Author Topic: Pay off/down loans? Invest?  (Read 2894 times)

engineerjourney

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Pay off/down loans? Invest?
« on: October 31, 2013, 11:45:55 AM »
I know this is a decision that will get differing opinions but I was hoping to see how other people would make this decision.

I have $20K over our emergency fund sitting in a savings account.  I see three options for this money. 

- Pay off $17K car loan at 3.09% rate, frees up $400/month
- Pay down mortgage at 4.75% rate (rate around 3.2% taking into account tax deduction), does not reduce monthly bills but saves $$ in interest over the loan
- Invest into taxable brokerage account, only an option because the loan rates are decently low

We are already maxing two 401Ks and two Roths.  I know the car is unmustachian, its not my car and its not worth the battle at this point. 

I would appreciate opinions on what you would do and why.  If you can think of other things thats cool too.   Thanks!

SunshineGirl

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Re: Pay off/down loans? Invest?
« Reply #1 on: October 31, 2013, 01:24:26 PM »
Do you intend to not have an emergency fund/consider your Roths your Efunds?

Without listing your expenses and the total owed on your mortgage and where you're at in the payment scheme, it's hard to say for sure, but I'd likely go with either #2 or #3. I wouldn't go with number one, because I'd want your significant other to feel the pain of making those payments so s/he would not rush into another car loan when this one's paid off. Or maybe that's too harsh....

In any case, how secure are your jobs? How much cash would you leave in a savings account?

Personally, I used to make larger-than-minimum payments on my mortgage, but  I had a really hard time sending in large chunks of money when it didn't pay off the mortgage or lessen my payment. Just me, but I found it psychologically difficult, so what I did was pay a bit over and let the money accrue until I had enough to pay it off in full.

engineerjourney

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Re: Pay off/down loans? Invest?
« Reply #2 on: October 31, 2013, 01:40:33 PM »
Hi SunshineGirl, I guess I wasn't clear.  We have our 6 month emergency fund fully funded at around $30K (would last much longer based on cut backs we would do if we were both without a job).  We have 20K over that amount currently sitting doing nothing.  Our jobs are pretty secure but you never know and since we are in the same industry 6 months is the amount we are currently comfortable with. 

For the mortgage, its for about $150K, 30 yr loan, 29.5 yrs left (obviously just started recently).  Overpayments now would obviously make the biggest affect since its early in the amortization schedule. 

hahaha, I love your thoughts on #1.  I don't think he will notice that much though.  He won't spend that $400/month on anything else at least.  He really doesn't pay attention to money and doesn't like buying things (thankfully) so its up to me to make the best decisions for our 2 person family.

hmm, your experience with the extra mortgage payments is interesting, I wonder if I would feel the same way. 

Thanks for commenting!

SunshineGirl

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Re: Pay off/down loans? Invest?
« Reply #3 on: October 31, 2013, 01:54:49 PM »
Gosh, honestly, I'd be tempted to refinance to a 15-year mortgage and go all-in with your whole 50K so your principal balance is $100K. Your payments would be quite low, so you could rebuild your emergency fund pretty quickly.

How come you didn't go for a 15-year loan to begin with?

If it was because you felt that with interest rates this low, you wanted to lock the rate in for the longest term possible, then following that logic would lead you to invest in the market vs. paying down your mortgage.

These things are so personal, really. Often, it's way more about psychology and your personal comfort level vs. the numbers. And the larger economy does what it does regardless, and it can make a huge difference in where you end up in life financially, too. We like to think we're smart when we do well in the market or in real estate, but we're really just riding the economic wave.

Living well below your means is the most important thing you can do, and you're doing it. Having liquidity really helps in bad financial times, and I just advised against that, didn't I? So don't listen to me, or only do so with a huge grain of salt!

engineerjourney

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Re: Pay off/down loans? Invest?
« Reply #4 on: October 31, 2013, 02:09:21 PM »
Thank you so much SunshineGirl! I know that my situation is my situation and it does depend on a lot of psychological things but I posted because I wanted some thoughts from people like you.  Your insight is appreciated. 

To be honest we went the 30 yr route because thats what you do (this was before I discovered MMM).  I will have to think about what you said about a 15 yr mortgage and investing.  Definitely a way I wouldn't have thought about it!

Catbert

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Re: Pay off/down loans? Invest?
« Reply #5 on: October 31, 2013, 02:54:14 PM »
I think investing in the taxable brokerage account makes the most sense given your interest rates. 

That said, if it was me I'd pay off the car.  At 3% it doesn't really make sense to do it, but I hate car payments (if you need to make payments you can't afford the car!).  Then I'd take the extra $400 a month and pay down on the mortgage if being mortgage free is a goal of yours.

This one really is about priorities.

engineerjourney

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Re: Pay off/down loans? Invest?
« Reply #6 on: October 31, 2013, 03:02:56 PM »
Thanks Mary.  I guess it is about priorities.  I am having a hard time deciding because nothing pops out at me as the absolute correct decision/order to attack.  I just want to make sure there isn't a wrong decision, or a stupid decision. 

PGH

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Re: Pay off/down loans? Invest?
« Reply #7 on: November 01, 2013, 06:54:27 AM »
I know I go against the grain on this one, but I've never been a huge fan of huge "emergency" staches if the person has a particularly marketable skill, a partner who can pay most or all expenses in the case of job loss, a high savings rate and a ready money source in the form of a HELOC or credit cards.

Because all these apply to me, I keep very little in liquid savings. I much prefer to stay debt free - and will pay off our mortgage next month! (And yes, I understand that that may not be the best solution for maximizing returns, but our situation called for it).