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There's a huge discussion happening both on Lifehacker and Get Rich Slowly regarding the pros and cons of paying off a mortgage early. Contrary to my own assumptions, the numbers (assuming current interest rates around 6%) seem to strongly encourage investing your money instead of paying toward your mortgage's principal.
On the one hand, you get a guaranteed outcome with paying down your mortgage. On the other, a conservative rate of return on an index fund should have no problem beating a 6% rate over the next 30 years. With the variability in people's risk-comfortability, there is no right answer here, but it's informative to hear the personal finance hackers weigh in with their opinions.
Are there any economists in the room that can explain how it's currently cheaper to borrow money and invest it elsewhere rather than to pay off debts? Why would a mortgage company ever lend money in this scenario?
Ask the Readers: Is It Better to Invest or to Prepay a Mortgage? - Link
Pay off your mortgage more quickly to save money - Link
DIY Mortgage Acceleration - Link
There are two important factors: 1) Expectations and 2) Risk. To say that it is "cheaper to borrow money and invest it elsewhere rather than to pay off debts" implies that one's expectations about the return of "elsewhere" (like the stock market) is higher than the cost of borrowing.
If a borrower expects the stock market to return 15% and can borrow for 6%, then that person will probably do so. However, if the stock market ends up dropping 10% instead, the person has not only lost the 10% drop, but the cost of borrowing (6% more). This is called risk.
Mortgage companies will lend money as they want the security of a low-risk investment (default being the primary risk) with a slightly higher return than risk-free investment options.
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another thing to remember, so long as the banks name is on deed, they actually own the house. they're just letting you live there while you pay them. if anything goes wrong, they get the house and you're S-O-L!
i don't know, maybe i'm just a low risk kind of guy, but i would rather own my own house down to the last brick and nail then put myself and my family at risk of being homeless while i try to invest. i would think if you're going to play money games, play them with secondary residences.
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