Saving for college vs paying off house

[Anonymous]

It's not even close

To help understand the economics of the mortgage decision, we test two scenarios: 1) a family uses $200,000 of savings for a home, and invests each month an amount that would otherwise be the mortgage payment (less the tax deduction), and 2) a family invests $200,000 in stocks and bonds while borrowing the same amount on a 30-year mortgage.

Over the course of 42 years, the family that borrows sees a positive outcome in 97% of the time, which is important for major matters like your retirement. The only period when paying cash would be better was between May and December 1981, when the mortgage rates ranged between 16.4% and 18.5%. If we allowed for refinancing, the mortgage-and-invest approach would be favorable at all time.

https://www.forbes.com/sites/lawrencelight/2015/11/14/whats-the-smartest-move-pay-off-mortgage-or-invest-the-money/#14f49e6bcde2

[Anonymous]

Anonymous wrote:PPs who paid off in 3 years here--the mortgage deduction was meaningless to us, as it didn't offset the additional interest faced by keeping the mortgage.

+1

[Anonymous]

Anonymous wrote:It's not even close

To help understand the economics of the mortgage decision, we test two scenarios: 1) a family uses $200,000 of savings for a home, and invests each month an amount that would otherwise be the mortgage payment (less the tax deduction), and 2) a family invests $200,000 in stocks and bonds while borrowing the same amount on a 30-year mortgage.

Over the course of 42 years, the family that borrows sees a positive outcome in 97% of the time, which is important for major matters like your retirement. The only period when paying cash would be better was between May and December 1981, when the mortgage rates ranged between 16.4% and 18.5%. If we allowed for refinancing, the mortgage-and-invest approach would be favorable at all time.

https://www.forbes.com/sites/lawrencelight/2015/11/14/whats-the-smartest-move-pay-off-mortgage-or-invest-the-money/#14f49e6bcde2

So, why don't you take out a loan and invest that money in the stock market if you are sure 97% of the time you will come out ahead?

[Anonymous]

Anonymous wrote:

Anonymous wrote:It's not even close

To help understand the economics of the mortgage decision, we test two scenarios: 1) a family uses $200,000 of savings for a home, and invests each month an amount that would otherwise be the mortgage payment (less the tax deduction), and 2) a family invests $200,000 in stocks and bonds while borrowing the same amount on a 30-year mortgage.

Over the course of 42 years, the family that borrows sees a positive outcome in 97% of the time, which is important for major matters like your retirement. The only period when paying cash would be better was between May and December 1981, when the mortgage rates ranged between 16.4% and 18.5%. If we allowed for refinancing, the mortgage-and-invest approach would be favorable at all time.

https://www.forbes.com/sites/lawrencelight/2015/11/14/whats-the-smartest-move-pay-off-mortgage-or-invest-the-money/#14f49e6bcde2

So, why don't you take out a loan and invest that money in the stock market if you are sure 97% of the time you will come out ahead?

+1. Similarly, why not buy as many properties as the banks will let you and pay them all off as slowly as possible while investing the difference?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Your husband sounds crazy.

Show him the actual dollars and cents on paper. I assume the $4k is for the state tax benefits? Show him that. Show him traditional growth of a home vs. growth of investment accounts over time.

The mortgage rates are SO LOW and housing can never be thought of as a sound investment. I can't imagine the logic behind that kind of strategy.

OP here. I have ran the numbers for him.

I've shown him my return on my Vanguard account and that we should budget a 7% increase, but he just talks about paying off the mortgage. He keeps saying nothing will get us 4% interest every year (even though I show him we can do better). If anything, it's better to invest and then when we have a lump sum to pay off the mortgage, do that. We get nothing for paying on our mortgage early right now.

Yes we're in VA and the 4k was for the state tax benefit. We paid off 80k of his student loans and he thinks it was easy and no big deal and that our kids should do the same.

He is selfish and ignorant.

I would have a major issue with this. Major. On a HHI of $180K at this (early) point in your parenting, there is NO reason not to be saving aggressively for college. None.

And your kids are going to be spoiled and entitled. Ever heard of the GI Bill? Didn't think so. The biggest losers I know had their parents pay for their college.

Students whose parents don't pay or at least help with most of the costs need to take out loans, and statistics make it clear that big loans hamper young adults in their efforts to create financial stability. They have difficulties buying houses, getting married and having kids, and saving for retirement. This is not my opinion. It is a documented fact.

But sure, make your kids get into debt up to their eyeballs by the time they are 22. Make it an object lesson (I guess?) for them.

[Anonymous]

Anonymous wrote:PPs who paid off in 3 years here--the mortgage deduction was meaningless to us, as it didn't offset the additional interest faced by keeping the mortgage.

This is --- literally --- identical reasoning to saying that a 40% off sale is meaningless to you because you'd still have to pay 60% of the original price for the item.

[Anonymous]

My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Your husband sounds crazy.

Show him the actual dollars and cents on paper. I assume the $4k is for the state tax benefits? Show him that. Show him traditional growth of a home vs. growth of investment accounts over time.

The mortgage rates are SO LOW and housing can never be thought of as a sound investment. I can't imagine the logic behind that kind of strategy.

OP here. I have ran the numbers for him.

I've shown him my return on my Vanguard account and that we should budget a 7% increase, but he just talks about paying off the mortgage. He keeps saying nothing will get us 4% interest every year (even though I show him we can do better). If anything, it's better to invest and then when we have a lump sum to pay off the mortgage, do that. We get nothing for paying on our mortgage early right now.

Yes we're in VA and the 4k was for the state tax benefit. We paid off 80k of his student loans and he thinks it was easy and no big deal and that our kids should do the same.

He is selfish and ignorant.

I would have a major issue with this. Major. On a HHI of $180K at this (early) point in your parenting, there is NO reason not to be saving aggressively for college. None.

And your kids are going to be spoiled and entitled. Ever heard of the GI Bill? Didn't think so. The biggest losers I know had their parents pay for their college.

Students whose parents don't pay or at least help with most of the costs need to take out loans, and statistics make it clear that big loans hamper young adults in their efforts to create financial stability. They have difficulties buying houses, getting married and having kids, and saving for retirement. This is not my opinion. It is a documented fact.

But sure, make your kids get into debt up to their eyeballs by the time they are 22. Make it an object lesson (I guess?) for them.

My mom not only had me pay for college she charged me rent, did home repairs, paid for own car and insurance, my clothes and food. I graduated on time with no loans. The two four letter words kids hate are work and home. Go to locall college, live at home and get a job. No loans needed. University of Maryland 10k tuition, cheap. Easy to make that

[Anonymous]

DH and I put $80k down on a rental house. It was mostly money I saved from a bunch of side hustles when I was single. DH had a modest house when we met (that we still live in with two kids). Our rental house has appreciated over $100k in 3 years based on recent comp sales of the exact same layout house on the same street, plus we are getting the benefit of someone paying on the mortgage. We had a scary 2 month gap in turnover which we recognize could happen again but overall it was a financial decision we feel good about. It restricts us a ton though in terms of options to move into a bigger house now because we aren't very liquid and won't have much extra until the kids are out of daycare.

[Anonymous]

Anonymous wrote:My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

LOL. I think you are supposed to tell your KIDS that. Let us know how it goes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

LOL. I think you are supposed to tell your KIDS that. Let us know how it goes.

My old boss on Wall Street made his kids pay for own college. He had a five million a year salary. Tough love

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

LOL. I think you are supposed to tell your KIDS that. Let us know how it goes.

My old boss on Wall Street made his kids pay for own college. He had a five million a year salary. Tough love

That's not tuff love. That's a selfish jerk who has no interest in his kids nor probably even parented them.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

LOL. I think you are supposed to tell your KIDS that. Let us know how it goes.

My old boss on Wall Street made his kids pay for own college. He had a five million a year salary. Tough love

That's not tuff love. That's a selfish jerk who has no interest in his kids nor probably even parented them.

Our kids have a trust fund that can pay for 100% of college and grad school. We're not telling them it exists until they're much older. We will be making them pay a portion of their college tuition and/or living expenses. We haven't decided yet, but maybe around 20%. If we think they didn't squander college, we'll have that "debt" erased.

I have found that kids that don't have skin in the game have a higher likelihood of squandering their opportunities.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:My family has been on earth thousands of years. My generation was first generation to go to college and all 4 of my widowed Moms kids paid themselves. Why do I owe paying for college to my kids?

LOL. I think you are supposed to tell your KIDS that. Let us know how it goes.

My old boss on Wall Street made his kids pay for own college. He had a five million a year salary. Tough love

That's not tuff love. That's a selfish jerk who has no interest in his kids nor probably even parented them.

Our kids have a trust fund that can pay for 100% of college and grad school. We're not telling them it exists until they're much older. We will be making them pay a portion of their college tuition and/or living expenses. We haven't decided yet, but maybe around 20%. If we think they didn't squander college, we'll have that "debt" erased.

I have found that kids that don't have skin in the game have a higher likelihood of squandering their opportunities.

17 and 18 year olds can't even comprehend the magnitude of large student loans. They have no idea what a burden they will be. I would be so angry if my parents tricked me and then rewarded me with my trust fund if I behaved a certain way. Talk about trying to control someone with money. If you treat your children this way in other areas of their lives they are going to need the trust fund to pay for their therapy bills. Wow.

[Anonymous]

Anonymous wrote:I'm a CPA and I am with your husband on this one. By paying off your mortgage, you are basically locking in a 3.5% - 4% guaranteed rate of return which isn't huge, but you can't get that anywhere else with 100% certainty. Secondly, most people overestimate the benefits of the mortgage interest deduction and itemizing in general - you already get a standard deduction without doing anything so the benefit is only the difference between the two. Thirdly, the vast majority of people in the U.S. do not have a college education. What will you do with the 529 if your kids don't go? Fourth, evaluate your savings rate and the pace at which your net worth is growing. We have similar incomes and increase our net worth about $100K each year so could easily pay off your mortgage in 3-5 years. If I were you, I would max out your 401K/Roth IRA, make sure you have an adequate emergency fund, and then allocate remaining funds to the mortgage. With the mortgage out of the way, you should be able to cash flow your kids education.

NP here. That last sentence is over simplification at best and misleading at worst. Our mortgage is 2k a month, including insurance and taxes, which we'd still have to pay. Using that as cash flow,we are looking at 20k a year for room, board and tuition. Our kids start college in 13 years.
Tuition will have gone up, but that 20k will still just be 20k. At the rate tuition is rising, I'm not sure that'll cover community college! It certainly won't be enough to cash flow MIT.

If you want to pay off your house, great. But don't think that the mortgage payment will cover college.