Pay early on a house, or "invest"?

From: "J.D. Baldwin" <baldwin@netcom.com>
Subject: Pay early on a house, or "invest"?
Date: Wed, 9 Dec 1998 11:39:39 -0800 (PST)

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> Your example sounds great.  Instead of paying off a debt at 5% net,
> invest at 10% net. Good in theory. Your plan though will force
> people to overpay for their homes.

It doesn't matter that you "overpay" for your home if the benefit
of doing so is a net "win" for you because that money was invested
elsewhere and made you that much more money.

That said, you are right to be skeptical.  In general, I think the
average person is a lot better off paying extra principal with his
house payment every month.  If you have extra money after *that* to
invest, great.  If you don't, then you probably aren't in a situation
where you'd benefit from putting money elsewhere.

There are several reasons for this:

1. The PMI scam.  (I really, really hate PMI.)  PMI isn't deductible,
and it goes away when you reach 20% equity in your home.  Thus, you
get a higher effective return on extra principal paid than you
mortgage rate alone would lead you to believe.

2. Confidence of ROI.  "Invest at 10%" sounds great.  I am still
waiting for someone to show me the investment where I get a 10%
GUARANTEED return.  Because of the nature of a loan repayment, paying
extra principal *guarantees* that I will get a significant positive
ROI on that money over time -- for me it's about 7.5% right now.  That
counts for a lot.

3. Liquidity.  Well, sort of.  When it comes time to sell a house,
it's usually because one is buying another house.  The extra principal
built up in one's current house will come in mighty handy then, and
might well make a significant difference in the amount of house one
can afford next time around.  In that hypothetical other "investment,"
your money may or may not be available to you.
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