly over time–and for specific times of your life.
As you approach retirement, I would argue, it’s in your interest to pay off the mortgage or to get yourself into a smaller house that you can pay for outright with the equity accrued in the palace you’ve lived in during your earning years. When I retire, which will be soon, my income off income & Social Security will barely cover my living expenses, assuming I cut back my lifestyle to some degree. It certainly would not cover a mortgage.
As a matter of fact, on what I’m earning right now, my lifestyle would be seriously pinched if I had to make mortgage or rent payments. I paid off my house with the proceeds of an investment and a book contract when I realized, about 12 years ago, that when the alimony ran out my fairly modest mortgage payment would consume over half my salary as a college professor, a salary that JUST covered my daily needs. It was obvious that I couldn’t afford to stay in my home–or rent in a decent apartment complex–and pay the bills out of cash flow.
@ Funny – two times NOT to do this: one you need the income not the appreciation (although, you can usually juggle things for a little of both) OR you don’t have enough ‘landing strip’ … you need TIME (decade/s) to make this work. That may (or may not) exclude retirees, or those close to it … see an unbiased financial advisor who understands real-estate as well as the usual.
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So, if you had paid off your house, you would borrow 80 % against it to speculate in the stock market?
Now you have a house payment, and your income from stocks is taxed. When you own your house outright, you are getting the rent equivalent tax free.
@ Bruce – Don’t confuse income with leveraging capital growth; the former is nice (while it lasts), the latter can make you rich.
Actually, what I recommend is that you use the released funds to purchase buy-and-hold, income-producing real-estate.
What I DO is a little different: I use transfer the funds to my online brokerage and margin-borrow to the maximum THEN invest in stocks … I’m double-leveraged (hence, carrying double-risk). But, I only recommend this under two circumstances:
1. You are aggressively trying to build wealth and are preapred to carry some risk (Making Money 101 habits in place, working on Making Money 201), OR
2. As in my case, you are ‘playing’ with a very small proportion of your portfolio and can stand the potential losses (Making Money 301).
I might have missed something but why then did you pay off your house to ultimately use a HELOC for levergage?
@ RDiN – I paid cash for the house. 🙂
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I think you have to ask yourself are you willing to pay 8% to use the money to make investment elsewhere. Let’s say you are paying 8% for 30 years (the first years all you are doing is paying interest not principal).
So ask yourself what return are you getting on your investment by paying this 8%? Most the stock market is running about 12% over any 5 year period so not you are effectively receiving a 4% gain (12-8=4) But that doesn’t count any taxes you pay on the investment returns nor inflation and your 4% is wiped out. Not to mention should Mr. Murphy come calling.
Now let’s look at this scenario. You pay the loan off in 10 years (it can be done) @ that point I’m investing receiving 12% on my investments – tax of course + what I was paying to the bank for the privilege of living in my house. Not only will I be able to invest way more than on your plan, but I would be very well hedged against any visits by Murphy.
Debt is the great deception told to this country. It is not good and takes away your greatest wealth building tool (your income).
@ Alvin – Thanks for your thoughts; I guess that you’ll like today’s post even less 😉
http://7million7years.com/2008/06/16/hitting-suze-orman-out-of-the-ball-park/
It’s my hypothesis that most people following the Alvin Plan ( a.k.a. Dave Ramsey’s ‘baby steps’ ) will be living in their retirement ‘nest egg’, instead of OFF their retirement nest egg … a.k.a. ‘house rich / cash poor’.
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I have to completely disagree with your assessment here. The whole strategy here depends on one key aspect: successful investing.
I think in the past this may have been a safe bet, but I don’t think the stock market functions the way it traditionally has in previous decades. If you were to have performed this strategy from January of 2000, you may have lost money in the market and you’d be paying that extra interest you could’ve avoided by putting more down or making prepayments. If you started in Jan ’04, you’d only have broke even. Of course this all really depends on how much money you put into the market and when you did it. Timing is everything.
The “guarenteed long term stock market return” is now a thing of the past. That is old school thinking. Now the market is a volatile place, and you are not guaranteed yearly returns (even on average). The swings are just too large. You may end up buying at what will become a 3 year high (or a 3 year low).
Most Americans will not be successful investors. The wealthy investors will become wealthy due to superior skill. They will, on average, make profits. In order to perpetuate cycles, people are also going to have to lose money. This will most likely be your average Joe using his etrade account to day trade, or whimsically buy AAPL or INTC because he likes the products.
For your average person, it will yield far better results to aggressively pay of their mortgage, and put a decent amount of money towards paying it off. Over time, this will save them a lot of money. “today’s dollars vs tomorrow’s dollars doesn’t matter”. You’ll have more cash tomorrow if you spend less of today’s on interest. The only exception would be
a) if you could get a bank or cd rate higher than your mortgage rate..
b) Your house appreciates in value by a good margin
Situation (A) is unlikely to happen within the next 5 years (assuming you just purchased your house) and as for (B).. currently the previously reliable returns from real estate are going to be greatly diminished due to overpriced housing costs..
In conclusion, unless you are a very saavy investor, pay off your debt.
@ Nick – or, c) You can find an investment that you like/understand that should exceed the returns from your bak mortgage.
Nick, you’re either an investor, or you’re not: if you are you will find your “c)” and, over the long-term it will perform as you expect (give or take the usual market fluctuations on the day you buy v the day you sell) … if not, then you are not an investor, put aside any thoughts of getting rich and choose b/w your a) and b). Thanks! 🙂
Well, I think that goes along with what I said in my previous post. It all hinges on whether or not you will be able to invest successfully or not.
I’m not saying that what you are proposing won’t work, provided you can invest successfully.. Quite the contrary, it makes perfect sense provided you can turn a reasonable profit investing.
My point is simply that this in not a given, nor is it necessarily a likely outcome. I do a decent amount of investing myself, and while I don’t claim to be a master of the trade, I do well. That doesn’t change the fact that I don’t know how my investments will turn out. Everything could go horribly wrong, and I could end up taking quite a hit… or it could go really well and I could make a killing.
I don’t think anyone really knows for sure how well their investments will perform. I think anyone who does is either lying or fooling themselves. It is all about managing risk.
Putting a sizable portion of your cash as a down payment, and making prepayments to pay off your mortgage, is very good way to minimize risk. You end up with lower monthly obligations, less debt, more equity… Of course, this means less free money to invest and less money making potential..
Once again though, risk management philosophy comes into play. Is your primary residence something you want to take the risk with? In today’s market, putting less down, and making lower payments would turn out to be a very costly mistake if your investments don’t net the return you wanted (you’ll be stuck paying up to hundreds of thousand of dollars more in interest over time).. and this is only assuming you merely break even on the money you invested (and are not in the red).
I think everyone’s long term plan involves moving to a nicer house in a nicer area. This is something perfectly attainable by playing this situation safe. IMO, it is dangerous to put such basic life plans on the chopping block. I think this is how people could potentially get into serious trouble.
Now, don’t get me wrong. I’m not saying that you should immediately put any money you have towards prepayments, or you should put all your money down on that new house. I’m saying that you need to carefully balance this based on your confidence about making good investments and the amount of risk you are willing to take. In other words, I think its foolish for just about anyone to put very little down and not make prepayments when they can (i.e. tax return time, or portions of a raise). I think its equally foolish to put ALL of your money towards prepayment and down payment.
Make no mistake, that large down payment is a very good protection plan when you lose your job, your wife has a kid, or you encounter some medical emergency. Those lower monthly payments make things more manageable and prevent you from being overrun with debt.
A prepayment of only $300 a month on a $350,000 principal can save you well over a hundred thousand dollars in interest over 30 years. That money goes straight into your bank account or investments when your mortgage is paid off early.
These items are your safety net… and that’s part of good risk management isn’t it? To maximize gains and minimize risks. You can’t just focus on maximizing gains – you need to protect against potential pit falls as well.
By all means have your money work for you, and try to get investments that produce greater returns than your mortgage rate… but start off by minimizing your monthly payment (sizable down payment) and put a good effort in to pay your house off early (prepayments)… You know, just in case those investments don’t work out.
@ Nick – If we consider that a 6% mortgage is realy ‘equivalent’ to an ‘investment’ that returns 8% (because paying down your mortgage is not taxable) then if you compare that to an investment that earns, say, 15% then what is the difference? TRIPLE the returns …
Now, if the ‘soft benefits’ that you state are worth losing triple returns, then pay down your mortgage early.
What investment returns 15% may ask? Simple: try comparing leveraged (i.e. includes initial borrowings) RE investment to a non-leveraged (because you are busy trying to pay it down) home.
Sure.. but, again, the returns are not guaranteed.
Just ask Lehman brothers and Merrill Lynch how their leveraged investments worked out for them.
I’m not sure what your position here really is… I would hope we both recognize that there is a notable amount of risk involved in such methods… and in this case, what you are risking is a potential safety line involving your home.
Maybe this is acceptable risk to you, but I think that the consequences of failure need to be looked at and deeply considered…
@ Nick – My point is that your relative loss is equally ‘guaranteed’ … check today’s post on ‘relative risk’ v ‘absolute risk’ then let me know what you think.
Well, I read your newest post and it seemed relatively well thought out… I agree with much of it…
However, I still think we may be talking about slightly different things here. I disagreed with this article because it seemed to be referring to your primary residence.
Now, if we are talking about a second property designed for income, I’d tend to deal with it more aggressively. I WOULD commit my money to other areas, and would NOT pay off the debt on this property in an aggressive manner. If my other investments failed, all it amounts to is a failed investment. If I did a poor job handling funds (failing with other investments), and felt that owning the property was against my best interest, I could just sell it and maybe start over again later on after recouping.
That isn’t a bad idea at all… but if we are talking about your primary residence, I think you have to treat it differently. You can’t think of this as any other investment. If you manage this property’s financials poorly the consequences can be far worse and far more damning.
In this case, I think “technical risk” is the only one you should be concerned about – its all there really is in this case. To use your analogy (slightly modified), if your trying to get out of the situation alive, it is still very risky to jump from building to building. Just because you want to get to the top of the next building in under 5 minutes, and not jumping isn’t aggressive enough to meet this goal, being dead will inevitably lead to a greater failure than being too slow. You’d need a net there in case things don’t go your way in order for jumping to become a tenable option. You want to avoid all situations where you end up “dead” (or close to it).
In short, I think the gist of what I’m saying is that you want to greatly reduce the risk of being royally screwed in 30 years. You want to ensure that there is some minimum baseline of success… Not being as well off as you hoped will always trump being in a miserable condition. This is why I’d personally shy away from taking many technical risks with my primary residence. For just about everything else, you should be as aggressive as you see fit.
@ Nick – Can you achieve your financial goals at the same time as paying off your mortgage quicker? It’s possible (hell, I did it), but not likely … if not, how important are your financial goals to you?
I don’t see the two as mutually exclusive (As long as you are living within your means). Of course, if you buy a $700,000 house with a household income of only $100,000 a year, then you probably are pretty bad at the whole financial planning thing and should just stop there.
I think you should be able to put away a healthy amount of money per month, and then do what you want with that money (invest it, put it in a bank, etc). As time goes on, you should start making more and have have more flexibility. At this point it shouldn’t be too hard do both – prepay and put away money to invest or save.
You probably shouldn’t devote all your money to one or the other… some should go to prepayment… at least that is my opinion.
@ Nick – I have a simple rule of thumb: you should have no more than 20% of your net worth in your house. Why? So that you ensure that you are always having at least 75% (allowing 5% for all the other ‘stuff’ in your life) INVESTED at higher rates of return than your mortgage interest is likely to incur (and, preferably leveraged to increase returns even further).
In addition to this ‘rule’, we add that no more than 25% of your Net income should go into paying your mortgage.
These are really the two critical rules … IF you want to get rich(er) quick(er), but it’s really up to you 🙂