From the article: Why Building Equity at the Expense of Liquidity Can Lead to Bankruptcy
Should the average person pay off their mortgage and debt or should they begin investing and saving more? Which is the wiser course of action in your opinion? Tell everyone your opinion and why you believe it. What Do You Think?
Opportunity cost
- It depends on your opportunity cost. If your debt interest is about 6%, and you can get a 10% return by placing that money in your business or investment funds, then go ahead. Else, just pay off the debt. And of course, if you do intend to go with investment rather than paying off debt, you need to have a cash reserve of about 1 year for that mortgage, so that in case you got retrenched, got sick, you can still manage payments of the debt. Or at least, it gives you a buffer to sell off the property.
- —Guest lokgp
But what about behavior?
- This is a nice idea on paper. I imagine there is evidence to support the positions taken about how bankers really do business? (I'm not a banker: do they all behave the way described here?). But in practice I doubt it holds water. Doesn't it seem plausible that most people paying off early make one extra payment per year (the pay-every-four-weeks plan) or just add a little each month? In those cases, how many people would actually invest that extra money? Very few, I suspect. For those who have the discipline, great.
- —Guest ThinkDeeper
Cash is King
- Don't be pressured by everyone else. People have nice things because they borrow money. Then when there is a disaster, they lose everything. Only buy what you can pay for with cash. The exception being a house. Then put down a huge down payment and pay it off quick. Houses are cheap these days and not an an asset but a liability. You will not look like a high roller, but then you will sleep better at night.
- —Guest jim
It depends
- If you can make more money investing than your mortgage rate, then yes. If your mortgage rate is higher than investing rate, then no. This is assuming you're investing in an IRA with no current taxation.
- —coveredcall
Duh????
- If you agree with the Duh! answer quit reading. Most people do not have the liquidity to get over bumps in the road and a paid off house does little good. Debt is not a bad thing is used wisely unlike some of you did with the real estate market and exotic loans. If you're with Duh!, go for it - I just think it's wrong to pay off - in today's environment cash is truly king and real estate may not provide you it.
- —Guest Randy
Pay off the mortgage!
- In the story Mary could have sold her house and helped herself out of her unfortunate situation since she only owed $15000 on it.
- —Guest Asher
It depends...
- If its your own house and the money to pay the mortgage is coming from your own pocket, better settle it AS SOON AS POSSIBLE. On the other hand, if the house is an investment and every month the rent covers the loan with positive cash flow let the business pay for the loan regardless how much we have to pay the interest on it. There's no right or wrong answer. It all depends on the situation.
- —Guest Haji Yusri
Nope - at least I won't be
- I am currently underwater on my 30yr fixed mortgage. That make me even more convinced to not throw extra money in there trying to pay it off earlier. I'd rather try to beat the interest rate by investing with it instead.
- —Guest cullinaire
Good advise!
- This article has really opened my eyes on this. It sounds counter-intuitive but it's the honest truth. The only onus on us is the dispcipline to manage our excess fund. I will do exactly what you said until my name appears in the forbe's list.
- —Guest Ussyman
Build Emergency Fund First
- I think that everyone should pay down their mortgage and debt early, but only after they have a fully funded emergency fund of 6 months expenses. It is wise to put all disposable income towards an emergency fund before paying any extra towards debt because you never know when you may need liquid funds.
- —Guest Gxrchk
Yes!
- Duh! People should pay off their mortgage. Nothing else matters but getting out of debt. I hate debt. Stop spending and start sending all extra money to the bank. Get out of debt!!!
- —Guest JimJong
