Octavo Dia

Friday, June 17, 2011

Should you pay down your mortgage?

This post was inspired by the question posed on the Get Rich Slowly blog. Rather than responding to the original question, as being able to pay off your mortgage in cash doesn't apply to a lot of people, here's my take on paying down the mortgage in general.

I'm assuming that an emergency fund and an appropriate cushion of savings is built up. If it isn't, you need to work on that first before considering whether to pay down your house.

First, if the market crashed (again), and you lost your job, could you afford to sell the house and move to where the jobs are? Basically, if you put less than 20% down, particularly if you have private mortgage insurance, paying down the mortgage is a good idea. It frees you to move when you need to, so if the local economy tanks, you don't have to go down with the ship. Also, extra payments early in the life of the loan save a lot more interest than investments later on.

Second, what does your investment portfolio look like? A house is a highly-leveraged, sector-specific, non-diversified investment. If you sank half your net worth into tech stocks, people would think you were crazy. If you borrowed several times that amount and invested it as well, they'd say you were crazy. If you bought all that stock in a single tech company, they'd know you were crazy. Yet if you do the same thing with a house, no one would bat an eyelash. If you're well and thoroughly invested in the rest of the market and you want to increase your exposure to real estate, paying down your mortgage is a reasonable decision.

Third, I've deliberately ignored comparisons of rate of return, investment risk, inflation risk, and other such considerations. Don't worry about the details until you've got the big picture. One thing that I would add, however, is that even when you take all of those into account, remember that the money you've locked up in equity is in there until you sell the house or pay off the loan, which could be a VERY long time. And if you sell during a downturn, you may not recoup the money at all. Which leads to my next point:

Fourth, the return on investment is heavily back-loaded. You don't see any improvement in cash flow until you sell the house (assuming you make a profit) or pay off the mortgage. The time value of money is a definite consideration. A $1,200 mortgage payment is worth a lot more now than it will be 20 years from now. So if you're at the point where you could be free of your mortgage in short order, and create a large cash flow, it may be worth it, but then you're not really saving all that much in interest if you're in the last few years of the mortgage.

With that being said, if you want to increase your investment in real estate, I would recommend investing in energy efficient home improvements. Increased energy efficiency has an immediate, after-tax, inflation-adjusted cash flow, shields you from fluctuations in the energy market, and increases the value of your home which provides additional equity to get you above the 20% line.

Sunday, June 12, 2011

Don't break your arm patting yourself on the back.

Boom and bust cycles are a natural feature of free markets, since producers do not have exact information about the market-clearing price. Thus they will tend to overshoot, leaving inventory unsold or forcing the price down until the market clears. While the market is clearing, unprofitable producers go out of business, reducing supply, which raises the market-clearing price.

What stands out is that, the more perfect the information available to the producers, the less pronounced the boom and bust will be. They will overshoot by less, and prices will have to decline less to clear the market. Price swings will be moderated solely by increasing information.

What does that say about the Great Moderation? The world's central banks figured they had them problem well in hand, when it could be that digital inventories and just-in-time production had done the job of moderating the economy for them. The luck of Greenspan, not the wisdom, is what set the course.

Saturday, June 11, 2011

God is Imaginary #23: Listen to the Doxology

Listen to the Doxology.

"Praise God from Whom all blessings flow."

This one is quite easy to answer, as it is specifically addressed in the Bible. The Parable of the Vineyard ends with the verse "Don't I have the right to do what I want with my own money? Or are you envious because I am generous?" It is only when you consider yourself entitled to something that the principle of fairness comes into play. Without entitlement, there is no fairness.

People believe they are entitled to the blessings of God. What they are entitled to is eternal damnation. People forget that the first blessing of God is that they have not already been damned. Everything beyond that is an additional blessing--even earthly suffering is a blessing compared to eternal suffering.

The greatest irony is that, as life becomes more and more comfortable, people feel less and less need for salvation. From our perspective on earth, it seems horrendously unfair. But how will it seem when the "starving kids" who die in the faith rejoice in the presence of God, while the pampered nabob who couldn't be bothered with religion discovers just what "from Whom all blessings flow" really means.

Perhaps the best verse to keep in mind when considering this is Job 1:21 "The Lord giveth, and the Lord taketh away. Blessed be the name of the Lord."

Back to the 50 Reasons.


God is Imaginary: Intro

I just received a comment on my Answers to the Ten Questions post asking me if I would continue my review of www.whydoesgodhateamputees.com by considering their list of the Fifty Reasons God is Imaginary. I must add one warning before I begin: there is a new little baby in my house, so blogging will most likely be even fewer and farther between than you have come to expect. I pray I may be helpful despite my newly acquired sleep deprivation.

1. Part 1: Try Praying.
1. Part 2: Try Praying.
2. Statistically Analyze Prayer.
3. Look at Historical Gods.
4. Think about Science.
5. Read the Bible.
6. Consider God's Plan.
7. Understand Religious Delusion.
8. Think about Near Death Experiences.
8. Think about Near Death Experiences - Revisited.
9. Understand Ambiguity.
10. Watch the Offering Plate.
11. Notice that there is no Scientific Evidence.
12. See the Magic.
13. Take a Look at Slavery.
13. Take a Look at Slavery: Rebuttal.
14. Examine Jesus' Miracles.
15. Examine Jesus' Resurrection.
16. Contemplate the Contradictions.
17. Think about Leprechauns.
18. Imagine Heaven.
19. Notice You Ignore Jesus.
20. Notice Your Church.
21. Understand Jesus' Core Message.
22. Count all the people God wants to murder.
22. Rebuttal.
23. Listen to the Doxology.