Author Topic: Pay Down the Mortgage or Invest More? A win/win question.  (Read 3155 times)

Larabeth

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Pay Down the Mortgage or Invest More? A win/win question.
« on: February 06, 2016, 01:36:10 AM »
In what situations do you all feel paying the mortgage is the best situation vs. investing more?

Currently, we are about to acquire a house for around $130K, though this is not going to be our retirement house (I'd rather be somewhere with more land once FIRE hits).  Because of this situation, I currently believe it would be better to put our extra money in investments instead of paying the mortgage down, then once we're in a house that we plan on staying in longer term (longer than 5-10 years) we will pay down the mortgage.

I'm interested in your anecdotes on the matter!

MDM

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Re: Pay Down the Mortgage or Invest More? A win/win question.
« Reply #1 on: February 06, 2016, 05:23:27 AM »
See the first post in http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/ under "Investing", and replies #6 and #7 in that thread.

aperture

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Re: Pay Down the Mortgage or Invest More? A win/win question.
« Reply #2 on: February 06, 2016, 05:45:00 AM »
One consideration is private mortgage insurance (PMI). If you borrow more than 80% of the value of the house you will be paying for PMI.  So it may make sense to pay your mortgage down to escape the PMI. 

I think most scenarios that make sense for paying off the mortgage (instead of investing) emphasize subjective emotional value unique to the person(s) in question over objective market analysis. 

In my own situation, my wife and I have decided to put everything we save in the next ~3 years into paying off a substantial mortgage rather then putting into stocks because (1) paying off this concrete cost in our life will reduce our draw when we FIRE (2) my wife has been much more motivated by this goal than by putting money into stocks that bounce around and make her sea-sick. I would say our situation is pretty typical of people that decide to pay off the mortgage rather than invest.  What we will not be doing is putting large amounts of money each month towards the mortgage without cash reserves in the event of unexpected job loss that would threaten our ability to continue payments. We will save about 1/3 of what remains on the mortgage (2 year reserve of mortgage payments) then start throwing gobs of cash at the mortgage for 2 years and pay the balance off when we are within striking distance.  Of course that leaves open the door to investing elsewhere at any point an opportunity opens up.

So presently we plan to pay off the mortgage and we are saving in a cash account to do it, but our horizon is short, (~3 years), the bond market is crap, and this is an acceptable diversification for our portfolio of ~80% US stock index and ~20% US bond index.

If you have not read it yet, I encourage every potential home owner to look at JL Collins' article about home ownership: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Best wishes, Aperture.

Larabeth

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Re: Pay Down the Mortgage or Invest More? A win/win question.
« Reply #3 on: February 06, 2016, 07:33:43 PM »
One consideration is private mortgage insurance (PMI). If you borrow more than 80% of the value of the house you will be paying for PMI.  So it may make sense to pay your mortgage down to escape the PMI. 

Actually a good point for a lot of people.  However, we will not be dealing with PMI coming into this mortgage, so at least we're not having to spend that money!!

Also, from the rest of your comments, it sounds like you think similarly to us about the mortgage situation.  As we get closer to FIRE, we will be in a different setup than our current situation and will pay down on that mortgage.

TheAnonOne

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Re: Pay Down the Mortgage or Invest More? A win/win question.
« Reply #4 on: February 08, 2016, 12:22:25 PM »
Generally, the math is only in favor if you have PMI to make extra payments. (Or if your rate is really high, but most would say you just need to 'REFI' then)

That being said, this is based in the USA, where interest is a deduction.... This fact is sometimes overlooked...

I have a mortgage at 3.250% which is right at inflation on average..... So do I pay it off? The money is 'free'..... but once I include the fact that I get to write off all the interest, the effective rate drops so far, that it's under inflation....

Basenji

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Mac_MacGyver

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Re: Pay Down the Mortgage or Invest More? A win/win question.
« Reply #6 on: February 27, 2016, 04:29:21 PM »
I really want to pay off the mortgage as quickly as possible, but at 2.75 percent, i make more in some credit union CD's.