If I Have $100 Should I Prepay My Mortgage?

J04331181_2Interesting story in Consumer Reports about whether $100 a month was better invested into prepaying your mortgage or investing an S&P 500 mutual fund. The results showed that over the long haul, the S&P (about a 10% annualized gain) was better and that when the stock market outperformed it did so with higher returns than the periods that investing into the mortgage did (6.5% annual gains) at 132 analyzed points between 1986 and 1996.

Their punchline: “Although there are exceptions, chances are you’ll be better off putting extra money into a good mutual fund, not into a prepaying your mortgage.”

12 Comments on “If I Have $100 Should I Prepay My Mortgage?

  1. The S&P 500 is sitting right about where it was at this time in 2000. That’s not accounting for inflation. The NASDAQ is still at 1/2 of it’s 2000 peak. If I had a mortgage I’d rather get the sure-thing return of paying it off early.

    Oh, and if the market is such a sure thing why the hell are banks lending out money for mortgages at 5.5% when they could play the market themselves?

  2. TiP-

    The math being used here is a little funny. The “return” on paying a loan down is the interest rate. In a declining market one might want to pay more on the home loan just to stay above water. More common in automobiles, people tend to pay less than the change in market value.

    Liquidity often has high value, so I would suggest that the liquidity is probably worth a small negative spread. Real estate is the most, or one of the most, illiquid investments.

    I had a friend pay of 2.75% debt only to run up 18+% credit card debt. Before he paid it off, I advised against paying down that free money.

    Ultimately the larger financial condition needs to be considered.

  3. From Consumer Reports, huh? Sounds like a story placed by Fidelity or some other mega fund company, trying to drum up business. It’s hilarious that they’d choose to look at points between 1986 and 1996.

  4. Nice catch Tiffany, what a difference a decade makes. I still remember some politician making a statement during the 401K/pension debate regarding the inability to control the market you retire with. Gosh, wish I could remember what he said.

  5. It’s coming back to me now. It was the whole privatization of SS debate. Just when the debate was gaining speed the stock market started to tank and so someone said something to the extent, “You retire with the market you have, not the market you wish you had.” It was a spoof on Cheney’s comment about going in with the army you have, not the army you wish you had (and look at the M.E. now, 6 years later, some “cake walk” this has been Rummy:O(

    Just like people have noted on other housing blogs, people bitch about ‘entitlements’ (SS and Medicare, ie) right up until they need ’em themselves.

  6. It all depends on how much savings they’ve got to begin with… and type of mortgage it is… but generally if $100 is all they have to spare, I’d say put it in a savings or money market market account as a rainy day fund.

  7. $100 would also make a great dp on one of those sparkly new FHA loans.

  8. Condos will lead the PDX real estate dive this year. I recently looked at a handful in NE and NW that had been on the market six months each and had both come down more than 20 percent. And they’re still wayyyy overpriced. I wonder how many of these conversion projects are going to stall? And how much new construction (e.g., the condos going up on the corner of NE Burnside and 28th)? It’s going to be very very ugly.

  9. Tiffany, I just walked past the Vaux (approx NW 23 and Quimby) the other day and noticed a quite few for sale signs. I skimmed portland maps and noticed at least 10 that have not sold and have yet to count the resales. A few of the the unsold units are offered below original asking but until they sell there is no documented price decline. (I noticed the LLC/developer is in AZ) I have been tracking the John Ross (SoWa) but there hasn’t been any resales lately to note a decline. There are a few units purchased in the past 4 months back on the market at about 10-30K over purchased price telling me that they aren’t in it for the profit since realtor fees will eat up that (10-30K)It’s just a matter of time before folks get desparate and slash prices for a loss (OR WALK!) The John Ross is still approx 45% unsold as of end of 2007.

    Just a matter of time. This summer in fact, will be the real show as credit freezes…got 10-20% down?!?! And the real stinger: have you sold your current home?

  10. We should get an office pool of sorts together here to bet on the rate and breadth of the nosedive in store for the PDX condo market. I don’t think it will be as bad as Miami or Las Vegas, but it will be close. The high end market in SoWa will certainly lead the way, as you note. Two of the four listing agents I mentioned who showed me the condos said they had lowered their commission to 4.5 (from 6). More pain to come!

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