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LOOK before you LEAP. ANALYZE before you ACT. Following the wrong advice in this topic could cost you MILLIONS!Apr 21 '00 (Updated Aug 06 '00) Write an essay on this topic.Many of the opinions in this section are very well written and convincing. Some appear to be backed up by clear financial / mathematical arguments. Yet, overall opinion seems to be almost evenly divided. Coming down on the wrong side of this issue in your personal situation can cost you literally millions of dollars over your lifetime. That's why I urge you not to make a decision based on what you read here. In order to make the decision of whether or not to accelerate the payoff of your mortgage, you need a detailed financial analysis, not an opinion. Other Ways to Make the Decision Many of you will base this decision on various feelings, for example, an aversion to carrying debt and/or paying interest, the fear of losing your job, the desire to pass an unmortgaged house to your heirs, and so on. Others will make the decision based on religious, moral, political or other convictions. As long as you are clear about the basis of your decision AND that it may not be in your best financial interest, I won't argue with you one bit. For you, important feelings or convictions simply trump pure financial analysis in this situation. Financial Analysis I assume the rest of you want a definite answer based on sound financial principals. The only way to get this is with a detailed financial analysis of your personal situation, not from a generalization in one of the opinions you read here. Such an analysis will incorporate the specifics of your situation (mortgage amount, interest rate, value of house, proposed accelerated payment schedule, alternative uses of your money, etc.) with reasonable assumptions that you agree to (future inflation rate, rate of appreciation of real estate, etc.) into a detailed financial model that will show the exact dollar consequences of accelerating payoff vs not accelerating payoff as well as any other scenarios you find interesting. So, how do you get such an analysis done? Well, I spent a while searching the web for an analytical engine for this problem, but I didn't find one. Simple calculators that just show you how much interest you will save by accelerating your payoff are worse than useless because they give you a false impression of your overall financial picture. You really need a calculator that shows what will happen to your total financial picture (your net worth) if you invest your extra money in some other way instead of paying off your mortgage. Maybe one of you can help us all out by finding a site with a comprehensive financial calculator and posting it in an opinion. Fortunately, I have a friend who is a financial analyst with 25 years experience. His initial response was, "Oh my god, don't ever pay off your mortgage faster than you have to," but I convinced him to sit down with me and spend a long afternoon building an Excel spreadsheet to crunch the numbers. In the end, we found only one type of realistic scenario in which accelerating payoff was better than not. It occurred when a person had no other regular savings or investment besides his/her mortgage. In my own situation, my net worth will be $1.5 million higher at retirement age by NOT accelerating my mortgage payoff. Our analysis showed that the worst thing you can do is to use a windfall like an inheritance or lottery winnings to pay down your mortgage rather than investing it in the stock market (assuming only the low historical rate of return of 11%). So How Do You Get Such an Analysis? Absent a friend who is an experienced financial analyst, I don't have good advice on this question, but hope some of you can help. My only suggestion is to interview financial planners until you find one with a strong analytical bent. After all, this isn't rocket science, just high school math. And no, I am not making my spreadsheet available because of liability implications. Want to Know More? It may seem surprising to some that carrying some debt is actually good for you. Several of the opinions in this section show very clearly why this is so. The academic work that proved this point rigorously and won a Nobel Prize for its author, William Sharpe of Stanford University, is known as the Capital Asset Pricing Model. Companies around the world use this model every day to determine their optimal level of debt, and it applies to individuals like us, too.  |
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