Quote:
Originally Posted by KenKat
My rate of return on my investments since I started tracking the detail in 1999 is 7.8% per year. My 3.39% mortgage was an effective rate of around 2.5% when it was deductible. Now that interest rates have cratered and it’s no longer deductible, maybe I just pay it off with some excess cash I have accumulated.
But yes, I will defer taxes on income and invest it at 7.8%, also tax deferred, rather than pay tax on that income to pay off a 3.39% mortgage.
Same thing on the Camaro - save tax deferred and invest at 7.8%, pay interest at 2.25% (less than that when I could deduct it). I could have paid cash, but why tie up capital in an asset with no return?
I’ve heard the “would you take out a mortgage to invest it?” argument. I view a home as a consumption item, not an investment - the mortgage funded that consumption while I put that money to better use. The income from a job funded the payments on the mortgage. Now that I am approaching retirement age, the income will go down some but the mortgage will be paid off. I don’t need to borrow against the house now because all that money I didn’t put into the house has grown much faster than the value of the house.
Over the very long run, houses are typically not an asset with good return on investment. They keep up with inflation, maybe another 1% on top of that. Paying cash for a house ties up capital in an asset with a low expected return.
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If you are going to borrow against the house or refinance for the lower rate is is better to do it before you retire. Loans are based on income so with a lower income you may not qualify for a loan at all or it will be for a smaller amount.