Tristan Ashby: “Re: Biweekly Mortgages. Perfect timing. I, too, almost enrolled, as an easy way to pay down my mortgage. But the kicker was even worse. They wanted to charge me $335 to start off AND $36 a year (or something very close, I can’t remember exactly). Since my mortgage is only $750 a month, I figured I would be better off just to pre-pay the extra $360 today and be done with it. Besides, my mortgage company already makes it easy to pre-pay by offering an extra line with the payment coupon.”
Stephen Gilbert: “There’s a great website that shows the effect of changes in your mortgage payments. Want to add nine dollars a month? You can instantly see the change in your loan term — graphically and with numbers. See: drcalculator.com/mortgage/ .”
Bill Kistler: “Ok, I got the idea on biweekly loans and prepayment. But how about a new purchase of a home? Is it better to pay cash or take a mortgage assuming a 15% or 28% marginal tax rate? And at what point (interest rates/time) might one decision change the other?”
☞ The higher the tax rate, the lower the effective interest rate. And the lower the interest rate, the better to borrow for a long time — if you think you’ll own the house a long time. It’s nice to have the bank on the hook for you for 30 years at a low rate while you are on the hook to it only until you decide to pay off the loan. But there’s no magic number at which it’s suddenly smart or stupid to borrow against your house.
Theoretically, you would do so the instant you can earn more, after tax and all expenses, than it costs to borrow. But you can never do that risk-free. (Mortgage rates will always be higher than short-term Treasury rates.) And you really can’t assume 10% a year in the stock market is “a given” even though the last 17 years have been so extraordinary. In the 16 prior years, the Dow went from a 1966 intra-day peak of 1000 to a 1982 low of 777. It fell.
But whatever the stock market or interest rates may do (and note the big news earlier this week that mortgage rates have bumped back up above 8% on average), one homespun is always true: It’s wonderful to own your home outright. This is not an archaic notion, and you are not a fool if you aspire to it.