And, unless you're investing in some tax-sheltered investment, you have to consider what your after-tax return really is. Look at my calculations in post 22. I don't think I can guarantee a 20% return on my money for the next 10 years anywhere else. Where am I wrong?
That's exactly the point. Borrow money cheaper than you can make it. Rick makes some additional liquidity arguments which have merit as well.
That is often true, but it really hasn't been true in the last couple of years. If you had invested that money in the stock market, you might well have negative returns.
Sure, but
a) you don't have to invest in the stock market and
b) you don't look at short-term returns in mortgage comparisons. Afterall, the mortgage isn't short term. Let's compare that effective interest rate and the stock market returns in 30 years... that's the point.
And, unless you're investing in some tax-sheltered investment, you have to consider what your after-tax return really is.
True, but take the extra money and put it in a Roth IRA and whatever return you get IS your after-tax return. What's more, if you don't invest in a tax-deferred vehicle, almost every investment you can make qualifies for capital gains treatment (stocks, bonds, real estate, etc) [ok, so real estate is a sec 1231 asset, but let's not get picky here, ok?] :)
Look at my calculations in post 22. I don't think I can guarantee a 20% return on my money for the next 10 years anywhere else. Where am I wrong?
You're not wrong per se, you just need to consider every variable. See below.
Well, I ran the numbers, and I'd save almost $100,000 if I go to a 10-year note at 4.5%. However, it would cost me about $400 more per month.
That's a little less than $5,000 per year. Kinda thinking out loud as I'm typing, that's paying $50,000 early over 10 years to save $100,000, or a 200% return on my investment. Annualized, that's 20%, something which I never got during the stock market boom of the late 90s.
Well, to begin, the return is 100% (50,000 returns $50,000, or $50k/$50k = 1 = 100%). Annualized that's a 7.178% return over 10 years. But that's beside the point.
Ok, we'll look at this from all angles. First, your savings isn't really $100,000, because you have to factor in the tax savings too. Because the $100k you "save" can only be interest, that number is reduced by whatever your marginal tax rate is (since I don't have that number, you'll have to calculate it for yourself). Probably the effective savings is around $70,000.
Additionally, you have to look at what your potential earnings would be if you put that $5000 per year for 10 years into some other investment. You are, afterall, choosing to "invest" it in your mortgage, so what happens if you choose to invest it elsewhere?
Starting with $0 and contributing $5,000 annually to a portfolio averaging 8% annually would net you $72,432 after 10 years. Even a conservative 6% would net you $65,903.
So basically, you'll break your back to make that 10-year monthly payment to break even on what your money would have done elsewhere for 10 years But, if instead you had used the difference between the 10 year payment and your 30-year payment over the entire 30 years, you get the tax deduction, the growth, and the liquidity that Rick is talking about. I'm not going to go into all those numbers, because I'm tired and this is long enough already :)
Just talk to several knowledgable financial advisers before jumping into a 10-year note. You may decide it's what you want, and you may not, but at least you'll have all the facts. HTH,
Jeff