[quote]VanderLaan wrote:
I am not overstretched by any means. I am just starting to think that there are better investments out there than a house. Of course one needs a house, but what do you really gain by paying it off early? Sure my house has gone up in value by about 3-4% annually. But my property taxes go up too. In comparison, the long-run average for the stock market is about 10%. So should I stick my money in my house or the stock market?
I realize this is a simple example, but I am coming around to believe that a house is something that you should buy to live in and not as an investment. I bet there are lots of real eastate speculators in Miami and California that are probably thinking the same thing.
I am curious what others think about this. [/quote]
I basically agree with you in that it doesn’t make sense to pay off a mortgage early, but there are some advantages to it that I want to point out.
First of all, the fact that your house appreciates at 3-4% annually is irrelevant to this. Those gains are all yours regardless of how much you have invested in your home.
If the interest rate on your home is high, prepaying is a good idea as you are essentially getting a gaurunteed rate of return equall to the interest rate on your home. Where else can you get a gaurunteed return of say 7%?
If you have a more reasonable rate, your return for prepaying is obviously lower, but a gaurunteed return of 6% is still pretty good. Even bonds returning 6% have some risk. Of course, if you are getting a tax deduction for the interest, this becomes less. Another thing to consider is the lack of liquidity of your home.
My advice would be (if you haven’t already) to make sure you have an 80/20 loan to value so you can get rid of private mortage insurance. If you have PMI, pay down your loan as fast as you can to get 20% in your home. This should be your #2 priority behind paying off the credit cards. If you already have 20% and your interest rate is low, don’t worry about prepaying.
As for the student loans, be sure to check the rates on them as they may be low too. If they are low then there is no reason to pay them off early either. Just invest as much as you can in an S&P 500 index fund instead. Do this first with IRA’s and 401k’s, then with taxable accounts.
Well-managed debt is not a bad thing, its the credit card debt that you should worry the most about.