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

[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.

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.

Yeah, I wouldn't suggest paying off a mortgage early if you have no liquid funds. I would recommend 6 months of reserves for all of your fixed costs and necessary costs in order to live and keep a roof over your head (mortgage, car, insurance, food, heating).

 

[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)

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.

see my post above for my "priority in investing". I'm diversified.

 

[TheWalkmen]

Furthermore, I would suggest that once you figure out a budget and how much you need in a reserve, and then reach your reserve to not accumulate any additional cash. Put that cash to work each month paying down debt, while maxing out a 401k up to what your employer matches. Not a penny more. Forget your IRA too. IRA's are so full of rules that they limit what you can do with your $. The best way to maximize your overall wealth is to do these few things.

 

[fantasycurse42]

Market is expensive right now, pay down the mortgage.

 

[TxBuckeye]

Furthermore, I would suggest that once you figure out a budget and how much you need in a reserve, and then reach your reserve to not accumulate any additional cash. Put that cash to work each month paying down debt, while maxing out a 401k up to what your employer matches. Not a penny more. Forget your IRA too. IRA's are so full of rules that they limit what you can do with your $. The best way to maximize your overall wealth is to do these few things.

Not trying to toot my own horn and I don't want to come off that way. But as I have mentioned, the 401Ks and IRAs are already maxed. Once I pay this last car payment, I have ZERO debt other than the mortgage. No credit card, no loan debt, nothing. And I pretty much have a six month reserve in cash. That's why the decision truly is mortgage or investing. Those are really the only options. Well, the only good/smart ones.

Edit: I should add that I have NO Bitcoins, if that changes anything...

 

[Tiger Fan]

Furthermore, I would suggest that once you figure out a budget and how much you need in a reserve, and then reach your reserve to not accumulate any additional cash. Put that cash to work each month paying down debt, while maxing out a 401k up to what your employer matches. Not a penny more. Forget your IRA too. IRA's are so full of rules that they limit what you can do with your $. The best way to maximize your overall wealth is to do these few things.

Not trying to toot my own horn and I don't want to come off that way. But as I have mentioned, the 401Ks and IRAs are already maxed. Once I pay this last car payment, I have ZERO debt other than the mortgage. No credit card, no loan debt, nothing. And I pretty much have a six month reserve in cash. That's why the decision truly is mortgage or investing. Those are really the only options. Well, the only good/smart ones.

Edit: I should add that I have NO Bitcoins, if that changes anything...

You're already invested to the max with respect to retirement, don't see any downside in paying the mortgage

 

[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.

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.

This is true and a *very* key point I didn't mention. A mortgage at 4.5% is like selling bonds at 4.5%, but you get a tax break on the interest. So the equivalent is more like buying back those bonds at 4.5% with tax free interest. If you can find an investment that either yields better than 4.5% tax free or beats 4.5% *after taxes*, THEN you're coming out ahead...again ignoring the liquidity issue.

 

[Steve Tasker]

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

I am a believer in the emotional/psychological aspect of investing, and this is a very good example of it. It's important to understand the actual numbers (and I'm sure you do), but it's also important to understand your individual preferences and needs and factor that into the equation.

 

[TxBuckeye]

Just an update for anyone that might give a rat's patooty. While we walked and talked, we decided to go with a mixed approach. We are going to put half in to further retirement investments, and the other half in to the house. That way our eggs will not all be in one proverbial basket. So once again, thanks to all who offered advice and tips. It was much appreciated.