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September 22, 2005


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I have to disagree with paying down your mortgage. Most people are paying 6% or less; after the tax break on the interest, that's effectively 4.5% or less. Even if you want your money to be totally safe (I would), you can make the same return in CDs, and the money is far more liquid -- if you get in a financial bind, you don't have to sell your house to get it back. Furthermore, typical mortgages are loaded so that at the beginning you pay mostly interest and at the end mostly principal, so as your mortgage ages, you put more and more of the interest behind you, and there's a rapidly diminishing return in paying extra principal.

Joe --

This makes sense on PAPER but my experience with people is that there's an (almost) insurmountable gap between "what's best technically" and "what's best practically".

In my early days, I used to advocate what you're saying above only to see people keep paying the regular payments on their mortgage and the extra money would somehow disappear -- spent in some "miscellaneous" hole. Then I switched to an easier to understand (and implement) strategy of telling people to add a bit extra to their mortgage payments and it was like a light came on -- they started to see results. Hence, I go with what people will do and what will get them results.

In addition, there is a "value" (even if it's only emotional -- but I would say it's more) to being totally free from debt. You owe no one anything and then you can build up a tremendous net worth in a short period of time. This is how I've done it, and it's worked out pretty well for me.


I see your point - for some people, I suppose it's a FEATURE that you can't (easily) get back the extra money you put down on your mortgage.

Joe --

Yes, you're correct.

Some of the worst advice I ever gave anyone was to my parents. They were thinking of buying a cash-value life insurance policy as a combination of insurance protection and an investment.

I explained how expensive this was and that they should "buy term and invest the difference". They understood what I was saying, so they rejected the cash-value insurance idea. However, they never followed up and "invested the difference".

In the two decades since, they have accumulated little savings, and have instead spent their funds on great long-term investments like cigarettes, entertainment equipment, and vacations. I can't help but think how better off they would be today if I had just told them to go the way that was not technically the best option, but was the best way practically. Financially, they'd be much better off.

The same sort of situation applies here -- though with a mortgage rather than insurance.


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