In a 30% tax bracket, your mortgage is costing you 4.375 So if you pay off the home you are getting 4.375 return for your money, do you think you can do better than that investing the money on your own?
you're not comparing apples to apples. This is what I want: 200,000 in real estate 200,000 in stocks I have 200,000 dollars, so I would need to borrow another 200,000 do I borrow the money w/ my real estate loan @ 6.25%? or do I borrow the money in the market @ 3%? you would think borrow money @ 3%, but there are a couple of issues present. I'm starting to realize that this thread is going nowhere.
Consider Instynct's point. And also recognize that to a first approximation your real mortgage rate = rate - rate of inflation. Think of it this way. Suppose you borrow $100 at 6% with the interest due up front and the principle due in one year and the inflation rate is 10%. You borrowed $100 of buying power and you returned 6$ of buying power as interest. At the end of the year, because of inflation, an asset that cost $100 when you borrowed the money now costs $110, but you only pay back the original $100. Your lender is out 10$ of purchasing power. Your real cost of the money you borrowed is 6% minus 10% or negative 4%. The lender has in effect paid you 4% (in buying power) to use his money. That's way you should take into account the inflation rate when deciding whether to pay off a fixed rate mortgage. Assuming your nominal rate is 6.25% and fixed, and with your mortgage deduction is effectively 4.375 %. Then as long as the real inflation rate is greater than 4.375%, which it is right now, you have a negative cost of borrowing and should not pay off the loan. Stretch it out as many years as you can and pay your lender back with inflated dollars. Debtors benefit from an inflationary economic environment!
there is no gaurantee that your s&p purchase won't drop 20% in value,i wouldn,t consider buying this mrkt long term until at least october if then
It comes from the fact that the size of commodity contracts used to be (still are for some i guess) based on the amount of commodity,e.g., grain, it took to fill one railroad car.
I still don't understand how inflation matters, the question is, do you borrow money w/ your real estate loan or via the stock market, whether inflation is 20% or 1% is not a factor for this ?. I see how 6.25 goes to 4.375%, however the built interest is still deducible on a futures contract.
I am assuming you already have a fixed rate mortgage. Are you saying you don't, but you want to borrow against your house to buy stocks? That probably would not be a good idea, especially in your case, if that is what you mean. And as far as the effect of inflation on real interest rates goes, i'm sorry but i don't know how to make it any clearer. I have done my best, which i guess was not good enough in this case.