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Pay off Home vs. Invest - math vs. psychology (1 Viewer)

Dentist

Dentist

***Official FBG Dentist***
OK

I owe 88K on my home. The note is for 2.625% The effective rate on the note after the deduction is about 1.78%

I have a spare 88K sitting around beyond an emergency fund just sitting in cash.

I can either write a check to wells fargo and be 100% debt free right now

or I can take that 88K and invest it in some manner.

Beating 2.625% even after taxes isn't terrible difficult over the long term

However, the stock market is already pretty cranked up...

My question: What rate of return should I target to make up for the risk of investing vs. the sure thing - mortgage

For instance... making 5% on my money would be +EV, but would the risk I would take offset that reward?

Given that there are no sure thing investments paying over 1% these days... what would you target and why?

My own personal thought... If in pursuit of an 8% gain I could tolerate the risk of losing about 10-15% of the portfolio...

What type of investments would you consider?

I was considering buying 20K in these 4 segments that either shoot a yield or seem like they are due for a correction in a positive direction:

REM - Reit ETF that yields about 14%

PFF - Preferred Stock ETF that yields about 6.5%

USO - OIl ETF - because I feel like oil is at or near a bottom.... and while I realize the market can remain irrational longer than I can remain solvent.. I'd be positively shocked if Gas were under $2.50 a gallon come late summer

BRK.B - because Warren Buffet is still awesome

Or is the psychology of having the note paid off superior to any +EV in the investment world?

I suppose the lack of liquidity is also a concern on the pay off end of things.. once that money goes into the home it's gone. AT least i can sell any investment

 
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Don't completely nuke your emergency fund for either of these things, though don't think you would.

And though you mention it, don't underestimate the possibility for earning negative returns on whatever investment you might make. The entire market could go down, you could pick a fund that performs poorly as a whole, an entire market sector could tank (think real estate crash, recent oil crash, etc.). Though odds are in your favor that you would likely earn more in the long run, just don't take that to be a 'sure thing' over the long run, which isn't so. Past 100 years of performance doesn't guarantee the future. What you can guarantee is that you WILL owe that money on your home.

I can tell you at least personally, I found being debt free more positive mentally than earning equivalent or more on investments.

 
Dentist, the math may say otherwise, but my gut says being debt-free is worth a lot. Monthly payments suck big-time. Pay that mortgage off and be out from under it. :2cents:

 
I'd love to pay off my mortgage and then be free from monthly payments. Well, except for the property taxes. And gas. and electric. Oh yeah, and garbage and our HOA fees. Then there's the water bill. Can't forget the cable TV subscription and internet. And the lawn service. But besides those, man, it would be sweet to not have the mortgage statement!!

 
Depends on your age. The older you are, the more value there is in paying off your mortgage and the more inherent risk there is in investing in the stock market. The longer period of time you have before you retire, the more confident you can be that the market will perform at close to it's historic averages over the long term.

 
Marauder said:
Depends on your age. The older you are, the more value there is in paying off your mortgage and the more inherent risk there is in investing in the stock market. The longer period of time you have before you retire, the more confident you can be that the market will perform at close to it's historic averages over the long term.
Click to expand...
Yup. That's why we discuss that stuff here. My age very well may taint my POV. Good post.

 
I went against the math and paid my house off. Financially speaking, it was the best moment of our lives outside of actually retiring.

 
I've asked this question a million times and the response is always invest.

My personal feeling is being debt free, but I guess that is technically the wrong answer.

 
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
 
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?

 
Last edited by a moderator:
Dentist said:
OK

I owe 88K on my home. The note is for 2.625% The effective rate on the note after the deduction is about 1.78%

I have a spare 88K sitting around beyond an emergency fund just sitting in cash.

I can either write a check to wells fargo and be 100% debt free right now

or I can take that 88K and invest it in some manner.

Beating 2.625% even after taxes isn't terrible difficult over the long term

However, the stock market is already pretty cranked up...

My question: What rate of return should I target to make up for the risk of investing vs. the sure thing - mortgage

For instance... making 5% on my money would be +EV, but would the risk I would take offset that reward?

Given that there are no sure thing investments paying over 1% these days... what would you target and why?

My own personal thought... If in pursuit of an 8% gain I could tolerate the risk of losing about 10-15% of the portfolio...

What type of investments would you consider?

I was considering buying 20K in these 4 segments that either shoot a yield or seem like they are due for a correction in a positive direction:

REM - Reit ETF that yields about 14%

PFF - Preferred Stock ETF that yields about 6.5%

USO - OIl ETF - because I feel like oil is at or near a bottom.... and while I realize the market can remain irrational longer than I can remain solvent.. I'd be positively shocked if Gas were under $2.50 a gallon come late summer

BRK.B - because Warren Buffet is still awesome

Or is the psychology of having the note paid off superior to any +EV in the investment world?

I suppose the lack of liquidity is also a concern on the pay off end of things.. once that money goes into the home it's gone. AT least i can sell any investment
Click to expand...
I'm not sure how old you are, but I'm 31. In my situation, paying off the mortgage with such a low, tax advantaged borrowing rate is a rube move. By the time I can build back to 88k, I've lost my prime years of heavy equity investing and being able to absorb a huge correction, like the one likely coming some time soon, are pretty much over. I can start to plan to work longer than I want to, because the potential yield I'll get once I'm back to square one (88k) with less ability to invest in equities will make me regret the move to pay off the house early.

I think if you're old enough, go for the house if you're starting to age yourself out of being heavy into equities to begin with.

As for the Oil ETF, I'd run from MLP's like USO and go with something like https://personal.vanguard.com/us/funds/snapshot?FundId=0951&FundIntExt=INT. 0.12% management fee, tax efficient, and no dealing with K-1 schedules and timing.

 
Last edited by a moderator:
kutta said:
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
Click to expand...
Maybe you wouldn't be "happier" but you'd be wealthier today if you had invested.

 
Last edited by a moderator:
kutta said:
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
Click to expand...
Same here.

It would be one thing if that math was completely guaranteed, but we know in most cases it is not since there is risk in most types of investing.

 
gianmarco said:
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?
Click to expand...
Hypothetical for the "math guys"

Do you take 0% loans on every asset you can so that you can invest that money? Because there are a lot of credit cards out there that would allow you to do this.

 
gianmarco said:
With a 2.65% rate? No chance I'd pay that off now. That's barely above inflation.
Click to expand...
This. I'd go into the whole "if you can earn a rate of return greater than the interest cost of holding the debt, you're better off investing" thing like I did on the Car Financing thread, but GeorgeJeffersonAirplane would show up and call me an idiot again. :rolleyes:

 
lumpy19 said:
kutta said:
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
Click to expand...
Maybe you wouldn't be "happier" but you'd be wealthier today if you had invested.
Click to expand...
Not necessarily. There is no guarantee with an investment. He could have seen his money turn to #### right in front of him.

 
Random said:
gianmarco said:
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?
Click to expand...
Hypothetical for the "math guys"

Do you take 0% loans on every asset you can so that you can invest that money? Because there are a lot of credit cards out there that would allow you to do this.
Click to expand...
If there wasn't a penalty for opening multiple credit cards and there wasn't a fixed time limit on 0% interest, then most definitely. It's free money. I'll let someone else foot the bill and pay them back over time while the overall value of that amount decreases with time and inflation and use my money for other things.

If I'm making a large purchase (like furniture) and the store is offering me 0% for 24 months on a $10K purchase, I sign up immediately and say thank you. I make minimum payments, pay it off at the very end, then close the account.

 
Random said:
gianmarco said:
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?
Click to expand...
Hypothetical for the "math guys"

Do you take 0% loans on every asset you can so that you can invest that money? Because there are a lot of credit cards out there that would allow you to do this.
Click to expand...
Yes - But in general, only if it's worth the effort. I'm not going to open a new line of credit to get 0% for a year on a couple hundred dollars. But...I bought $9K worth of furniture a few years back. I had the cash to buy it outright, but it made a lot of sense to open the credit card and get 18 months of 0% financing. I was able to do other things with the money I would've spent upfront, and $9K over 18 months is a lot less of a hit.

 
Sabertooth said:
lumpy19 said:
kutta said:
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
Click to expand...
Maybe you wouldn't be "happier" but you'd be wealthier today if you had invested.
Click to expand...
Not necessarily. There is no guarantee with an investment. He could have seen his money turn to #### right in front of him.
Click to expand...
Again, at 2.65% and the "value" of having that liquid money available, he could tuck it away as cash under his mattress, earn 0%, and it would still likely be the right decision given such a low rate and historical inflation rates (which range anywhere from 1.5 to 4%).

Sure, he could get a HELOC on the equity of his home, but no chance he's getting one at anything close to that rate.

 
Fat Nick said:
Random said:
gianmarco said:
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?
Click to expand...
Hypothetical for the "math guys"

Do you take 0% loans on every asset you can so that you can invest that money? Because there are a lot of credit cards out there that would allow you to do this.
Click to expand...
Yes - But in general, only if it's worth the effort. I'm not going to open a new line of credit to get 0% for a year on a couple hundred dollars. But...I bought $9K worth of furniture a few years back. I had the cash to buy it outright, but it made a lot of sense to open the credit card and get 18 months of 0% financing. I was able to do other things with the money I would've spent upfront, and $9K over 18 months is a lot less of a hit.
Click to expand...
Exactly.

 
Sabertooth said:
lumpy19 said:
kutta said:
lumpy19 said:
Math>Psychology

every. single. time.
Click to expand...
Totally disagree. I paid off my mortgage a few years back and it was the best decision I ever made. For someone who has scratched and clawed my whole life to to finally have the peace of mind that my house was paid off was an amazing feeling. I wouldn't trade it for all the math in the world.
Click to expand...
Maybe you wouldn't be "happier" but you'd be wealthier today if you had invested.
Click to expand...
Not necessarily. There is no guarantee with an investment. He could have seen his money turn to #### right in front of him.
Click to expand...
He said a few years back he paid of his house...pretty confident if a few means 3 he lost money by paying off his mortgage. A lot of factors but it's been a pretty nice 3 year run in the market

 
fantasycurse42 said:
I've asked this question a million times and the response is always invest.

My personal feeling is being debt free, but I guess that is technically the wrong answer.
Click to expand...
There is no "wrong answer", FC... it's what you're most comfortable with. Some people may have the discipline and the ability to track their savings by not paying off that mortgage as fast as possible. but for most people, the relief from being free of those monthly payments will be worth much more than the math says. It's really not a math problem..... it's more of a psychology problem.

 
Fat Nick said:
gianmarco said:
With a 2.65% rate? No chance I'd pay that off now. That's barely above inflation.
Click to expand...
This. I'd go into the whole "if you can earn a rate of return greater than the interest cost of holding the debt, you're better off investing" thing like I did on the Car Financing thread, but GeorgeJeffersonAirplane would show up and call me an idiot again. :rolleyes:
Click to expand...
I don't think you're an idiot, rather 100% correct.

 
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.

 
Random said:
No doubt I would pay off the mortgage. But I thought you were against doing that?
Click to expand...
Generally speaking, I am

But i'm already so heavily invested in traditional stocks and the market as a whole.. that's why when i suggested some investments that I picked stuff that wasn't totally in lock step with the market

I'm really beginning to run out of things I can do with my money other than actually spend and enjoy it, which we all know is really wasteful.

I'm still considering investing though based on sheer liquidity and the liklihood I sell this home in 3-5 years.

 
Last edited by a moderator:
Dentist said:
Random said:
No doubt I would pay off the mortgage. But I thought you were against doing that?
Click to expand...
Generally speaking, I am

But i'm already so heavily invested in traditional stocks and the market as a whole

I'm really beginning to run out of things I can do with my money other than actually spend and enjoy it, which we all know is really wasteful.

I'm still considering investing though based on sheer liquidity and the liklihood I sell this home in 3-5 years.
Click to expand...
:lmao:

Dentist, serious question: What if you drop dead tomorrow? Would your dead self regret not enjoying the fruits of your labors up until this point? What if something happens prior to your retirement that prevents you from actually enjoying your retirement?

It's all about balance. Spending needlessly, especially with money you don't have, is foolish. However, it's similarly foolish to pack it all away when there's no guarantee you'll be healthy and around to enjoy it so far down the road. Life has this funny thing about being unpredictable. Even the best of plans can end up sucking. How many threads just on this board have we seen of personal tragedies that came out of nowhere?

The frugal shtick is funny, but there comes a time when it's as much about the journey as it is about the destination. My $.02.

 
TheWalkmen said:
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.
Click to expand...
I was planning to buy a new home in 3-5 years.

 
gianmarco said:
Dentist said:
Random said:
No doubt I would pay off the mortgage. But I thought you were against doing that?
Click to expand...
Generally speaking, I am

But i'm already so heavily invested in traditional stocks and the market as a whole

I'm really beginning to run out of things I can do with my money other than actually spend and enjoy it, which we all know is really wasteful.

I'm still considering investing though based on sheer liquidity and the liklihood I sell this home in 3-5 years.
Click to expand...
:lmao:

Dentist, serious question: What if you drop dead tomorrow? Would your dead self regret not enjoying the fruits of your labors up until this point? What if something happens prior to your retirement that prevents you from actually enjoying your retirement?
Click to expand...
If i die tomorrow at least I'll know I set my family up really nicely with my life insurance plus an ample supply of other assets. My wife, son, and child on the way will have over a million bucks which hopefully will sustain them relatively well moving forward. I can rest in peace knowing i've done everything I could to support them properly.

If something happens to me that prevents me from enjoying my retirement then hopefully i'll at least be able to use my money for a nice charitable cause, or to further my family's life in some way. Someone can always use the money somehow.

 
Dentist said:
TheWalkmen said:
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.
Click to expand...
I was planning to buy a new home in 3-5 years.
Click to expand...
Why wait, with rates where they're at and with home prices where they're at? Assuming you will be buying a more expensive house than you're selling.

 
Fat Nick said:
gianmarco said:
With a 2.65% rate? No chance I'd pay that off now. That's barely above inflation.
Click to expand...
This. I'd go into the whole "if you can earn a rate of return greater than the interest cost of holding the debt, you're better off investing" thing like I did on the Car Financing thread, but GeorgeJeffersonAirplane would show up and call me an idiot again. :rolleyes:
Click to expand...
I'm in agreement with this. You will make way more than $2.65% by simply flipping between a few index funds. I flip between VUSTX and VCHSX right now. Pay it off and you are losing $.

Oh, and stay the #### away from oil. If it looks to good to be true, it probably is. I now believe that it is not an easy win. Barring some unforeseen event, oil is not going back to where it was for years. Great for all of us. Bad for North Dakota.

 
Last edited by a moderator:
gianmarco said:
Random said:
gianmarco said:
Hypothetical situation for the "psychology guys":

What if you have a 0% interest mortgage? You owe $100,000 and you have $100,000 sitting in the bank. You can pay it off monthly at no interest for the next 10 years, let's say, or you can pay it all in one lump sum and be done with it. Are you saying that the mental benefit of not owing anymore is better than interest free payments?
Click to expand...
Hypothetical for the "math guys"

Do you take 0% loans on every asset you can so that you can invest that money? Because there are a lot of credit cards out there that would allow you to do this.
Click to expand...
If there wasn't a penalty for opening multiple credit cards and there wasn't a fixed time limit on 0% interest, then most definitely. It's free money. I'll let someone else foot the bill and pay them back over time while the overall value of that amount decreases with time and inflation and use my money for other things.

If I'm making a large purchase (like furniture) and the store is offering me 0% for 24 months on a $10K purchase, I sign up immediately and say thank you. I make minimum payments, pay it off at the very end, then close the account.
Click to expand...
So is it fair to assume you have only the bare minimum equity in your property?

I could refi today and pull out a decent amount, as I'm sure most of us could. But do you really do that? I know I don't. I actually have quite a few houses paid off but cashing out all available equity is certainly not on my radar. Its actually quite the opposite of my retirement goals.

 
Last edited by a moderator:
TheWalkmen said:
Dentist said:
TheWalkmen said:
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.
Click to expand...
I was planning to buy a new home in 3-5 years.
Click to expand...
Why wait, with rates where they're at and with home prices where they're at? Assuming you will be buying a more expensive house than you're selling.
Click to expand...
Because my life is in a transitional stage right now with a 10 month old and a child in route and my wife just quit her job.

I'd really prefer to enjoy my lower cost home for right now while I can because I know when I move that my overall life costs are just going to explode... bigger house in a nicer neighborhood just leads to higher property taxes, insurance, more furniture, higher utilities, etc.

I really don't want to move even though I know it's probably a good idea.

 
Dentist said:
TheWalkmen said:
Dentist said:
TheWalkmen said:
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.
Click to expand...
I was planning to buy a new home in 3-5 years.
Click to expand...
Why wait, with rates where they're at and with home prices where they're at? Assuming you will be buying a more expensive house than you're selling.
Click to expand...
Because my life is in a transitional stage right now with a 10 month old and a child in route and my wife just quit her job.

I'd really prefer to enjoy my lower cost home for right now while I can because I know when I move that my overall life costs are just going to explode... bigger house in a nicer neighborhood just leads to higher property taxes, insurance, more furniture, higher utilities, etc.

I really don't want to move even though I know it's probably a good idea.
Click to expand...
Move and keep your paid off house as a rental :moneybag: :moneybag: :moneybag:

 
Random said:
Dentist said:
TheWalkmen said:
Dentist said:
TheWalkmen said:
Rates are so low and housing prices are pretty low still. There will be another massive housing boom in the next 15 years so I would upgrade your house big time. Sounds like you have equity (actually I know you have a bunch of equity you stingy *******); sell your house and upgrade and thank me in 15 years. Inflation + the upcoming housing boom will be :moneybag: :moneybag: for you.
Click to expand...
I was planning to buy a new home in 3-5 years.
Click to expand...
Why wait, with rates where they're at and with home prices where they're at? Assuming you will be buying a more expensive house than you're selling.
Click to expand...
Because my life is in a transitional stage right now with a 10 month old and a child in route and my wife just quit her job.

I'd really prefer to enjoy my lower cost home for right now while I can because I know when I move that my overall life costs are just going to explode... bigger house in a nicer neighborhood just leads to higher property taxes, insurance, more furniture, higher utilities, etc.

I really don't want to move even though I know it's probably a good idea.
Click to expand...
Move and keep your paid off house as a rental :moneybag: :moneybag: :moneybag:
Click to expand...
This.

 
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