Originally Posted By: TrevorS
Wow. A lot of misunderstanding and false equivalences going on here.
Firstly, structuring your finances between debt and investing presupposes that you are already responsible. You don't use this to spend more than you can afford. You use it to optimize your arrangements on what you're already committed to. Your financial position is virtually no different if you own a $10 million home with no mortgage compared to having a $9m loan at say 4% and having $9m in state bonds that pay 4%. The difference is the risk on the investment but which state last went bankrupt and diversification reduces risk substantially.
Hogwash. Many/most people are irresponsible with their money, "investors" or "homeowners" or not. The savings rate is near zero or perhaps even negative, and LOTS of folks have upside down and horrid mortgage and debt situations. Thus your assumptions that people are responsible and especially "savvy" beyond just thinking that they are good investors is beyond laughable.
Originally Posted By: TrevorS
If one doesn't get that a 4%-5% mortgage with tax credits is cheap money during a time of hidden inflation and stocks with high dividends, and you don't attempt to max out your 401k instead choosing to reduce your mortgage, then you're not really looking at the facts too closely. Sure you may think the market is high at the moment and set for a correction, but check the past performance of all the funds in your 401k.
It may or may not be cheap. If you earn enough to pay AMT, then the tax advantage is even poorer than many claim. Yes, 401k does minimuze your tax exposure, but contributions are also limited... for 2014: $17,500 ($23,000 if age 50 or older). My portfolio is full of stocks yielding 8-10%, and my mortgage is 2.99%, but the sooner I can get rid of the mortgage, the sooner I can dump far larger amounts of money into the investment pool.
Originally Posted By: TrevorS
What also amazes me is those that point out the compounding on a large amount such as a mortgage makes the compounding on a small amount insignificant so it's not worth it. Poppycock, you have to start somewhere and investments that are higher compounding will by definition outgrow lower compounding investments. Just as you feel that extra hundred or so dollars makes a difference to your mortgage, it makes an even bigger difference invested. Its money in both cases. It's an investment decision in both cases. It doesn't behave differently invested in a mortgage repayment than in an investment. One gives you a lower return the other gives you a higher return. Look at the numbers I wrote out on a marginal difference from a very low risk investment option.
Nobody said that compounding wasnt powerful. Ive said it is many times. But a responsible person is already investing and manifesting a decent amount of money as return in those high yield and gaining investments. Generally for most people here, we are talking about free money after paying the first/second mortgage, bills, taxes, etc. SO were talking hundreds to thousands free money to invest or pay the mortgage with, versus multiple thousands being paid to a mortgage. Therein lies the difference. The return, or compounding if not touched, on a much smaller amount versus the continued charging of interest on a very large amount of the interest principal. That does not negate the power of the compounding, but again, were generally talking about smaller deltas in money here.
Originally Posted By: TrevorS
The argument that the amount you can invest is too small is also problematic to me. If that is the case, your mortgage is too big or your outgoings are too large. If you have a decent salary and only have $100 left over every month then it is illogical to call that amount a small amount. That small amount is your "profit", if you worked 200 hours and that is what you have left then it should be precious to you and you should treat that as a large amount that you need to optimize.
Again, nobody said this and many of us on here are very avid investors with pretty decent returns and track records. Its a matter of allocation of a little money upfront so that you can free your greatest cashflow which is the money going into the mortgage month after month.
Originally Posted By: TrevorS
Let me share my own situation a little on how this works. I have an investment property with a mortgage whose balance is currently optimized to give me as much tax free profit as possible (due to past losses). The income on this property is not as good as it could be (was not originally purchased as an investment). I also have some munis. The asset value of these two is less than my home mortgage liability. The income from both of these covers my after tax mortgage payment. I even times the muni purchases quite well and have a decent capital gain on them. Meanwhile, my investment property rises at a minimum the rate of inflation if not the rate of earnings growth for that location. The historic growth rate is 6% or so. Had I actually been looking for an investment property in that city, I would have done even better.
So by keeping a mortgage and not instead almost paying it down with two investments, I am paying the interest on the mortgage and getting 6% capital gain on top.
So despite all your financial savviness, youve taken losses before on this all. Wonderful... Have you even broken even on your losses to justify your "advice"? If youre trying to spread tax sheltering losses across multiple years, one might also play strategies a bit differently - same thing as if/when we take strategic losses on stocks. Does not mean you can broad brush that approach to everyone.
