Final say on mortgage vs stock market - cougarguard.com — unofficial BYU Cougars / LDS sports, football, basketball forum and message board

jay santos · 06-13-2007, 03:33 PM

Bottom line is ...

Is your expected return greater than your effective mortgage interest rate?

Effective interest rate can be 3-5% based on recent years interest rates, with your tax savings applied.

Stock market returns average 11% over last 50 years. Apply capital gains tax to lower it a bit.

There is no NPV analysis you can do with today's numbers on these assumptions to show paying off mortgage is right thing to do (ignoring risk).

Financially (excluding moral issues like GBH's counsel), there are two more issues to be aware of.

1. Stock market returns the next 20 or 30 years may not match the 11%. The pessimists claim the 11% is due to a. normal returns of 3-5% above inflation + b. a growth in PE ratios which will not endure. So if you're conservative you might use something like 7-8% for future stock market returns.

2. Risk. 11% or 8% or whatever is an AVERAGE. That means it could be 14 and it could be 2. You might be five years into it and your return might be -30% and you need some cash. If it's in your home, a home equity loan pulls it out. If it's in the stock market it might be gone.

Personally, I'm young and can handle risk and I maximize my home loan as much as possible and invest in the stock market.

nikuman · 06-13-2007, 03:50 PM

Quote:

Originally Posted by jay santos

Personally, I'm young and can handle risk and I maximize my home loan as much as possible and invest in the stock market.

I'm admittedly not the most sophisticated investor, but this is my view too. I'm young and I can wait out the valleys in the stock market.

BYU71 · 06-13-2007, 03:57 PM

Definitely a good starting point when making an analysis. I don't know if I would use the effective rate of return which means taking taxes into consideration. Too many variables. Tax rate now vs later vs capital gains, etc.

Just use the mortgage rate vs expected ROR on using the money for investing.

After that you really need to consider personal things. A lot of people say they can handle risk. They invest for 5 years and then the market tanks 20-30%. Now they can't handle it. They sell out at a loss never to venture in again or at least until the market peaks again.

Investing involves so much more than the numbers. The psychology of the investor has a huge role in whether a strategy will be successful or not.

FMCoug · 06-13-2007, 03:58 PM

The other thing that has not been discussed here is liquidity. The stock market is highly liquid, RE is not. So that's another point to look at.

BYU71 · 06-13-2007, 04:11 PM

True if you are discussing the pro's and con's of each investment. However if the discussion is on paying off the mortgage or investing, a fully paid off house is very liquid. Just go get a line of credit against the house.

cougjunkie · 06-13-2007, 05:12 PM

BYU71 was the minimum amount you will accept from a client for you to take on.

MikeWaters · 06-13-2007, 05:21 PM

Quote:

Originally Posted by cougjunkie

BYU71 was the minimum amount you will accept from a client for you to take on.

after the deal you talked about, you will be golden in terms of BYU71 taking you on.

cougjunkie · 06-13-2007, 06:13 PM

I have a feeling even that is not enough for him.

06-13-2007, 03:33 PM	#1
jay santos Senior Member Join Date: Jan 2006 Posts: 6,177	Final say on mortgage vs stock market Bottom line is ... Is your expected return greater than your effective mortgage interest rate? Effective interest rate can be 3-5% based on recent years interest rates, with your tax savings applied. Stock market returns average 11% over last 50 years. Apply capital gains tax to lower it a bit. There is no NPV analysis you can do with today's numbers on these assumptions to show paying off mortgage is right thing to do (ignoring risk). Financially (excluding moral issues like GBH's counsel), there are two more issues to be aware of. 1. Stock market returns the next 20 or 30 years may not match the 11%. The pessimists claim the 11% is due to a. normal returns of 3-5% above inflation + b. a growth in PE ratios which will not endure. So if you're conservative you might use something like 7-8% for future stock market returns. 2. Risk. 11% or 8% or whatever is an AVERAGE. That means it could be 14 and it could be 2. You might be five years into it and your return might be -30% and you need some cash. If it's in your home, a home equity loan pulls it out. If it's in the stock market it might be gone. Personally, I'm young and can handle risk and I maximize my home loan as much as possible and invest in the stock market.

06-13-2007, 05:12 PM	#6
cougjunkie Senior Member Join Date: Jan 2006 Location: Utah Posts: 5,741	BYU71 was the minimum amount you will accept from a client for you to take on. __________________ LINCECUM!

06-13-2007, 06:13 PM	#8
cougjunkie Senior Member Join Date: Jan 2006 Location: Utah Posts: 5,741	I have a feeling even that is not enough for him. __________________ LINCECUM!

06-13-2007, 03:57 PM	#3
BYU71 Senior Member Join Date: Jan 2006 Posts: 5,084	Definitely a good starting point when making an analysis. I don't know if I would use the effective rate of return which means taking taxes into consideration. Too many variables. Tax rate now vs later vs capital gains, etc. Just use the mortgage rate vs expected ROR on using the money for investing. After that you really need to consider personal things. A lot of people say they can handle risk. They invest for 5 years and then the market tanks 20-30%. Now they can't handle it. They sell out at a loss never to venture in again or at least until the market peaks again. Investing involves so much more than the numbers. The psychology of the investor has a huge role in whether a strategy will be successful or not.

06-13-2007, 03:58 PM	#4
FMCoug Senior Member Join Date: Jan 2006 Location: Kaysville, UT Posts: 3,151	The other thing that has not been discussed here is liquidity. The stock market is highly liquid, RE is not. So that's another point to look at.

06-13-2007, 04:11 PM	#5
BYU71 Senior Member Join Date: Jan 2006 Posts: 5,084	True if you are discussing the pro's and con's of each investment. However if the discussion is on paying off the mortgage or investing, a fully paid off house is very liquid. Just go get a line of credit against the house.