Author Topic: Lump sum toward house or toward investments?  (Read 1773 times)

onemorebike

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Lump sum toward house or toward investments?
« on: June 15, 2017, 05:14:53 AM »
We moved recently and we've been sitting on ~$70,000 in cash in case it was needed as we moved, acquired jobs and settled in. Turns out we didn't need it, which is great, but now I'm itching to get it out of savings and into something useful.

Honestly, I've got reservations about where our current leadership will take our economy over the coming 3.5 years and hesitation about investing even in index funds as I'm braced for fallout at some point along the way.

I've been wondering if I should put this money toward our mortgage (currently owe ~$168,000 on a ~$278,000 home) or if we should move it over to an index fund. We have no debt other than our mortgage, both are middle class earners bringing in ~$100,000 for the household annually, and spend way less than we earn. I'm interested in any and all strategies that feel "safe" to put this money to its best use.

Anyone out there willing to help me think about this next step?



webguy

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Re: Lump sum toward house or toward investments?
« Reply #1 on: June 15, 2017, 09:01:12 AM »
I guess the big question is what your mortgage interest rate is?

nara

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Re: Lump sum toward house or toward investments?
« Reply #2 on: June 15, 2017, 09:18:11 AM »
As long as I am not paying PMI, I would put the lump sum into investments (minus any cash for an emergency fund). The historic rate of return for the stock market has been 7% since the 1950's which exceeds mortgage interest rates. Even better if you can get some of this cash into tax advantaged accounts like an IRA or HSA. If you're invested for the long term the minor fluctuations based on who's in office shouldn't matter as historically the market has always gone up.

Car Jack

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Re: Lump sum toward house or toward investments?
« Reply #3 on: June 15, 2017, 09:19:51 AM »
It comes down to what risk are you willing to put your $70k under.  If you put that on the mortgage, your payoff date comes sooner.  This is fully guaranteed.  If you put it into stock funds, you get whatever return the market gives you.....and still have the same mortgage payoff date.

I used to be 100% risk averse and paid all extra money towards debt and mortgage until these were all gone.  I will say that I've never been unhappy when I no longer had mortgage payments.  Each new month comes and I pull out my checkbook to pay that mortgage payment.....then I close it and put it away.

birdman2003

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Re: Lump sum toward house or toward investments?
« Reply #4 on: June 15, 2017, 09:23:41 AM »
You get a guaranteed rate of return equal to whatever your mortgage interest happens to be.  You may lose money or get more money with an index fund.

What's your risk tolerance?  The 3-4% guaranteed rate of return would be my choice.

ysette9

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Re: Lump sum toward house or toward investments?
« Reply #5 on: June 15, 2017, 09:27:49 AM »
The current administration will hopefully be no more than a four-year blip on the radar and the markets will not crater as a result. This is presumably long-term money you are talking about, so take the long view. If you still don't feel comfortable then put your money into VTIAX (international) instead. There is an entire globe out there outside the US.

boarder42

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Re: Lump sum toward house or toward investments?
« Reply #6 on: June 15, 2017, 11:52:55 AM »
You get a guaranteed rate of return equal to whatever your mortgage interest happens to be.  You may lose money or get more money with an index fund.

What's your risk tolerance?  The 3-4% guaranteed rate of return would be my choice.

market returns over 30+ years are all but guaranteed. 7% after inflation.  its what the entire premise of FIRE is based on .... if you cant stomach the markets you'll have to save to an extremely small SWR to be safe.

the 3-4% return on a house is a poor choice if its fixed for 30 years even 15 years. 

Your future self will thank you for dumping money into the market vs a house.  even if you were to have timed the market right in 2008 before the crash and dumped the money into a mortgage.  the guy who decided to ride the total stock market down and back up would be miles ahead of you in NW at this point.

ysette9

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Re: Lump sum toward house or toward investments?
« Reply #7 on: June 15, 2017, 12:23:26 PM »
You could pull up cFIREsim and run some simulations of putting the lump sum on your mortgage now versus putting it into the stock market. I ran some scenarios for my situation which were more dramatic (20% down, 50%0 down, all-cash) and found that the difference between 20% down and keeping the mortgage for the full 30-year term versus paying all-cash for a house meant several fewer years of work. Whenever I think of putting extra on the mortgage in the future I always run back to those simulations.

birdman2003

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Re: Lump sum toward house or toward investments?
« Reply #8 on: June 16, 2017, 07:30:43 AM »
You get a guaranteed rate of return equal to whatever your mortgage interest happens to be.  You may lose money or get more money with an index fund.

What's your risk tolerance?  The 3-4% guaranteed rate of return would be my choice.

market returns over 30+ years are all but guaranteed. 7% after inflation.  its what the entire premise of FIRE is based on .... if you cant stomach the markets you'll have to save to an extremely small SWR to be safe.

the 3-4% return on a house is a poor choice if its fixed for 30 years even 15 years. 

Your future self will thank you for dumping money into the market vs a house.  even if you were to have timed the market right in 2008 before the crash and dumped the money into a mortgage.  the guy who decided to ride the total stock market down and back up would be miles ahead of you in NW at this point.

I would never take a $70k HELOC at 3-4% interest to invest in stocks.  Too risky for me.  Rather have the quick win and then use my $100k income to pay off the house in the next 2-3 years and then start dumping what used to be my house payment (plus more) into the index fund of my choice.

boarder42

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Re: Lump sum toward house or toward investments?
« Reply #9 on: June 16, 2017, 07:51:30 AM »
You get a guaranteed rate of return equal to whatever your mortgage interest happens to be.  You may lose money or get more money with an index fund.

What's your risk tolerance?  The 3-4% guaranteed rate of return would be my choice.

market returns over 30+ years are all but guaranteed. 7% after inflation.  its what the entire premise of FIRE is based on .... if you cant stomach the markets you'll have to save to an extremely small SWR to be safe.

the 3-4% return on a house is a poor choice if its fixed for 30 years even 15 years. 

Your future self will thank you for dumping money into the market vs a house.  even if you were to have timed the market right in 2008 before the crash and dumped the money into a mortgage.  the guy who decided to ride the total stock market down and back up would be miles ahead of you in NW at this point.

I would never take a $70k HELOC at 3-4% interest to invest in stocks.  Too risky for me.  Rather have the quick win and then use my $100k income to pay off the house in the next 2-3 years and then start dumping what used to be my house payment (plus more) into the index fund of my choice.

a HELOC and a mortgage are 2 very different things.  HELOC's are not fixed rates and are callable. 

dumping money into a low fixed rate mortgage increases time to fire for most people by 1 or 2 years.  this has been debated at length here. 

my only question is what do you plan to use to support yourself once FIRE'd is it some version of the 4% rule?  if so you're already planning to rely on the stock market returns. 

if i could take out millions of dollars at a low fixed non callable interest rate for 30+ years today i would do it in a heart beat.  <---- if i could do this i'd be FIREd today.

It should also be noted that if your tax advantaged accounts arent yet being maxed to the tune of 18k 401k and 5500 ira and possibly HSA maxes.  then you are taking a larger step back than 1 to 2 years when funneling this money into a house vs investing in the total stock market.
« Last Edit: June 16, 2017, 08:02:36 AM by boarder42 »