Homes 'Earn' Minimum Wage or More in Almost Half the Nation's Largest Cities

[Krugminator2]

The best way to profit is paying off the mortgage. Then you no longer have that expense- giving you more money to spend on other things- giving yourself an effective raise in income.

I don't think there is anything wrong with paying off a mortgage, but it clearly isn't the "best way to profit." If you have a mortgage at 4.5% and work you get to deduct that interest, your effective interest rate is around 3%. An index fund yields around 8% over the very long run. You are far better off over your lifetime having a mortgage putting that money in equities.

[timosman]

The problem with paying off your house is after it is paid off you will want a bigger one.

[angelatc]

Not true. Not when the value of the dollar shrinks faster than the interest.

You're assuming that we're keeping that extra money in a mattress.

Let's assume we both have $100,000 cash. I buy a house for $50,000, you take out a mortgage at 5% and put $10,000 down.

Now you have $90,000 to invest, and I have $50,000. If we both invest at an 8% return, your only getting a 3% return.

[angelatc]

I don't think there is anything wrong with paying off a mortgage, but it clearly isn't the "best way to profit." If you have a mortgage at 4.5% and work you get to deduct that interest, your effective interest rate is around 3%.

The mortgage rate deduction is below the line, so the yield depends on your tax bracket.

[CaptUSA]

You're assuming that we're keeping that extra money in a mattress.

Let's assume we both have $100,000 cash. I buy a house for $50,000, you take out a mortgage at 5% and put $10,000 down.

Now you have $90,000 to invest, and I have $50,000. If we both invest at an 8% return, your only getting a 3% return.

?? I think you misunderstand. Here, let me try to explain. The question was about doubling mortgage payments to pay off your home early. Let's say we both took out a 30 year mortgage in 1990 that cost us $1000/month and let's say the interest was 5%. I'll pay my $1000/month and you pay $2000/month. Sure, you will pay off your mortgage much quicker than I will. Maybe in 10 years. Which means I'll be paying my mortgage (including interest) for 20 years longer. That's easy to see. But here's the kicker...

I took my $1000/month extra, invested it and made 8% interest on it for the first 10 years - you made nothing. I continued to invest my $1000/month for the next 20 years and made 8%, but you could now invest $2000/month for those 20 years and make that 8%! Seems like you'd probably still win, right? No. Because for the first 10 years, the dollars were worth much more. For example, $1000 in 1990 is equivalent in purchasing power to $1836.30 in 2016. https://www.officialdata.org/1990-dollars-in-2016

So during those first 10 years, I was investing more valuable dollars and was accumulating interest on the full value. By the time you got started, your dollars were already worth less. By the time I make my last payment, my $1000 will have the purchasing power of $544.60 in real terms. So, I'm already saving $455.40 in value on top of the other $1000 that I continue to invest.

By the way, this is why inflation encourages debt. You use the money while it's expensive and pay it back when it's cheap.


(Note: in this example, the interest rate was 5% and the inflation rate for that period averaged 2.36%. In order for this to work, you'd need an investment that made up more than the difference - your 8% obviously did the trick. But recently, with the low interests rates and likely higher inflation rates over the next 30 years, it makes the calculus MUCH more favorable!)

[Krugminator2]

(Note: in this example, the interest rate was 5% and the inflation rate for that period averaged 2.36%. In order for this to work, you'd need an investment that made up more than the difference - your 8% obviously did the trick. But recently, with the low interests rates and likely higher inflation rates over the next 30 years, it makes the calculus MUCH more favorable!)

It is even more favorable because mortgage interest is tax deductible AND you are either able to put more pre-tax money into a company retirement plan or a Roth if you aren't maxing those plans out. And even if you just save the money into an index fund outside of a retirement plan, most of the gains will be tax deferred and taxed at the capital gains rate when you sell, which is lower than the income tax rates.

I believe none of those are good tax policy. I would eliminate the mortgage deduction and I would tax all gains at ordinary income with a flat tax. But the law is what it is and inflation encourages the longest length mortgage.

Your whole logic on inflation encouraging a mortgage is similar to the publicity stunt Kyle Bass did a few years back. He financed his home in Yen because he thinks over the long term the Yen will be worth much less. http://www.businessinsider.com/kyle-...-in-yen-2010-1