OT: If you had a million dollars...

[Qube]

OT: If you had a million dollars...

Now this is hypothetical and please I need some real answers

Assuming you had a million dollars and a mortgage at 4.5% ($220,000). Would it be more beneficial and practical to take the million and invest, getting better return than 4.5%, or to pay off the mortgage fully, with three month penalty?

The reason I ask is because of all those factors like compounding interest and sorts... it doesn't seem to be an easy and cut answer.

Yes, this is hypothetical

[mikell]

Can't say - what do you mean "three month penalty"? Is that a pre-payment penalty equal to 3 monthly installments? So, what was the original term and what is the remaining term on the loan? Penalties suck.
If you are in the top tax bracket, the deduction for home mortgage interest has to be figured, and that can mean real bucks.
Besides, jumbo CD rates are now over 4.5%, so investing the $ in safe investments seems to make better sense than paying off a mortgage.
That's my quick and dirty take.

[diamond777]

pay off the mortgage and invest the 780k

[Martin in Bellevue]

In the US, that mortgage interest is deductible, making the interest earned elsewhere more attractive.

How much is the early payoff penalty, which I thought to be illegal?

There's also the liquidity issue? Is the current income reliable? Will reserves be needed in the short term? If you can get, say 6% from a bond structure, is the return worth having that amount tied up? Sometimes, that can be preferred, as long as short term liquidity is met. Don't forget to maintain a cash reserve that you're comfortable holding.

[Jay 535i]

The first thing I would do is talk to a financial advisor, because he can answer your question with knowledge rather than intuition.

That aside, my intuition tells me that $1m, wisely invested, should generate a liveable income indefinitely. It doesn't make sense to spend a big chunk of the principal straight off the bat.

[calmloki]

Lately I've been fighting my natural inclination to pay off debt as fast as possible. My home loan is at 5.5% (interest is deductible). I have an amount greater than the home loan earning 6.1% (taxable) in multiple 6 and 12 month accounts at the same credit union. Crazy times! Multiple accounts so if I did need or want to pull it early I could pull only close to the amount necessary. Another credit union had a 7% short term interest account available, so some money is stashed w/ them. Bear in mind that you are only insured to $100,000 per SSN per institution. In inflationary times like these (think 3.6% claimed and I believe it is greater) debt is good. It's like watching the debt decrease by the amount of inflation for free. Of course, your savings are doing the same thing, but I'm thinking hold cash, wait for opportunity, and be ready to invest. Shoot - if you have a Costco card Chase will pay you 4.55% in a money market checking account right now.

[Qube]

The first thing I would do is talk to a financial advisor, because he can answer your question with knowledge rather than intuition.

That aside, my intuition tells me that $1m, wisely invested, should generate a liveable income indefinitely. It doesn't make sense to spend a big chunk of the principal straight off the bat.

That's what I'm thinking. Not that I have a million dollars mind you, but that's my first thought... like the other comments as well.

[mholbrook]

There is nothing quite like having your home paid off and having in the neighborhood of $700k if "go to hell" money invested. If you are like me, in my late 50's, it means that I can live quite nicely on my pension income, interest, and my 15 hour/week part time job.

Thanks to California and those home prices, we bailed and took just over 1/2 of the equity and bought a brand new 2600 sqft home in Meridian, Idaho last year. The Idaho home has already gone up over $100k and the new houses in our sub are all over $500k. If they sell, we are gold again!

Pay off the mortgage.

[Scott H]

In the US, the interest paid on a home loan is tax deductible so that eases the effective interest rate on the home loan. Paying off your current home is way too subjective to anayize without all the facts. It's a condo right? How long do you plan on being there? What is your current loan term? 5,7,10 year ARM? 15 or 30 year standard? How much is your current home appreciating?

Maintaining some sort of mortgage is beneficial for both credit rating AND tax deductions in the US. If it were my home, and I planned on being there until I grew out of it, I would refinance to a 15 year mortgage with no prepayment penalties. The 15 year term allows you to pay down principal at a faster rate but still leaves you cash to put work earning higher interest rates. The no prepayment penalty allows you an out if you decide to pay down the principal at any time without negative impact.

You are in a vastly different age group, income stream, cost of living, and real estate scheme than Mike is, and probably cannot count on r/e appreciation to beat out other investments the same way you might have in the past 5-8 years.

Let me also add that using it to pay for karting and E34 shipping would be counterproductive

In the US, that mortgage interest is deductible, making the interest earned elsewhere more attractive.

How much is the early payoff penalty, which I thought to be illegal?

There's also the liquidity issue? Is the current income reliable? Will reserves be needed in the short term? If you can get, say 6% from a bond structure, is the return worth having that amount tied up? Sometimes, that can be preferred, as long as short term liquidity is met. Don't forget to maintain a cash reserve that you're comfortable holding.

[Qube]

In the US, the interest paid on a home loan is tax deductible so that eases the effective interest rate on the home loan. Paying off your current home is way too subjective to anayize without all the facts. It's a condo right? How long do you plan on being there? What is your current loan term? 5,7,10 year ARM? 15 or 30 year standard? How much is your current home appreciating?

Maintaining some sort of mortgage is beneficial for both credit rating AND tax deductions in the US. If it were my home, and I planned on being there until I grew out of it, I would refinance to a 15 year mortgage with no prepayment penalties. The 15 year term allows you to pay down principal at a faster rate but still leaves you cash to put work earning higher interest rates. The no prepayment penalty allows you an out if you decide to pay down the principal at any time without negative impact.

You are in a vastly different real estate scheme than Mike is, and probably cannot count on r/e appreciation to beat out other investments the same way you might have in the past 5-8 years.

Thanks for your input. I don't count on any appreciation given that it's a condo unit... even if it's in a very prime location. All your comments have given me a jump point for when I finally make that first million. Of course, at that time a financial advisor should be in tow.

One thing is for sure... even when I have a million, I won't sell my e34. Sure, she may be a partner to a z4, but never gone