TheBonifaceOption said:howitzercannon said:
Paying off the house vs investing.
Why do people enjoy living in debt?
I would agree with not paying off the house if I could match 1:1 my mortgage payment and investing. But what I see is people saying don't pay off the house, when I can throw an extra $100-200 / month at the principal ca throwing that into the stock market.
I haven't seen the math work out where $200/month out paces a gain of my mortgage payment per month after a paid off house.
If I have a $1500/mo mtg, 15 year, when does throwing $200/mo in the market equal that payment I gain after paying the house off sooner than 15 yrs that I then can put that $1500 into the market?
Depends on your definition of "investing".
Let's say you, howitzer, had $50k to invest. You could take that $50k and throw it at some stocks or mutual funds. You have 100% equity in that $50k, you need to beat the inflation rate to keep the purchasing-power-parity (PPP) of that $50k. So you need to make 8% just to tread water with that $50k. Then you have capital gains taxes on it. (This is all assuming you make a gain on it, you may lose.)
Now let's try $50k in a second home that you want to rent. Worst case scenario, they require 20% LTV, so the biggest house you can buy is $250k (worst case), if you are creative you could get that LTV rate at 3% and you could get as big a house as you like. But let's stick to worst case:
You own $50k equity in a $250k investment, you're on the title, your assets and net worth has increased $200k. Your biggest concern is finding a tenant. But even if you can't find a tenant, you are throwing your personal income into equity (and interest) on this property. While not ideal, you are still paying for something you own. Further, home prices adjust with inflation. So you don't need to make 8% this year, the property will appreciate regardless.
Oh! And you have a depreciating asset, so you can use 1/27.5 of your properties purchase price as a write off on your taxes. That's $9.1k/year you don't pay to uncle Sam, but damn depending on your mortgage, that $9k is 3-4months of mortgage payments.
To think of it another way, the taxes on your vocational employment you are obligated to pay instead just paid 1/3rd of your annual expense on this asset--by virtue of you choosing this investment over Wall Street.
"But Dave Ramsay said mutual funds are better." Bull.
Alright so first of all… this is not how net worth works. You have a 250k asset and 200k mortgage. Your net worth the day you purchase a home is just the equity you own. You have a LEVERED return on a rental potentially… but you have not quintupled your net worth.
You also have capital gains taxes on the sale of a home and, if you are writing off depreciation… also capital gains on some of your cost basis and depreciation isn't a tax credit, it is an expense so you actually are saving 9.1k * marginal tax rate and you have a tax deferral rather than free money.