Invest versus Extra Mortgage, Prognostication Time! (1 Viewer)

[TxBuckeye]

So, I had asked in an earlier thread about what was better, paying down your principal or investing with some extra monthly cash? I am now in a different house and under a different mortgage. I refigured all my numbers based on a target date of when I retire. Question still remains, pay extra towards the house so it is paid off, or invest and be rollin' in the proverbial fat cash?

This time, I did a break even validation based on my actual planned retirement date. I was surprised somewhat to see that the breakeven point on investing would require a return of 6.378% over the next 16 years to break even and be able to pay off the balance of what I would still owe on the home. I say somewhat because I realize that monthly payments need time to grow and earn, and the latter payments simply wouldn't have time to do that. That being said, the point remains, 6.378%. Anything greater, profit. Anything less, I lose out.

That number to me, given the economy, seems fairly unattainable. But I'm not a finance guru, and maybe others have a different opinion. Does anyone think I would actually have a chance of beating that sort of rate just using index funds and whatnot, keeping fees low? Or is that really just no way, not gonna happen, making the extra principal payments the easy choice? I am definitely leaning towards the house at this point.

 

[Dentist]

a lot of variables before this question is answerable.

Are the home values in this area seemingly on the rise... do you have a decent overall view of your neighborhood?

What is your risk tolerance and level of knowledge for investing?

I'll tell you what I've done.. i didn't go all-in or all-out of either of them.. i refinanced my loan to a 10 year loan so i was putting more towards the house, I'm making a few extra payments on the house as I get bonus money, but am investing the rest.. so kind of going 50/50 on home vs. investing.

my interest rate is so low that it's probably not +EV for me to pay any extra dollars on the home... but I"m so heavily invested already in the market and am not as optimistic about market gains over the next 1-3 years as I was 2-4 years ago when we were on the rebound..

 

[Patriotsfatboy1]

I think that the S&P has done about 6% annualized rate of return over the last 16 years or so. It would be hard to say whether you will be looking at 6.5% or greater over the next 16 years, but it is not unreasonable with even a basic investment.

 

[pats3in4]

Think of paying down your mortgage as buying bonds for the mortgage APR. For example:

Take out a $200K mortgage at 4.5% is like selling $200K worth of bonds at 4.5%.

Paying down the mortgage is like buying back some of those bonds at 4.5% since that's what you will be paying yourself back - the saved interest.

So, if you think you can do better than buying a 4.5% bond, invest elsewhere. Otherwise invest in the mortgage, but also understand that the amount you are paying yourself back is not liquid...it's in your home.

 

[mquinnjr]

I'm in a different, but in the ballpark similar situation. I own a 1-bedroom apartment in a co-op that is under water significantly (bought in May 2008 ). I am 30 and single, and have a relatively stable career. I refinanced in January 2013 down to 3.6% on a 30-year fixed mortgage. So, my cost of borrowing is significantly lower than it was for the mortgage at 6.375% from the original mortgage loan. At 3.6% to pay down the sunk under water mortgage vs. hope for an annualized 7-8% long term rate of return in the stock market, I am literally pounding every dollar I reasonably can into my retirement accounts, small amounts taxable for things I want to save for in the short term. I'll rent the place and turn it into a capital asset if I ever move, and deal with the loss when the day comes. Pray for a housing recovery where I live (central NJ) and strike if it ever comes. But yeah, if you can get a sizeable enough spread on your mortgage interest rate vs. your market return percentage, put the money into safe-ish index ETF's, etc.

 

[Dentist]

I should've asked this..... are you already taking full advantage of a 401k at work if you have one and getting every match dollar you can? are you maximizing your Roth IRA if elegible? Are you maximizing your HSA if elegible? Are you properly insured against going poor? life if needed, umbrella if you are rich, etc. Do you have children? if so have you made any provisions if you so choose for a 529 plan for them (if it fits into your financial plan?)

I would definitely say all of these things should be satisfied before you make the decision invest or pay down debt.

I would say you need to be at the point where you have maximized every tax advantaged vehicle you have access to and are then considering investing in a cash management account vs. the debt pay down.

 

[TxBuckeye]

Both wife and I are maxed on 401k and IRA. I have military healthcare so HSA not really a factor. All of our children are fully grown, 19+ in age.

 

[fourd]

Are you planning on staying in the house or selling it when you retire? How old will you be when you plan to retire? How many years away is that? What will you need income-wise at retirement? These are some other questions you need to ask yourself.

 

[TxBuckeye]

Most likely going to sell because it is two stories and I will be 65, the wife 67. It is 15 years from now. As for what I need investment wise, good question. Without a crystal ball, hard to tell. I do know I would like to have a place to live when I retire without worry. So the sale of this house will have to fully fund the next one. Or the sale of this house plus the extra I invest if going that option.

 

[ffldrew]

Think of paying down your mortgage as buying bonds for the mortgage APR. For example:

Take out a $200K mortgage at 4.5% is like selling $200K worth of bonds at 4.5%.

Paying down the mortgage is like buying back some of those bonds at 4.5% since that's what you will be paying yourself back - the saved interest.

So, if you think you can do better than buying a 4.5% bond, invest elsewhere. Otherwise invest in the mortgage, but also understand that the amount you are paying yourself back is not liquid...it's in your home.

Also remember that your mortgage is most likely amortized with the bulk of interest paid up front during your early years - your extra payments will go towards principal but you are paying larger interest with your regular payment so it's not really a straight calculation.

 

[NutterButter]

I think that the S&P has done about 6% annualized rate of return over the last 16 years or so. It would be hard to say whether you will be looking at 6.5% or greater over the next 16 years, but it is not unreasonable with even a basic investment.

If that's the actual increase, you have to add a percent or two for dividends. That's separate from the actual increase in the index.

 

[NutterButter]

Think of paying down your mortgage as buying bonds for the mortgage APR. For example:

Take out a $200K mortgage at 4.5% is like selling $200K worth of bonds at 4.5%.

Paying down the mortgage is like buying back some of those bonds at 4.5% since that's what you will be paying yourself back - the saved interest.

So, if you think you can do better than buying a 4.5% bond, invest elsewhere. Otherwise invest in the mortgage, but also understand that the amount you are paying yourself back is not liquid...it's in your home.

Also remember that your mortgage is most likely amortized with the bulk of interest paid up front during your early years - your extra payments will go towards principal but you are paying larger interest with your regular payment so it's not really a straight calculation.

Also remember your real rate is not 4.5%. You have to figure in the deduction based on your marginal tax rate. You could realistically knock another point off of that.

Unless you're debt adverse, you're much better off investing that money with a rate like that.

 

[TheWalkmen]

I think a lot of people overlook the fact that on the mortgage you're paying interest on the principal balance so just thinking that if you earn a rate better by investing than what the rate is on your mortgage that you're automatically coming out ahead regardless of the investment balance. So if the mtg is $200,000 and you're paying 4.5% you would need to have a $200,000 investment earning the same % same to break even, excluding tax impact. The principal balance goes down slowly - the scumbag banks win. I suggest prepaying the mtg so the banks don't win.

 

[belljr]

Little of both

 

[NutterButter]

I think a lot of people overlook the fact that on the mortgage you're paying interest on the principal balance so just thinking that if you earn a rate better by investing than what the rate is on your mortgage that you're automatically coming out ahead regardless of the investment balance. So if the mtg is $200,000 and you're paying 4.5% you would need to have a $200,000 investment earning the same % same to break even, excluding tax impact. The principal balance goes down slowly - the scumbag banks win. I suggest prepaying the mtg so the banks don't win.

Just to give a simple example, if you have a 200k 20 year loan at 4.5%. By my calculations, you're paying 1265/month (not considering your deduction to keep it simple). Say right when your loan begins you come across 2k to either invest or put towards your mortgage. If you put it towards the mortgage, you'd decrease your mortgage length by 4 months; so that's 5k in payments you don't have to make. Now if instead you invest that money, lets say in a roth to take any taxes out of the equation at say a 7% rate of return. After 20 years of compounding interest, that 2k would be at 7233. Now there's a lot of factors at play there. That investment rate is historically below average, but there's no guarantee you'll make that. If you can't weather out the timing of that 20 year coming to an end possibly being during something like 2007, you'd certainly be worse off than just paying off your mortgage. If you're paying capital gains tax on your investment, that knocks off 15% off any profit (the 5233 in the example I gave). At that mortgage rate, paying off the mortgage is the safe investment b/c you're guaranteed to shave off 4 months on that loan and thus save 5k in payments.

 

[bostonfred]

I'll tell you what I've done.. i didn't go all-in or all-out of either of them.. i refinanced my loan to a 10 year loan so i was putting more towards the house, I'm making a few extra payments on the house as I get bonus money, but am investing the rest.. so kind of going 50/50 on home vs. investing.

my interest rate is so low that it's probably not +EV for me to pay any extra dollars on the home... but I"m so heavily invested already in the market and am not as optimistic about market gains over the next 1-3 years as I was 2-4 years ago when we were on the rebound..

lolyou should make as much as my money and do both.

but then you follow up with the mo money mo problems shtick with

you know it's hard when you get such a good interest rate that it's not worth paying more down on your mortgage. you end up having too much money in the stock market.

 

[Dinsy Ejotuz]

Also consider that the return you give yourself by paying down the mortgage is a 100% guaranteed return.

Getting a guaranteed 4-5-6% for the next X years is pretty solid. Far better than other safe investments.

 

[TxBuckeye]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

 

[Short Corner]

Also consider that the return you give yourself by paying down the mortgage is a 100% guaranteed return.

No it isn't.

 

[NutterButter]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

Christ, you're certainly under 3% after the deduction. That's like free money. You'd have to be one conservative, risk adverse, debt adverse investor to pay that off early. Remember if you put that extra money in a roth, you can always withdraw the principle if you're ever in a pinch penalty free. If you pay down your mortgage, you'll still owe the same amount each month; you're just lessening the duration. So investing in a roth gives you that extra security.

 

[fourd]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

Generally speaking a person would be better off saving the money with that interest rate on the mortgage. You'll also be giving up liquidity by putting it back in the house. I'm assuming the rate is fixed?

 

[E Street Brat]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

If your house was paid off. Would you borrow money at 3.52% in order to invest it?

 

[Tiger Fan]

If you look at it solely using NPV, and you expect conservative returns from the stock market based on history; it doesn't make sense to pay off early. When you factor other factors including peace of mind, it often makes sense. There has been a ton of discussion on the boards about this topic and there are good arguements for both sides...you just need to figure out where your priorities are. Here's a link I started a while back...there are some others, you just need to search:http://forums.footba...ge&fromsearch=1

 

[Tiger Fan]

I used to be in the camp of "why pay off, when I can (almost) certainly make more investing"...then I started to think about what I wanted to do with my life. One of the big drivers was that I wanted to stay and raise my family in New Orleans for ever. I work for a huge company, and I know at some point there is a great possibility that I will either be asked to move, or that the company itself could up and move my department from New Orleans. I wanted to make sure that I do everything in my power to make it so that I am "not dependable on this job". The obvious answer to that is to eliminate my mortgage. The 4% (difference b/w my mortgage rate and average stock returns) was worth that to me. So I changed my personal finance strategy to the following:

• taking advantage of the full 401k match at work (if you have that option) - this is free money, everyone should be doing this first
• paying off other high % debts like car loans, credit card debt, etc. - didn't have any, no issue here
• having proper levels of insurance (life, home, auto, disability, etc... whatever pertains to your situation)
• having a 6 mo. emergency fund
• fully funding your Roth IRA/401k - Once I made too much $ for my Roth, I decided to put 10k/year into my 401k. I ran the #s, and I could have put this extra $10k/year into my mortgage, but it would have only saved me 9 additional months, which really won't mean too much to me.
• paying down mortgage with any additional money
• funding your children's educational funds (if you have children) - this will come after mortgage is paid off
• investing outside of a tax advantaged account - this will come after mortgage is paid off

 

[TxBuckeye]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

Christ, you're certainly under 3% after the deduction. That's like free money. You'd have to be one conservative, risk adverse, debt adverse investor to pay that off early. Remember if you put that extra money in a roth, you can always withdraw the principle if you're ever in a pinch penalty free. If you pay down your mortgage, you'll still owe the same amount each month; you're just lessening the duration. So investing in a roth gives you that extra security.

As I mentioned earlier, I do monthly Roth contributions and am already maxed out for both me and my spouse. I can't put any more in a Roth. Also, I retire in 15 years. The mortgage is 30. I don't want 15 years of house payments remaining when I retire. This is one of the big factors to me.

 

[TxBuckeye]

I'm assuming the rate is fixed?

Yes.

 

[Tiger Fan]

How long would it take you to pay it off?

 

[TxBuckeye]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

If your house was paid off. Would you borrow money at 3.52% in order to invest it?

No. To be honest, I would probably never borrow money to invest it. Is this a common thing that folks do?

 

[TxBuckeye]

How long would it take you to pay it off?

If I add the money from my current car payment (that is the source of extra income about to be freed up) plus make one extra annual payment each year when my company bonus comes in, it would be paid in full Nov 2029. By adding an additional $107 a month, I can have it paid off in full on my 65th birthday, i.e. Retirement Day. That is April 2028. Without the extra $107 a month, the payoff amount at age 65 would be $25k.

 

[E Street Brat]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

If your house was paid off. Would you borrow money at 3.52% in order to invest it?

No. To be honest, I would probably never borrow money to invest it. Is this a common thing that folks do?

I'm not sure if it's common or not, but investing that money instead of paying off you house is the same thing as borrowing it,

 

[Dentist]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

If your house was paid off. Would you borrow money at 3.52% in order to invest it?

So in your opinion is any dollar invested before you are 100% debt free a mistake if you would answer that you would not borrow the money to invest it?

 

[NewlyRetired]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

Christ, you're certainly under 3% after the deduction. That's like free money. You'd have to be one conservative, risk adverse, debt adverse investor to pay that off early. Remember if you put that extra money in a roth, you can always withdraw the principle if you're ever in a pinch penalty free. If you pay down your mortgage, you'll still owe the same amount each month; you're just lessening the duration. So investing in a roth gives you that extra security.

As I mentioned earlier, I do monthly Roth contributions and am already maxed out for both me and my spouse. I can't put any more in a Roth. Also, I retire in 15 years. The mortgage is 30. I don't want 15 years of house payments remaining when I retire.This is one of the big factors to me.

15 years of having a mortgage while in retirement is not common (it happens but not a lot).

Are you expecting this to be your house for life or is there a chance you might downsize come retirement?

 

[NutterButter]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

Christ, you're certainly under 3% after the deduction. That's like free money. You'd have to be one conservative, risk adverse, debt adverse investor to pay that off early. Remember if you put that extra money in a roth, you can always withdraw the principle if you're ever in a pinch penalty free. If you pay down your mortgage, you'll still owe the same amount each month; you're just lessening the duration. So investing in a roth gives you that extra security.

As I mentioned earlier, I do monthly Roth contributions and am already maxed out for both me and my spouse. I can't put any more in a Roth. Also, I retire in 15 years. The mortgage is 30. I don't want 15 years of house payments remaining when I retire. This is one of the big factors to me.

So both you and your wife are saving 17.5k in 401k and 5.5k in roth. Those are the max for each. You're collectively saving 46k each year. That's plenty.

Your next option is just a standard brokerage account which means you'll be paying tax every year that you realize earnings either from dividends or from some form of sale. If you were just only buy and never sell anything until you want to cash out, then you'd only be stuck paying tax on earnings at that time aside from tax on any dividends you receive each year.

As far as your remaining house payments, that money you invest is always liquid. You'll just have to pay tax on earnings. This tax does decrease your profit, but by how much is hard to determine b/c it all depends on how often you're selling. Anything you hold for less than a year is considered short term cap gains and is taxed at the ordinary income rate while longer than a year is long term cap gains and is taxed at 15%.

From the sound of it, you're saving plenty and to keep things simple, just pay off the mortgage.

 

[TheWalkmen]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

 

[Dentist]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

That's a fairly negative opinion of the stock market.

I'm not necessarily defending bankers and financial advisors, but when they state that over teh last 100 years it has averaged X they certainly didn't eliminate the crashes from teh equation.

The recent market crash in '08-'09 did wipe out a lot of "paper" principal for people, but provided that you didn't cash out at the bottom like a moron, then you've made your money back and then some... it's all paper gains and losses until you realize it.

Paying off your mortgage is the safe play, but some people have some truly microscopic loan rates these days whereby making investments is a very reasonable alternative to paying down your mortgage provided you have the proper time frame for the money and the proper risk tolerance.

 

[NutterButter]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

Yeah, you have to be able to absorb the crashes. Never try to time the market. And that's also why you invest in index funds to keep your fees almost at nothing. And you're not forced to take anything out of a Roth

 

[TheWalkmen]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

That's a fairly negative opinion of the stock market.

I'm not necessarily defending bankers and financial advisors, but when they state that over teh last 100 years it has averaged X they certainly didn't eliminate the crashes from teh equation.

The recent market crash in '08-'09 did wipe out a lot of "paper" principal for people, but provided that you didn't cash out at the bottom like a moron, then you've made your money back and then some... it's all paper gains and losses until you realize it.

Paying off your mortgage is the safe play, but some people have some truly microscopic loan rates these days whereby making investments is a very reasonable alternative to paying down your mortgage provided you have the proper time frame for the money and the proper risk tolerance.

It totally depends on timing when looking at a time horizon. If you look out 30 years from today and compare the guaranteed return of paying off the mtg vs. investing, there will be market crashes in within teh 30 years. Depending on when teh crash is, paying off the mtg can be a better investment. It really all comes down to timing. Some people can't afford to have a crash and recover from it. You can apparently.

 

[mquinnjr]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

That's a fairly negative opinion of the stock market.

I'm not necessarily defending bankers and financial advisors, but when they state that over teh last 100 years it has averaged X they certainly didn't eliminate the crashes from teh equation.

The recent market crash in '08-'09 did wipe out a lot of "paper" principal for people, but provided that you didn't cash out at the bottom like a moron, then you've made your money back and then some... it's all paper gains and losses until you realize it.

Paying off your mortgage is the safe play, but some people have some truly microscopic loan rates these days whereby making investments is a very reasonable alternative to paying down your mortgage provided you have the proper time frame for the money and the proper risk tolerance.

If you're automatically investing, or manually investing but holding to a schedule where you're dollar cost averaging your contributions and share purchases, a market crash is a great thing if you're time horizon is long-term. Dentist is right, it's literally a paper loss, and when the market drops, you're getting more shares for your invested capital for the long term. Market gains just look cool on paper. If you're long term right now, you're actually buying more expensive shares of index ETF's and what have you that you invest in. But you're getting your money into the market and giving it time to grow up and down, while adding more all along the timeline.

If you have a big enough spread in your interest rate on your mortgage vs. your anticipated or historical stock market returns, it is kind of overly conservative and short sighted to not be in the market. Great, once the house is paid off, you have a lot shorter window to jam money into the market and let it grow, and lose your ability to grow in equities. Have fun working into your late 60's+ with your paid off house. Invest in sound, lowest fee possible indexes, match your risk vs. your timeline, and let the time value of money do its thing.

 

[E Street Brat]

I guess I should add that my mortgage rate is 3.52% under the TxVet program.

If your house was paid off. Would you borrow money at 3.52% in order to invest it?

So in your opinion is any dollar invested before you are 100% debt free a mistake if you would answer that you would not borrow the money to invest it?

No, but in this case his pretax contributions on his 401k and Roth are maxed out. So I would start working on the mortgage.

 

[TheWalkmen]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

That's a fairly negative opinion of the stock market.

I'm not necessarily defending bankers and financial advisors, but when they state that over teh last 100 years it has averaged X they certainly didn't eliminate the crashes from teh equation.

The recent market crash in '08-'09 did wipe out a lot of "paper" principal for people, but provided that you didn't cash out at the bottom like a moron, then you've made your money back and then some... it's all paper gains and losses until you realize it.

Paying off your mortgage is the safe play, but some people have some truly microscopic loan rates these days whereby making investments is a very reasonable alternative to paying down your mortgage provided you have the proper time frame for the money and the proper risk tolerance.

If you're automatically investing, or manually investing but holding to a schedule where you're dollar cost averaging your contributions and share purchases, a market crash is a great thing if you're time horizon is long-term. Dentist is right, it's literally a paper loss, and when the market drops, you're getting more shares for your invested capital for the long term. Market gains just look cool on paper. If you're long term right now, you're actually buying more expensive shares of index ETF's and what have you that you invest in. But you're getting your money into the market and giving it time to grow up and down, while adding more all along the timeline.

If you have a big enough spread in your interest rate on your mortgage vs. your anticipated or historical stock market returns, it is kind of overly conservative and short sighted to not be in the market. Great, once the house is paid off, you have a lot shorter window to jam money into the market and let it grow, and lose your ability to grow in equities. Have fun working into your late 60's+ with your paid off house. Invest in sound, lowest fee possible indexes, match your risk vs. your timeline, and let the time value of money do its thing.

Take this scenario over 360 months. $300,000 mortgage at 4.375% for 30 years starting 4/1/14. You have $1000 a month you can save and invest or put to the mortgage.

Your P&I is right around $1500 a month without prepaying. By prepaying the $1000 a month you would pay off the mortgage in 6/2027 after 159 months, so there is $159,000 you could have saved or invested. Then you can save the $1000 and the $1500 in P&I you no longer have to pay. At the end of 360 months, if you prepay for 159 and then save $2500 for 201 months you'll have $500,000 plus. If you just saved the $1000 a month for 360 months you would have $360,000. Of course you could have a crapload of money if the market work in your favor. It all depends on timing. If the crash happens at the wrong time you're screwed.

 

[TxBuckeye]

Yes Nutter, we are socking away about 24% of our gross income (not net) because we both got late starts due to ex-spouses that were way more in to spending than saving. So we know we have a ways to go and are aggressive about our saving approach.

The key for me, the big cog in the wheel if you will, is that retirement is only 15 years away. If it were 30 or so, then investing this monthly money would be an easy call. But the fact is, with the time frame being as short as it is, the money just won't have a lot of time to compund. If it were all available today and I could invest it all in one giant lump sum, I'd probably jump on it. Unfortunately it has to be a monthly stipend type of investment, greatly reducing the earning potential (in my mind). Plus I must admit, I just don't have a postive view of future returns. Maybe I am seeing all the negative sources, but it seems everywhere I turn, people are saying the market is over-valued and is going to downturn. That is playing a part too. Are these negative views not necessarily widespread? Do the investors in here disagree with that outlook?

By the way, this is an awesome discussion and I appreciate all the inputs and views.

 

[mquinnjr]

Yeah that's the thing, timing is absolutely key. And I don't mean market timing I mean investing in the right products in the market and managing your risk along the timeline in the right way.

So, let's say I'm 30 when I buy the house on 4/1/14. I'm 43 when it's paid off. So I am debt free from the house, but I am in deep trouble in terms of my ability to hit equities since I'm 43 now, and yielded 13 years of equity investing while I had the time to absorb more ups and downs on the timeline to investing in a home. I'm 43 and have a goose egg in my retirement accounts, and I have to be in investments now that are less risky, and have far lesser potential returns...to make up the lost ground. I also have a ton of ground to cover with those lower yield investments to get my nest egg to a good place so my family and I can retire comfortably. In our house that is paid for.

It just seems like chasing your tail, to get that low yield guarantee on the house being paid off.

 

[NutterButter]

Yeah that's the thing, timing is absolutely key. And I don't mean market timing I mean investing in the right products in the market and managing your risk along the timeline in the right way.

So, let's say I'm 30 when I buy the house on 4/1/14. I'm 43 when it's paid off. So I am debt free from the house, but I am in deep trouble in terms of my ability to hit equities since I'm 43 now, and yielded 13 years of equity investing while I had the time to absorb more ups and downs on the timeline to investing in a home. I'm 43 and have a goose egg in my retirement accounts, and I have to be in investments now that are less risky, and have far lesser potential returns...to make up the lost ground. I also have a ton of ground to cover with those lower yield investments to get my nest egg to a good place so my family and I can retire comfortably. In our house that is paid for.

It just seems like chasing your tail, to get that low yield guarantee on the house being paid off.

yeah, a lot of what's in this thread is investing 101. You take on the risk early in your life while you can absorb the ups and downs and as you get closer to retirement, you rebalance your portfolio so that you're taking on less and less risk.

 

[TheWalkmen]

The best answer is a combo of prepaying and investing. Another plus of prepaying is this: prepare a yearly income statement based on your income and expenses. Take your Principal and Interest out of your expenses. How much money do you now need to live?

 

[fourd]

Yes Nutter, we are socking away about 24% of our gross income (not net) because we both got late starts due to ex-spouses that were way more in to spending than saving. So we know we have a ways to go and are aggressive about our saving approach.

The key for me, the big cog in the wheel if you will, is that retirement is only 15 years away. If it were 30 or so, then investing this monthly money would be an easy call. But the fact is, with the time frame being as short as it is, the money just won't have a lot of time to compund. If it were all available today and I could invest it all in one giant lump sum, I'd probably jump on it. Unfortunately it has to be a monthly stipend type of investment, greatly reducing the earning potential (in my mind). Plus I must admit, I just don't have a postive view of future returns. Maybe I am seeing all the negative sources, but it seems everywhere I turn, people are saying the market is over-valued and is going to downturn. That is playing a part too. Are these negative views not necessarily widespread? Do the investors in here disagree with that outlook?

By the way, this is an awesome discussion and I appreciate all the inputs and views.

Have you looked at the cost of moving to a 15-year mortgage? And keep in mind that while retirement may be 15 years away you are going to live for X number of years in retirement. You don't just stop investing and put all your money in the mattress on the day you retire. As you approach retirement you determine what you will need for living expenses and start moving that money into "safe" investments/money market. And remember 15 years is a long time for an investment horizon. How many people, at the start of 2009, would have expected the market to be where it is today?

 

[TxBuckeye]

Have you looked at the cost of moving to a 15-year mortgage? And keep in mind that while retirement may be 15 years away you are going to live for X number of years in retirement. You don't just stop investing and put all your money in the mattress on the day you retire. As you approach retirement you determine what you will need for living expenses and start moving that money into "safe" investments/money market. And remember 15 years is a long time for an investment horizon. How many people, at the start of 2009, would have expected the market to be where it is today?

I intially was going to do a 15 but decided against it since I was taking on a new job. I figured better to take the 30 and pay extra monthly, having a fallback if things went sour for a bit. As opposed to the payment on the 15, where I'd have been locked in.

 

[Short Corner]

Bankers and financial advisers like to sell you on "over the last 100 years the market has averaged x%" so you should invest. They don't tell you about market crashes that wipe out 50% of your principal. Why would they? Over a 30 year loan, you're paying almost as much in interest as in principal at around 4%. Also, financial advisers get paid by holding your $ - which is what's important to them. The government wants you to invest in IRA and crap and then force you to take out a certain amount each year - they tell you the accounts are tax advantaged which isn't necessarily true. All these games are rigged.

The safest, smartest route is to pay off the mortgage. I have an excel file I can email that models out paying off early.

That's a fairly negative opinion of the stock market.

I'm not necessarily defending bankers and financial advisors, but when they state that over teh last 100 years it has averaged X they certainly didn't eliminate the crashes from teh equation.

The recent market crash in '08-'09 did wipe out a lot of "paper" principal for people, but provided that you didn't cash out at the bottom like a moron, then you've made your money back and then some... it's all paper gains and losses until you realize it.

Paying off your mortgage is the safe play, but some people have some truly microscopic loan rates these days whereby making investments is a very reasonable alternative to paying down your mortgage provided you have the proper time frame for the money and the proper risk tolerance.

If you're automatically investing, or manually investing but holding to a schedule where you're dollar cost averaging your contributions and share purchases, a market crash is a great thing if you're time horizon is long-term. Dentist is right, it's literally a paper loss, and when the market drops, you're getting more shares for your invested capital for the long term. Market gains just look cool on paper. If you're long term right now, you're actually buying more expensive shares of index ETF's and what have you that you invest in. But you're getting your money into the market and giving it time to grow up and down, while adding more all along the timeline.

If you have a big enough spread in your interest rate on your mortgage vs. your anticipated or historical stock market returns, it is kind of overly conservative and short sighted to not be in the market. Great, once the house is paid off, you have a lot shorter window to jam money into the market and let it grow, and lose your ability to grow in equities. Have fun working into your late 60's+ with your paid off house. Invest in sound, lowest fee possible indexes, match your risk vs. your timeline, and let the time value of money do its thing.

Take this scenario over 360 months. $300,000 mortgage at 4.375% for 30 years starting 4/1/14. You have $1000 a month you can save and invest or put to the mortgage.

Your P&I is right around $1500 a month without prepaying. By prepaying the $1000 a month you would pay off the mortgage in 6/2027 after 159 months, so there is $159,000 you could have saved or invested. Then you can save the $1000 and the $1500 in P&I you no longer have to pay. At the end of 360 months, if you prepay for 159 and then save $2500 for 201 months you'll have $500,000 plus. If you just saved the $1000 a month for 360 months you would have $360,000. Of course you could have a crapload of money if the market work in your favor. It all depends on timing. If the crash happens at the wrong time you're screwed.

And if for some reason he loses his job during those 159 months he is screwed. He has zero liquidity and will be forced to sell. Hopefully the circumstances leading him to losing his job didn't turn the housing market as well. If he is under water, all that money he put into paying odd the mortgage early vanishes.

 

[Tiger Fan]

Given your situation, it seems like paying off the mortgage is the right idea.

FWIW, I'm 9 months away from paying mine off and it's increadible liberating just looking at all of this extra income that I'll have when its all said and done. Basically anything I want to do is an option (quit job for less stress, invest in a business, real estate, buy some toys, etc)

 

[NewlyRetired]

FWIW, I'm 9 months away from paying mine off and it's incredible liberating just looking at all of this extra income that I'll have when its all said and done. Basically anything I want to do is an option (quit job for less stress, invest in a business, real estate, buy some toys, etc)

I can tell you first hand it was the best feeling I ever had financially. It blew away stock options hitting, promotions, raises etc.

We did not do the old fashioned "mortgage burning" bit, but we knew from that point on that every thing changed.

Congrats and enjoy the peace of mind this gives you.

 

[Patriotsfatboy1]

Given your situation, it seems like paying off the mortgage is the right idea.

FWIW, I'm 9 months away from paying mine off and it's increadible liberating just looking at all of this extra income that I'll have when its all said and done. Basically anything I want to do is an option (quit job for less stress, invest in a business, real estate, buy some toys, etc)

I have had that for quite some time because I invested and have a low mortgage rate. I am not a huge fan of having your eggs in a single basket like a home. That market has tanked recently as well, so you have to have a balance of investments. Either way, none of that opportunity to balance investments happens if you spend poorly.