Pay down 2.75% 15 yr mortgage vs invest in taxable account

[trihiker]

Hi, I would appreciate any advice on whether I should use some additional cashflow to pay down the remainder of my mortgage or invest in my brokerage account.  I just paid off my auto loan (I know, stupid of me to get it in the first place), which frees up about $350 per month that I'd rather invest than spend.

37 years old, married, 1 child (2 yrs old), one more on the way this summer.  Our daycare expenses will increase next year
Wife and I both max out 401k and traditional IRAs.
Combined gross income ~$225k (excludes employer matches on 401k)
Mortgage:  $295k left on it, 2.75% 15 year mortgage (about 13.5 years left on it).  We put 20% down when we bought the house.
No other debt
Combined 401k value ~$140k
Combined IRA value $295k
(both IRA and 401k are in Vanguard ETFs, about 55% US equities, 25% international, 10% US REIT, 10% US bonds)
Brokerage account $100k, which I use exclusively as an emergency fund in cash and Vanguard ETFs (short term bonds, intermediate bonds, and Schwab TIPS ETF (I realize this is overly conservative, but I was unemployed for 2 years during financial crisis, so am hesitant to shrink the emergency fund and re-invest some of it into equities or mortgage, though am reconsidering that too).

I realize I'm in a very fortunate situation and am thankful for that.

Question - would you recommend taking the $350 per month and adding to the mortgage principal payment, or would you invest it in equities in the brokerage account?

Thank you all for your help.

[matchewed]

I personally recommend investing with the extra money.

A) You can probably make more than 2.75% on an investment. Paying down your mortgage is the same as investing in the same percentage rate on it.

B) Unless you plan on selling the house or renting it out it is not an investment. It is shelter, one of those things you need as a human. You will always need a place to live whether you're paying rent or a mortgage. Even if you pay off the mortgage there are still all the other associated costs related to home ownership.

[Hamster]

Statistically, you're clearly better putting it in equities unless you are very intolerant of risk or there are other emotional/personal factors involved. You're talking about exchanging a 2.75% guaranteed return with the mortgage for a reasonable assumption of ~5-7% return with more volatility, but more liquidity with equities (assuming you're not gambling with stock picks or something).

You probably know that though, so there must be another reason you are asking or you have other thoughts?

With your income, you probably have - or should have :-) - a fair amount of money left over after paying the mortgage and the retirement plans you mentioned. So, rather than thinking of taht $350 per month in isolation, it may be more fun/worthwhile to think about it in the context of all of your "disposable" income and as part of a broader plan based on what your goals are.

[DavidR]

I am a professional financial consultant and advise high net worth private business owners on both business management and personal finance/tax issues.

Thanks for providing good, detailed information.  But one problem here is that  you are choosing between apples and oranges.    You have a classic Asset Allocation issue. 

Paying down your mortgage results in a guaranteed pre-tax return of 2.75%, not bad in today's interest rate environment, but not great either.

If you put the money in equities you are investing with an uncertain, non-guaranteed return; it can easily vary from minus 10% or more to plus 10% or more, and will probably be somewhere inbetween.

But given the relatively low 2.75% rate on your mortgage, if you are comfortable in equities you should invest in stocks.  I would strongly recommend very conservative issues, and ones that pay a dividend at a minimum of 2.5%.  This way  you will have approximately the same pre-tax return as paying down the mortgage with some upside potential.  If stocks decline than given your rather strong financial situation you can hold the issues until the market recovers, and if the dividends are not cut you will still get a cash return.

Good luck!

[trihiker]

Thanks all.  I'd posted the same question on bogleheads, and most felt that I should be investing as well.  Some suggested depositing in a 529, which I hadn't thought of (I didn't mention that we do actually have a 529 for the first child, but I hadn't yet thought through for baby coming this summer).  Anyway, I'm going to go ahead and invest it - not sure whether in the 529 or brokerage just yet.

Thanks!