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Eli5 how does paying off your home and owning it make it worth less?
EconomicsYour boss doesn't know what he's talking about. The value of a home is not dependent on how it is paid for.
What that will do is make you pay a ton of interest over the term of the mortgage, meaning you paid a lot more for it, but that doesn't get added to the value.
He's likely assuming that the money that would be used to pay off the house faster could be better used to invest in higher yield investments that would more than offset the interest paid for the mortgage.
Which still has nothing to do with the value of the house.
i think he's saying the house will be less expensive over the life of the loan but either explained it as poorly as possible or OP didn't understand
Likely.
Maybe the boss thinks higher monthly payments means less money available for any maintenance which means the houses loses value due to disrepair or something? Idk
Your boss isn't in the financial advice business is he?
I sure hope not, at any rate.
He might mean that your net worth will be greater if you pay your mortgage off as slow as possible and have the rest of your money in the stock market rather than putting it all towards the mortgage. Otherwise he's just wrong.
Idk the question but if it’s about “why don’t I rush to pay down my mortgage?”
The answer is opportunity cost. The time value of money theorem is a thing. Any lump sum of money now is theorized to be worth less later on. So keeping your money on hand now will allow you to invest and make more money on it.
Still doesn’t account for the large amount of interest you’ll pay but even a 7% mortgage can be arbitraged against the historical 10% returns of the S&P500
Now —you— could be worth less in the future. Say your interest rate is 3%. And your boss gives you a $10k bonus.
You can either a) pay down the loan or b) buy a certificate of deposit at 5%.
What do you choose?
Not going to say there is a correct answer, but the advantage of b) is paying back the loan with inflated dollars, netting 2% on the difference, and you still have the $10k liquid should something unforeseen occur.
3%….. cries….
I just bought a home at 6.75 and apparently that’s really good right now.
Will FOREVER be happy that we bought ours at 3.5 in 2020 for the actual asking price before everything got inflated. We are never leaving this house.
Historically, 6.75 isn’t terrible. But the 2s and 3s (an anomaly) were uncommon not too long ago.
Also, when mortgage rates were in the 2s and 3s, certificate rates were like .05%
What he probably means is if the interest rate in the mortgage is low enough, you’ll save less money paying off the mortgage than a higher interest loan.
I.e. 3% mortgage vs a 7% car loan or a 20% credit card balance.
The only way in which your boss can be correct is if he is talking about the marginal advantage of the loan. Specifically, when you own your house outright, you have put in 100% of the money required, and you earn 100% of the appreciation when the house increases in value. When you have a mortgage and you only put in 20% of the money required… you still earn 100% of the appreciation. You’re effectively earning interest on the bank’s money.
This effect kind of doesn’t matter too much in most situations, and it’s absolutely outweighed by the interest on the mortgage itself, but it is interesting in that the advantage you (the buyer) gain from this effect decreases as you pay off the loan. It is one of the subtler ways in which mortgages are actually really advantageous to the homeowner in the US.
But in any literal sense your boss is wrong. The house value is independent of its financing.
That's the dumbest thing I've heard...okay so the ONLY way I could see this having even an air of legitimacy is your boss misunderstood the concept of interest rates
Basically if you have a mortgage and the mortgage is for 500,000 dollars and you got super lucky with an interest rate of 2%. Now lets say you have 500,000 dollars in cash do you pay it off or do you invest it put it bonds or a high yield savings accoubt? If the rate of return/interest rates are higher than 2% then yes it makes more financial sense to not pay it off as you will end up with more money by using it differently.
This once again in no way changes the value of the house in any way.
He's probably talking about opportunity cost but phrasing it badly. Or maybe incorrectly parroting something he heard but misunderstood.
If you have a very low rate loan, like a mortgage usually is, it's often strictly more optimal to invest instead of paying off the debt fastee. If you invest and earn say...7% you'll have more in the end than if you pay off a loan that was only costing you 3-4%
While not related to actual housing value, paying off a loan can negatively affect your credit rating. Credit reports need data to make estimations, and a mortgage is often the oldest account that still requires a monthly payment. If a person pays off all of their loans and carries no monthly credit card debt, they cease to demonstrate an ability to make regular payments on time, and this can result in your credit score going down.
This is what me and a friend thinks he means. It's the only conclusion we have drawn where there is a downcast in light of lessening my financial obligations to my property that will "hopefully" continue to valuate
The other comments on this thread surrounding investments vs your mortgage rate are also worth considering; if you have a 4.5% mortgage rate, investing in an S&P index (currently at almost 7%) nets you a +2.5% return (before accounting for any broker fees.) And for long term investments, maxing out an IRA and other tax sheltered vehicles becomes far more financially sound.
This is all generic Reddit advice, mind you, and you shouldn't be sweating anything any of us (especially your boss) says, unless they can demonstrate significant financial experience, and have a Fiduciary Obligation to you.
As others have stated, taken at his word, your boss is simply incorrect. Giving him some benefit of the doubt, he probably just meant that it's more beneficial to you if you pay it off a little bit at a time, and being even more generous well assume he specifically meant per the payment schedule of the mortgage. This isn't always true, but can be true for a lot of people depending on your mortgage rate.
The mortgage allows you to pay off your house in small instalments at the cost of interest. The terms of the mortgage can differ country to country or bank to bank but generally the interest over the term of the loan is calculated at the beginning and the total debt (principal + interest) is divided up into the total number of instalments but the payment schedule is worked out so that you pay mostly interest at the beginning. However if you pay off the principal early you don't owe the interest so the earlier you pay it off the more you save in interest but the more money it takes up front to do it.
The reason it can be more beneficial to simply keep to the payment plan is because, assuming you had enough money to pay off a mortgage, you can usually make more money investing it in the stock market than you would save in interest. But if your interest rate is really high then you have to earn a lot more money before you come out ahead and your better off just paying off the mortgage.
But all of that personal finance is irrelevant to the actual value of your house which is really determined by the market, or put another way, whatever someone is willing to pay for it. In the US this largely boils down to square footage at a $/Sq Ft rate overwhelmingly driven by the quality of the schools in the district your house happens to be located in.
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