Finance question
- Thread starter cnsaguy
- Start date
I thought I did a decent job with my 'rules of thumb.'
But in the end, this is a 'qualitative' as much as 'quantitative' argument.
Personal finance always is.
Breaking a CD is not the same as having to sell a house quickly. Also a CD provides you a known penalty, down turn in the housing market and you are losing thousands at the minimum.
I provide the CD has proof that you can match the return you get from paying off the house, I personally would be more aggressive.
The fact is, he's not saving 3.5% on $230k by paying it off. He's saving 3.5% on the 5 years worth of payments he would make before he moves.
Plus the added bonus, if the market sucks in 5 years. You can buy a new house on the cheap with money you do not have tied to the original house, and sell the original house when housing recovers.
Here is the answer:
230k * ROI >< 230k* (3.5% + tax benefit )
Tax benefit = annual interest expense * effective tax rate (10.6% for average american.)
Assume $12k of interest payments at 10.6%. If you payoff the mortgage you'll lose out of $1,200 a year or 0.5%.
So now you have:
230k * ROI >< 230k* (3.5% + .5% )
Or said with words, if you have $230k and can find an investment (portfolio) with a similar risk profile as your house and rate of return (ROI) greater than 4% then do the investment. If you can't pay off the house. 4% is super low. Large Cap stocks ROI is 12% but has a VaR of 20%. High Grade bonds should be greater than 5% ROI with less risk than your house.
If you really want to get technical, you could add an liquidity premium. That liquidity premium would so greatly offset any tax ramifications in the capital markets vs the housing market.
230k * ROI >< 230k* (3.5% + tax benefit )
Tax benefit = annual interest expense * effective tax rate (10.6% for average american.)
Assume $12k of interest payments at 10.6%. If you payoff the mortgage you'll lose out of $1,200 a year or 0.5%.
So now you have:
230k * ROI >< 230k* (3.5% + .5% )
Or said with words, if you have $230k and can find an investment (portfolio) with a similar risk profile as your house and rate of return (ROI) greater than 4% then do the investment. If you can't pay off the house. 4% is super low. Large Cap stocks ROI is 12% but has a VaR of 20%. High Grade bonds should be greater than 5% ROI with less risk than your house.
If you really want to get technical, you could add an liquidity premium. That liquidity premium would so greatly offset any tax ramifications in the capital markets vs the housing market.
Indeed.
And this includes accountants, comptrollers and CFOs at SMBs too when it comes to 401k and even health insurance. I have no problem 'calling them out' on it too.
Heck, I had no problem calling out a CFO at a S&P500 company when he made the mistake of responding to the complaints of keeping the mileage compensation low (>$0.15/mi difference, very sigificant), and made a statement that was dead false. I had avoided joining the 'chorus of complaints,' and even defended the 'policy,' but once he the CFO stated the IRS rate was 'just a suggestion,' I had to quote the IRS page in total counter. The rate changed within the next 2 weeks after that.
Ummm, engineering is deciding upon and managing inputs and building a system of equations around them. Many different approaches with many different care/don't care inputs.
Finance is "qualitative"?No, it's about as qualitative as engineering is.
So it's, again, actually both.
