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

Author Topic: Poll- Mortgage paydown or taxable investments?  (Read 6982 times)

tyd450

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Poll- Mortgage paydown or taxable investments?
« on: November 10, 2014, 10:14:30 AM »
Just curious what you would do in my situation...  Wife and I (no kids yet, 29 years old) currently live in Chicago Suburbs w/ high COL.  Our FIRE timeline is 10-15 years.  We will be moving to a lower COL area once we FIRE.  At that point we would pay cash for a house.

Bought house in March 2013 for $345,000.  Took out a 30 year fixed @ 3.5% for $276,000 after 20% down.

Currently owe $259,097.67

Given the fact that this is NOT our forever home, we have a great rate and we will likely be moving in 10 years is there any advantage at all to making extra payments?  I keep wavering (math geeks may notice we have paid a little extra already) and I just want to make a damn decision and stick with it for good.

The math seems to favor 100% investments right?

P.S. We are maxing out all tax advantaged accounts, Roths and have about $1-2k extra per month to invest or throw at the mortgage.

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).

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #5 on: November 10, 2014, 11:33:04 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

I guess my thinking is that is would be tough to get another mortgage when neither of us is "employed" post FIRE.

I am expecting to probably sell our house in 10 years for around $500k then move downstate and purchase something in the $200k range with cash.

If I were to not pay any extra, I would still owe about $195k on the house in 10 years.  If I were to throw an extra $500 per month for the next 10 years, I would owe $127k.  So in either situation I could sell the house, pay off the old mortgage and pay cash for our FIRE forever house, and have some cash to live on for a few years

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #6 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 #7 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. 

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #8 on: November 10, 2014, 11:49:36 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.

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #9 on: November 10, 2014, 11:52:35 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.

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.

Davids

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #10 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 #11 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 »

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #12 on: November 10, 2014, 11:59:20 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.

Absolutely-  I guess my thinking is that in 10 years when we go to sell (most likely) there is no way that I would have the house totally paid off either way.  I mean I guess if I went "all in" on paying it off we could do it but that would be foolish for us.  So is there any point at all to throw some of our monthly cash flow towards the principal?  I am leaning towards no.

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #13 on: November 10, 2014, 12:04:38 PM »
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 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.

Property taxes here are nuts-  for our little 1400 sq ft brick ranch we are paying $7-8k per year!  I say little because our neighbors in their 2500+ sqft homes are paying in the $12-16k range per year in property taxes-  it is crazy.

However I think for now it is worth it-  we are in an awesome walkable location with great schools.  My commute via train is 20 mins.  And I wouldn't be able to make what I make or do what I do outside of a major city.  So I figured we would take advantage of the high wages now, live as frugally as we can in all areas other than housing cost, and then cash out and move to a cheaper part of the state once our stash can support us.  My wife and I both grew up in Central IL and all of our family is there so that seems to be the best landing spot for us.

Cheddar Stacker

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #14 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 #15 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 #16 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 #17 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 #18 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 #19 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 #20 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 #21 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.

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #22 on: November 10, 2014, 07:13:15 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.

but let's say you dont pay extra on your mortgage-  if the real estate market goes off don't you still win because you still gain more equity from the value of your house increasing?

chuckaluck

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #23 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.

tyd450

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Re: Poll- Mortgage paydown or taxable investments?
« Reply #24 on: November 11, 2014, 10:05:25 AM »
Well I think I made my decision-  I won't be putting anything extra towards the mortgage.  The plan is to build our stash with any extra cash flow and hopefully when 2024 rolls around we are in the position to FIRE, pay cash for our new house downstate and start living the good life. 

We are working on kids now so it will be a sweet thing to have a few 6-9 year olds that we can actually spend time with and raise while not worrying about careers, cash flow and making a monthly mortgage payment.