Paying off debt is the only investment that reduces rather than increases your risk, and has no chance of loss. It also pays a tax-free return greater than treasuries or cash, and almost as good as the after-tax return on stocks (with none of the massive volatility and risk of the latter). Your savings priorities should be: 1. Build up a cash emergency fund sufficient to pay 1 year of normal living expenses plus another year of reduced living expenses. 2. Put all your additional savings and spare cash into paying off any debt, starting with the highest interest rate first, and your mortgage last. 3. Once you have paid off your entire mortgage, start putting 50% of your savings into bonds and 50% into stocks. Rebalance each year, and reduce your weighting if there is a serious market valuation bubble (e.g. 2000). As long as you have a 1-2 year cash cushion, then you should always pay off your mortgage in full before you invest any money into stocks or bonds. One great thing about paying off the mortgage is that the more you do it, the more free cashflow you have each year to pay it off even more, due to your mortgage decreasing thus cutting the monthly payment. It's a virtuous circle. The only scenario where it's good to have a mortgage is if there's high inflation. But if you see that happening, just buy an investment property to take advantage. Leverage is good in inflation, and rental property offers far more leverage ability than stocks do. A $100k apartment that goes up to 200k is a 5-fold return for someone who bought with $20k down. $20k in stocks is only going to be a double in the same scenario. Just to illustrate the point between paying down your mortgage vs investing in stocks, consider this: investing in stocks whilst you have a mortgage is identical to taking out a long-term fixed-rate margin loan to invest in stocks. Borrowing at 5-6% per annum to buy an asset with a historical 3 year return of somewhere between -89% and +120% is crazy.
paying off a fixed 5% debt is like investing in something that makes 5%. in other words, it's an awful investment. regardless of whether you like the debt-free approach to living, you should never pay off your mortgage unless you have 3 years of living expenses in liquid assets. you never know when you'll need it. getting a heloc isn't a good way to make your illiquid asset (home) more liquid, either, because the bank can freeze withdraws without warning.
You are foolish. I am sorry but all of you who believe that your Job/Business is guaranteed to last and therefore you are guaranteed to hold the mortgage for 20-30-40 years You are not bright in my opinion. Not to mention you can get sick and lose ability to work. And whole lot of other things that can happen. And your bank is counting on that to eventually take your home. You clueless masses. You think your Bank is your friend.
The bank isn't my friend but my 4.5% 30-year fixed rate mortgage is....Oh did I mention its tax deductible too? Would never consider making any extra payments never mind paying it off entirely early.
If you own a $400k home which you owe $200k on and it goes to foreclosure then you don't "lose it all". After the home is sold and the $200k mortgage is paid off you get the remainder ($200k) ... something about the story doesn't wash. Other than that I agree with the overall point Attacking Mid made - for most people paying off a low fixed-rate mortgage doesn't make financial sense. The only obvious exception is financially incompetent folks who will blow the money if they don't make the extra principle payments each month, e.g. they don't know how to save/invest - for those type of folks I guess its the best they can muster.
A huge problem is that most people buy out of their price range. People take these huge mortgages because Banks tell them its okay. This is completely wrong. They are in debt till they die. Their whole life they'll be in debt. If a person can afford 150k house. Bank lets them buy 250 k house. bank wants you as their slave FOREVER
I'm a CFP and former adjunct faculty member at The College For Financial Planning. I'd say, AM has it exactly right.
Whatever happened to personal responsibility? Banks should be motivated to not write bad loans but ultimately the decision to take out a mortgage is the made by the consumer, you can't put all the blame on the bank.
Well.... 1. Banks want to make the most on your deal, so the bigger the loan the more they make. The low rates and skulduggery to get around "qualifications" all add to bigger loans. 2. People are greedy. They saw homes as a "can't miss" investment... so the bigger house the more they expect to profit. I'm not in the camp of "the bank's primary motive is to have you as a slave forever".