Poll

Should I invest, pay down mortage or a little of both?

Put all $ towards taxable investments
Put all $ towards mortgage
Put a little towards both

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tmd012

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« on: November 10, 2014, 10:14:30 AM »
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« Last Edit: November 10, 2021, 11:24:07 AM by tmd012 »

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #1 on: November 10, 2014, 10:21:49 AM »
I will nearly always vote invest (which I did) if the interest rate is < 5%. However, with a short enough time frame paying down the mortgage might make more sense since you aren't giving the market time to recover from a dip.

In case you missed it: http://forum.mrmoneymustache.com/ask-a-mustachian/let's-settle-this-with-a-vote-invest-or-payoff-debts/msg349246/#msg349246

A lot of good discussion there and in other places on the forum. The good news, it's win win. The bad news, one way is optimal, but you won't know until the time frame is over. If history is an indication, and you have a long enough time frame, don't prepay a mortgage. When you move, don't pay all cash for a house. 

Here's another good thread: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg66727/#msg66727

FarmerPete

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #2 on: November 10, 2014, 10:24:14 AM »
Mathematically, it's a better bet to invest the money.  From a mental sanity standpoint, it would probably be better to pay off the house.  I try to focus on my net worth (Taxable accounts + retirement accounts + house value - mortgage balance) and take comfort in knowing that I could pay my house off tomorrow if I wanted to.  Seeing that net worth go up makes me very happy.

hodedofome

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #3 on: November 10, 2014, 10:47:52 AM »
What some have done is take big market gains in taxable accounts and use those to pay off the house. Of course you're market timing to a degree, but the idea is you take some off the table after it's been a big bull year (like last year).

It's hard to beat being completely, totally debt free. But then the other side of our brain runs the numbers and decides investing is the 'smarter' play. Using market gains (intellectually smart) to pay off the house (emotionally smart) isn't a horrible idea.

Mother Fussbudget

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #4 on: November 10, 2014, 11:08:23 AM »
I'm a fan of the 'double-pay-the-principle' method of shortening the life of a mortgage.  You're no doubt aware that most of your monthly payment goes toward interest, and a smaller portion goes toward principle.  Calculate how much you're paying toward principle, and pay double that amount (realizing that amount increases slightly every month).

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #5 on: November 10, 2014, 11:41:01 AM »
You would just have to prove your ability to pay the mortgage. For someone who is FI, you should be fine. Difficult, not impossible. If you don't want a mortgage there's nothing wrong with doing what you propose. For me the biggest reason to get a mortgage at that point is to hedge against inflation. It's a very good thing to borrow at low, fixed, tax deductible rates.

frugaliknowit

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #6 on: November 10, 2014, 11:46:46 AM »
I have recently wondered the same thing.

I like options.  Not prepaying the mortgage gives you the most options, plus mathematically it should be optimal.  I like the concept of investing/saving to pay off the mortgage with one bullet.  I do not like the feeling of "throwing money down a hole", even though theoretically, the benefit is there.

Nothing wrong with the peace of mind of prepaying. 

Davids

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #7 on: November 10, 2014, 11:54:38 AM »
The answer depends on 2 factors, interest rate and your piece of mind. I agree if the rate is less than 4% then there is no need to pay off early but i won't fault anyone who does as piece of mind does play a role.

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #8 on: November 10, 2014, 11:57:11 AM »
You would just have to prove your ability to pay the mortgage. For someone who is FI, you should be fine. Difficult, not impossible. If you don't want a mortgage there's nothing wrong with doing what you propose. For me the biggest reason to get a mortgage at that point is to hedge against inflation. It's a very good thing to borrow at low, fixed, tax deductible rates.

this is a question that depends on many variables but would the typical FIRE family living in a low COL area even itemize to take advantage of the mortgage interest tax deduction?  I just figured at that point  we would be taking the standard deduction.  I need to brush up on my tax knowledge.  I guess at that point we would be doing some roth conversions to get our 5 year pipeline going.

Good point. It depends. A $160k ($200k @ 80%) 30 year mortgage at 5% is $7,946 interest in the first year. Add in real estate taxes which are crazy high in IL (I'm in MO) IIRC and a bit of IL income tax at 5% and it's very possible to get above the standard deduction of ~$12K for a married couple. Itemizing might allow you to convert more into Roth. Carrying a mortgage would also increase your monthly cash outflow obviously, so your stache would have to support it.

In any case, at some point you are trading cash for debt reduction. Either you pay it all up front, or you pay it later. In either case, you are spending down your stache. It counts against your cash flow at some point, but paying it up front reduces your ability to earn beyond the rate of your mortgage.

Edit in red, forgot to put in the interest rate I used.
« Last Edit: November 10, 2014, 12:23:21 PM by Cheddar Stacker »

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #9 on: November 10, 2014, 12:05:51 PM »
I have recently wondered the same thing.

I like options.  Not prepaying the mortgage gives you the most options, plus mathematically it should be optimal.  I like the concept of investing/saving to pay off the mortgage with one bullet.  I do not like the feeling of "throwing money down a hole", even though theoretically, the benefit is there.

Nothing wrong with the peace of mind of prepaying.

I think I am leaning that way too.  Once you send that payment it is gone and worth nothing to future payments, right?  I could send them $100k today but next month I would still owe them my usual mortgage payment so If I get laid off and my cash flow takes a hit I could be screwed.  But if instead I took that $100k and invested it, I would have it there to make the next 80 mortgage payments.

This is the main point most people overlook in these discussions, so good for you realizing it. My investments surpass my mortgage now, so I feel very secure carrying it. Even before that milestone, having x months/years worth of payments set aside created piece of mind.

chuckaluck

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #10 on: November 10, 2014, 12:20:53 PM »
I started buying residences in 1983 and have always carried a 30 year mortgage, and refinanced multiple times to another 30 year mortgage.  Sometimes I took money out (for rental properties), and sometimes just financed to a lower rate. However, and this is a big however, I always saved a lot and invested wisely with what would have been going to payoff the mortgage earlier.  Currently, I am retired and my passive income easily pays the mortgage, monthly bills, vacations, and sends my kids to private colleges in the Boston and Cambridge area.   I'm not sure if I could make such a statement if I decided to become "house-poor" and pay off the mortgage (I live in a very expensive part of the country and real estate prices are beyond belief).  At the very least, I would have had less years for the investments to compound.     

Vilgan

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #11 on: November 10, 2014, 12:21:24 PM »
I put a bit of both because I find it easier psychologically. If I dump the excess into the mortgage and the market continues to do well for another 5 years I'll have regrets. Likewise, if I dump all the excess into stocks and then we have a long bear market, I might have regrets about not putting it into the mortgage. By doing 50/50 I feel like there is always an upside and feeling like I did "the right thing" at least partially. That being said, if we were in a bear market I'd be dumping 100% of the money into investments but it doesn't feel like that right now.

Good luck, regardless!

Guses

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #12 on: November 10, 2014, 12:41:40 PM »
I don't know how mortgage interest deduction works in the US. In Canada, there is no deduction for mortgage payment.

The question is therefore;

Do I prefer a guaranteed 3.5% after taxes return or do I prefer a non guaranteed investment return that will be taxed.

At worst, (highest marginal tax bracket of 50%) you need to make 4.67% before taxes to break even.

My personal strategy is to max my registered accounts for me and my wife first (around $10K each) and then pay the mortgage with the rest.

I just turned 30 this year and we are down to the last 25% of our mortgage to pay off. It should be done by October 2015. It's a nice feeling.

Overall I think doing a little bit of both is better in terms of short term performance.


minimustache1985

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #13 on: November 10, 2014, 12:44:18 PM »
I'd do a bit of both, treating the mortgage prepayment like a bond with a 3.5% yield that matures when you sell.  So if you invest 80/20, put 20% of your extra cash to the mortgage, and 80% into stocks.

That said it's hard to go wrong investing all the excess at that mortgage rate, especially knowing it's not your forever home.  I certainly wouldn't put any more than 20% of excess into pre-payment.

Guses

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #14 on: November 10, 2014, 12:51:12 PM »
I'd do a bit of both, treating the mortgage prepayment like a bond with a 3.5% yield that matures when you sell.  So if you invest 80/20, put 20% of your extra cash to the mortgage, and 80% into stocks.

That said it's hard to go wrong investing all the excess at that mortgage rate, especially knowing it's not your forever home.  I certainly wouldn't put any more than 20% of excess into pre-payment.

Bold is mine. Why does this matter?

minimustache1985

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #15 on: November 10, 2014, 12:57:17 PM »
I'd do a bit of both, treating the mortgage prepayment like a bond with a 3.5% yield that matures when you sell.  So if you invest 80/20, put 20% of your extra cash to the mortgage, and 80% into stocks.

That said it's hard to go wrong investing all the excess at that mortgage rate, especially knowing it's not your forever home.  I certainly wouldn't put any more than 20% of excess into pre-payment.

Bold is mine. Why does this matter?
Mathematically it doesn't, but psychologically it can make a big difference.  Many here want to be mortgage free in retirement for peace of mind, but OP won't be carrying this mortgage once he FIREs anyway.

Olysouthpaw24

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #16 on: November 10, 2014, 04:05:51 PM »
I answer this question with a modern portfolio theory approach.  In my opinion I want to have 15-30% of my investments in US Real Estate for my portfolio. 

This is a way of reducing your risk without reducing your returns by a significant margin.  In my case I choose to put 30% of my monthly investable income as an extra payment towards my mortgage and the remaining 70% into stocks and bonds.  This gives you the best of both worlds and minimizes your overall risk.

In the next 10 years the stock market may be stagnant while real estate runs like a bull .... or vis-versa.  If either of these scenarios occur you will win if you choose to diversify.

chuckaluck

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #17 on: November 11, 2014, 03:11:54 AM »
To TYD450,  Absolutely!  That is a major reason why I have always preferred NOT to pay extra into the mortgage, but put extra money into paper investments.  In our immediate area (suburb of Boston), home prices range from 300k to 850k. (Ours is currently worth 460k).  A reasonable 5% increase in home prices increases my equity by 23k --- I am going to get that if or when I sell whether or not I pay down the mortgage. So my real estate portion of my investment portfolio keeps in step with my paper investments (though I really don't consider my residence an investment in the same way as I do my mutual fund portion).  And in time, the passive income resulting from my my increased savings and investments has paid, and will continue to pay out, enough for the mortgage and then some long after I'm gone.  Also, partly because of the buildup of an emergency fund that resulted from not paying extra into the mortgage (for my residence and rental properties), all repairs/maintenance on the residence, rentals as well as autos have always allowed me to pay bills in cash. Having extra cash also allowed me to purchase additional rental properties when market conditions favored buying.  Other than for a residence or rental property mortgage, I have never had to take out a loan. Ever!  To work our finances in this way was a decision made by my wife and me 30+ years ago and we have never looked back.

 

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