From time to time, I've had discussions with friends about whehter it's wise to invest extra cash or to payoff the house with extra cash. The argument is always: "Why wouldn't I just pay my mortgage at 5 1/2% and invest extra money to earn 10%?" That's a great question! Logically speaking, the numbers seem to suggest that earning 10% and paying 5 1/2% is the prudent way to go. I'm even prone to say that if you've got the assets to sell to pay off your house in an emergency, invest the money.
The problem with the logic is risk. I have to give Dave Ramsey credit for opening my eyes to this argument. If you could borrow money at 5 1/2% and earn 10% on it day in and day out, why not borrow twice the value of your home and invest it? What about three, four, or five times the value? Eventually, everyone says that would be silly. Why? Because once the number gets big enough, we inherently factor in the risk.
What is the risk? There is risk in borrowing and risk in investing. The times we're living through right now illustrate the risk precisely. Lots of people are losing their job, the value of the stock market has been cut in half, and the value of homes has dropped significantly. If someone who decided to invest instead of paying off their house lost their job recently, had their investments cut in half, and lives in a home that is worth less than they owe, how do they stay in their home if they can't pay the mortgage? How do they pay the mortgage without the income from a job? What do they do with the investments that are worth half of what they invested? I don't know. Personally? I think I'd rather be looking for a job in a paid for house than worrying about how long my devalued investments are going to cover my mortgage.
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Great post. I agree with your assessment. Eight years ago, after going through Crown, I cashed in some investments and paid off my house. I felt God leading my wife and I to become totally debt free. After retiring from the Navy, God called me into full time ministry at a church plant; and I am able to do it without a salary because of the decision to be debt free.
After a situation last summer with a client where I recommended they sell all their investments and pay off their mortgage (making the bank lose two clients from one person that day), I realized one more way we have been misled by the financial markets. Not only factoring risk, I actually had a retiree that when running through the numbers would save money by paying off the house. They would draw less from their IRA, reducing ordinary income taxes, reducing social security tax bracket at least to 50% if not to 0%, and making the 7.5% AGI health expense deduction hit sooner. Nothing else could be justified.
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In my own personal point of view I'd rather invest first before I pay fully for my house. Because as long as you can pay for the house you still have place to live, while a stagnant savings will be just a certain amount of cash, but if you try to find ways in doubling it up, you could be able to save more and could be able to pay for your house in advance. Now that I am into binary options, I invest just a small portion of my savings to gratify what our24optionreview.com 24option review can do to increase the value of the money I saved thru investing in binary options. Well, I am just a starter so for now I can not say I am successful with it but for the time being I am happy with the returns I am getting.
Before investing straight at lavish and stylish homes, it's essential to create a budget plan that you will be able to stick to all the way through the entire process. Finances have a way of rapidly building up, but with a spending limit, it is less likely that you will spend more than you anticipate. If your budget is not enough yet, invest first in a good trading system like binary trading 24option.com which gives high returns with average risks.
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