The lost opportunity cost might be real, albeit the future returns were unknown at the time, but you ignored the fact that over 10 years we will have paid $17K anyway in annual bond payments.That money would be gone with virtually nothing to show for it. The bond is amortized like a 30-year mortgage so most of the interest is in the early years. That interest, plus the $100 annual service fee, is not tax deductible, unless you are a tax cheater. So, at the end of 10 years I paid $22K instead of $17K and there is really no telling how much of the $22K we will recover when we sell. The annual carrying cost on the house is now $1400 (lower than the initial $1700 before the refinance of the bond last year, the initial interest rate was just shy of 6%, IIRC) less than if the bond was still in place. An astute buyer will recognize this and it may support a higher sales price. Neither you nor I know.
I could have left the money invested and used the returns to pay the annual bond payment but this would have required an annual return in excess of 8%, depending on tax bracket. Safe returns in that neighborhood didn't exist 10 years ago. If those returns were available and were used to pay the annual bond payment then the original $22K would not be growing (i.e. it is not $40K). Since those safe returns weren't available 10 years ago, the $22K I paid upfront to eliminate the bond would have been spent down to some unknown level, with a bond payment still in place after 10 years. Let's assume I could have gotten an after tax return of 5% on the original $22K. This would have resulted in a shortfall of about $600 per year. So at the end of 10 years my $22K would have been down to $16K, and I am still paying the bond and the returns on the "balance" still won't cover the bond payment so the "$16K after 10 years" will continue to go down.
Quote:
Originally Posted by Altavia
Banks love people who think like that.
$22k would have grown to $40K if invested at 6% for 10yrs.
Plus it is unlikely you will recover that $22K at time of sale, much less the $40 it would have grown to safely invested.
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