Archive for the ‘Uncategorized’ Category

PAY OFF MORTGAGE OR INVEST? CRUNCHING THE NUMBERS.

February 10, 2010

I have read a lot of subjective articles and on the issue, so I have decided to do the math.  Paying down my s mortgage is a safe way for me to diversify my retirement investments.  I also believe that investing in the stock market is an important part of my overall strategy, but paying down my mortgage ensures that I am not putting all my eggs in one (risky) basket.

The easiest way to invest in the S&P 500 is to purchase shares of SPY.  SPY is a high-volume Exchanged Trade Fund (ETF) whose  inception date was January 29th, 1993.   SPY seeks to correspond generally to the price and yield performance, before fees and expenses, of the S&P 500 Index.

Simulation Information

To keep it simple, I have chosen to ignore trading fees but consider SPY’s average 2.5% dividends.

Start Date: 01/29/1993 (spy’s first trading day)

End Date: 02/23/2010

Number of trading years: 17

Dividends:  Every 12 months, my simulation deposited 2.5% of the market value into the account.

Monthly deposit into simulation trading account = $300  (I deposited $300 on 01/29/1993 and $300 on the first of every month from there on.  I kept my monthly contributions at $300 for the entire 17 years of simulation.  I kept it at a fixed investment amount because mortgage rates are also fixed.)

Results

Total Invested = $61,800

Total # shares purchased during the 17 years of simulation = 914

Current account value at $110.67 per share (that was SPY’s closing price on 02/25/2010 when I ran my simulation) = $100,414.98

Total return in 17 years = $38,614.98.   That’s a a total return of 62.48% in 17 years.

We would be in bad shape because it’s an average of 3.7% return per year.  At3.7% return average per year, our gains would have been outpaced by inflation whose rate is substantially higher than 3.7% per year.

MORTGAGE

Now let’s assume that we got a 30-year, fixed-rate mortgage at the very low rate of 5% 17 years ago (that rate did not exist back then).  Let’s borrow $100,000.  During the 17 years, we would have paid only paid the minimal payments.  The $300 extra money we had each month was used in the stock market while we only made the minimal payment of $536  (principal + interest).  After 17 years, we would still have 13 years left in our mortgage.   We would still have an unpaid balance of $61,487 left.

Now let’s go back in time and, instead of investing the $300 a month in the stock market, let’s apply it to our mortgage principal.  WE WOULD HAVE PAID IT OFF IN 2006.

But back in 1993, our mortgage rate would be 7%.  At 7%, the numbers look astronomical.  For our 30-year mortgage, if we paid only the minimal payment while investing our extra $300 a month, we would pay a total of $139,508 in interest in the life of the loan.  If we apply our $300 extra money towards our principal, we would again have paid off our mortgage in 2006.

So, the property that we purchased 17 years ago for $100,000 would be worth how much today, 17 years later.  (In my case, I know that the house that I purchased back in 1998 (that’s not even 17 years ago) is worth tens of thousands more today.)

Real estate as an investment

If you Google “housing prices chart,” you come across a site called investmenttools.com.  (I AM NOT AFFILIATED WITH THEM.)  And here’s their chart showing the historical housing prices in the United States.  You can see that real estate has been a solid investment vehicle even considering the recent drop in prices.  Our $100,000 property which we purchased 17 years ago would be worth substantially more today.

(I AM NOT AFFILIATED WITH INVESTMENTTOOLS.COM.)

EMERGENCY MONEY OR PAY DOWN MORTGAGE? WHY NOT BOTH.

January 22, 2010

After losing enough sleep over personal/family finance issues, I am glad to report that I have made some decisions.  I have prioritized my goals, which include short-term emergency money, long-term emergency fund and paying off my mortgage as soon as possible.

WITHOUT A DOUBT,  AFTER MUCH THINKING AND READING, THE TOP PRIORITY IS…  SURVING EMERGENCIES.

Emergency Funds:

1) Short-term: $2,000.  (Maxed).  This includes unexpected emergencies, such as having to replace a tire that I didn’t know was going to cause my truck to fail safety.  I keep this savings account within reach, use it for unexpected, small emergencies, and pay it back as soon as possible.

2) Long-term:

After finding many different opinions on how long a long-term emergency fund should be able to last, I have decided that 2 years is the best answer.

* Current Balance: $9,111

* Amount needed:  I am not sure, I am going to start with a goal of $50,000 excluding mortgage.

* Two-year mortgage payment:   As of today (2010/01/22), my next mortgage payment is due in 14 months.  I will stop with the early payments once I reach 24 months.

Debt:

1) Furniture:  (We owe about $1,800 at 0% interest at the moment. )

2) HELOC: $9,800

3) Mortgage: $155,587.18   (Yes, a mortgage is a debt!  A good debt is one you don’t have!)

Car Replacement: Talk about a neglected item in most people’s financial planning.

* Balance: $1,500

Target date for replacing  car:  4.5 years from now.

Where should I invest my long-term emergency fund?

January 21, 2010

The so-called high yield savings accounts today pace behind inflation.  A savings account at my bank pays less than 1% in interest.  My current long-term emergency fund, which is slowly but surely growing, is $9,111.  It’s all in invested in pathetic CDs at my credit union, growing a few cents here and there.  I remain undecided.  Just keeping up with inflation is a major challenge.  Any suggestion would be appreciated!