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Old 09-01-2016, 12:47 PM   #29
Leondros
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Join Date: Mar 2011
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Quote:
Originally Posted by V View Post
Paying off your mortgage has nothing to do with property value, though. Even if your place devalues to zero, you're still paying 3% on your borrowed amount. So paying off your mortgage is risk free savings on that mortgage interest, independent of your property value.
Actually it has everything to do with paying off your mortgage.

Think of it this way. You have a $300K mortgage on a $500K house.

Lets assume your rate is 3% and amortization is 25 years. That puts your payments at $1,422.63 per month. In the first year that means you are paying $8,888.09 in interest and $8,183.52 in principal.

For all intensive purposes you are paying close to $9K for borrow that money for the first year.

Now, lets say you run into $300K immediately after entering into said mortgage and have the option of either paying off your mortgage (we will assume without penalty) or investing that in the market.

We will assume the market will produce 8% in the same year. So for that extra $300K, you will assume roughly $24K. Alternatively you can chose to own your now $500K home.

By paying off your mortgage you are saving the $9K in interest per year, compared to making $24K in the market. What would you rather do? Well now we have house appreciation come into play, along with factors such as risk of not meeting the mortgage payments (say you lose your job and it impacts cashflow). If your house is projected to increase to $700K over the next 2 years, sure, your $500K house you own today 100% after paying off the mortgage will year $200K/3 years = $100K per year. That is pretty good.

However, lets say your house drops to $400K over the next two years (which is entirely possible here in Calgary). Well that's $50K lost each year in addition to the opportunity cost lost in being able to make $24K per year in the market.

Short story is, when making these decisions, appreciation or depreciation of the asset that you are planning to own (paying off the mortgage is increasing ownership) entirely should impact your decision. At the end of the day, you have to look at the value of that property. Just like every other financial decision there has to be a "terminal value" or exit strategy where the underlying asset or capital must be considered.
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