Author Topic: Have $400k cash - pay off $318 mortgage or invest?  (Read 2471 times)

Aimza

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Have $400k cash - pay off $318 mortgage or invest?
« on: November 14, 2017, 12:11:36 PM »
Hello all!

I'm trying to help my aunt. She just downsized from a house to condo. Age 54, wants to retire at age 60. Has $600k saved in Roth IRA and IRAs and $75k in a crappy investment account with some random company that she will pull out of.

Old House profit - $400k
New Condo mortgage - $318k

Her initial thoughts were to just pay off the mortgage and keep the rest in savings. Of course, I told her that savings will not accomplish much for her, so now I've turned her onto investing.

However, I'm wondering WWMMMD?

Her interest rate is around 4.5%. Should she pay off half the condo for piece of mind and invest the remaining $159k profit + the $75k from the other investment account into a Vanguard fund?

Is it better to just keep paying the mortgage as is and invest the whole $475k? She has a separate emergency fund that covers at least 6 months of expenses already.

If you were her, how would you proceed?

I appreciate any thoughts on this subject.

Thank you!

talltexan

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #1 on: November 14, 2017, 12:18:30 PM »
I personally maintain a variety of taxable investments that could pay off my mortgage.

But your aunt should pay off her mortgage. If her money is with a crappy investing company, then new money would also be with that. And I'd rather pay off the house than invest with a crappy company.

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #2 on: November 15, 2017, 11:57:23 AM »
Personally, I would pay off the condo and invest the rest. She would have ~$750,000 in investments vs. $320,000 in home equity at that point, which would be a good balance for me so close to retirement. But yeah, make sure the excess cash and the $75,000 investments make it into low-cost index funds.
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MrThatsDifferent

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #3 on: November 16, 2017, 01:14:48 AM »
At her age, with $675k she’s sitting pretty, plus she wants to keep working 6 more years!?! She’s fine financially. What’s motivating her to buy the condo instead of rent? She’d probably have even more money if she rented and invest the rest of the money from the $400k. If not that, sure, buy it outright.

Maenad

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #4 on: November 16, 2017, 07:49:23 AM »
Considering that her first impulse was to put spare $$ "in savings", I would lean towards putting any investments  into a more conservative stock/bond split (no more than 60/40). My guess is that when the next bear market hits she'll freak out if her balance drops too much and will sell low.

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #5 on: November 16, 2017, 02:02:03 PM »
I personally maintain a variety of taxable investments that could pay off my mortgage.

But your aunt should pay off her mortgage. If her money is with a crappy investing company, then new money would also be with that. And I'd rather pay off the house than invest with a crappy company.

I agree. Actually in this climate, getting a guaranteed nominal return of 4.5% is a pretty good deal. Lots of people expect a nominal equity return of something like that over next decade... me included...
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ChpBstrd

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #6 on: November 21, 2017, 03:31:37 PM »
I bet lots of people in HCOL locations poured their funds into home equity in 2007, when stocks seemed expensive. Unfortunately, by doing so they also lost the option - which is priced into the market - of walking away from losses and buying something similar at 50% off. This flexibility has value.

If it was me, I'd rent for a few more years, reach maybe $1.2M, and move to a LCOL area. $300k for a condo seems like a lot of money to tie up.

freedcorporateslave

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #7 on: November 21, 2017, 08:53:21 PM »
Unless she plans on keeping the condo for the term of the loan, pay it off. Mortgage interest is front end loaded.

MDM

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #8 on: November 21, 2017, 09:23:27 PM »
Unless she plans on keeping the condo for the term of the loan, pay it off. Mortgage interest is front end loaded.
Depends what is meant by "front end loaded".

The interest charge is always (in this case) 4.5%/yr of the unpaid principal.

If the aunt could put $318K into a bank account earning 4.5%, each month she could withdraw the mortgage payment from the bank.  The final mortgage payment would coincide with the bank account going to $0.

Change "a bank account" to "an investment" and one has the "pay mortgage vs. invest" question.  If the aunt's investment CAGR is >4.5%, there will be money left over in the investment account when the mortgage is paid in full.  If the CAGR is <4.5%, the investment balance would hit $0 before the mortgage is paid.

freedcorporateslave

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #9 on: November 21, 2017, 10:03:59 PM »
Unless she plans on keeping the condo for the term of the loan, pay it off. Mortgage interest is front end loaded.
Depends what is meant by "front end loaded".

The interest charge is always (in this case) 4.5%/yr of the unpaid principal.

If the aunt could put $318K into a bank account earning 4.5%, each month she could withdraw the mortgage payment from the bank.  The final mortgage payment would coincide with the bank account going to $0.


Thanks, took me a minute to work out what you are saying but you are right. You pay more interest first up front, but you are being paid more interest at first in the investment account. I've always been very conservative about investing though and this just feels wrong. These questions come up every time the stock market gets hot. As soon I as start hearing people coming up with this great idea of re-financing their home and investing the money in the market it is time to get out. Are we there yet?

Michael in ABQ

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #10 on: November 22, 2017, 07:46:13 AM »
Unless she plans on keeping the condo for the term of the loan, pay it off. Mortgage interest is front end loaded.
Depends what is meant by "front end loaded".

The interest charge is always (in this case) 4.5%/yr of the unpaid principal.

If the aunt could put $318K into a bank account earning 4.5%, each month she could withdraw the mortgage payment from the bank.  The final mortgage payment would coincide with the bank account going to $0.


Thanks, took me a minute to work out what you are saying but you are right. You pay more interest first up front, but you are being paid more interest at first in the investment account. I've always been very conservative about investing though and this just feels wrong. These questions come up every time the stock market gets hot. As soon I as start hearing people coming up with this great idea of re-financing their home and investing the money in the market it is time to get out. Are we there yet?

If you could get a very safe investment earning 5% or more this idea might work. In reality, you're taking on a lot of additional risk for that potential spread. If you earn 20% on money borrowed at 4.5% you're doing great. However, what happens if your investments drop 30% in a year and you have to sell some at the bottom of the market and as its recovering to continue paying that debt service? Now all of the sudden you have to earn 7, 8, 9% on that lower amount just to cover the debt.

I know that lots of people around here basically borrow money on their home to invest in the stock market (either explicitly with a second mortgage/HELOC or implicitly by choosing to use extra cash for investment over paying off their mortgage) but I agree with you that the risk involved is a lot more than just a simple equation of earning a return above the interest rate on the mortgage.

Tell her to pay off the mortgage. She's got plenty left over to invest and she's already a millionaire. With no house payment she could retire now and be pulling out about $35k a year at 4%. If she does work a few more years her investments will probably grow to over a million and be throwing off $40k plus a year which should be plenty to live on with no house payment to worry about.
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Aimza

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #11 on: November 28, 2017, 01:47:07 PM »
Thank you for all the replies. I hadn't clicked "notify" and thought no one responded. Sorry about that!

My aunt has no hobbies, no friends, nothing to do if she retired, so she has no desire to get out of the workforce. Even when she "retires" she plans to get some kind of part time job closer to home.

Moving to a LCOL area is not an option for her. All of her family is here in NY - Queens and Long Island - both very HCOL areas.

She bought the condo instead of renting because it guarantees her stability of where she will be living in the future. As of now, she plans to live out her life there - with the exception of possibly moving to a 55+ home for amenities and community when she gets much older.

I'm going to try to talk her into paying off the mortgage and putting all of her cash into the 3 fund Vanguard portfolio.

My only other question is that since she can't pay off the mortgage until February (one of the rules for the mortgage), should I have her invest ALL of the money for the next 3 months and then pay off the mortgage or just use the money that will not be needed to pay off the mortgage?

Thanks again for all your input. Your insight is invaluable.


Michael in ABQ

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #12 on: November 28, 2017, 03:28:25 PM »
Thank you for all the replies. I hadn't clicked "notify" and thought no one responded. Sorry about that!

My aunt has no hobbies, no friends, nothing to do if she retired, so she has no desire to get out of the workforce. Even when she "retires" she plans to get some kind of part time job closer to home.

Moving to a LCOL area is not an option for her. All of her family is here in NY - Queens and Long Island - both very HCOL areas.

She bought the condo instead of renting because it guarantees her stability of where she will be living in the future. As of now, she plans to live out her life there - with the exception of possibly moving to a 55+ home for amenities and community when she gets much older.

I'm going to try to talk her into paying off the mortgage and putting all of her cash into the 3 fund Vanguard portfolio.

My only other question is that since she can't pay off the mortgage until February (one of the rules for the mortgage), should I have her invest ALL of the money for the next 3 months and then pay off the mortgage or just use the money that will not be needed to pay off the mortgage?

Thanks again for all your input. Your insight is invaluable.

The stock market is great for long-term returns. Short-term, she could easily lose $10k on $318,000 to a minor fluctuation in the market. Have her put it in a money market or high-yield savings account and earn about 1%.
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ChpBstrd

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #13 on: November 28, 2017, 08:59:25 PM »
Be careful not to become the person who told your aunt to jump into the stock market right before the big correction that everyone could see was coming (in hindsight).

MDM

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #14 on: November 28, 2017, 09:31:24 PM »
Thank you for all the replies. I hadn't clicked "notify" and thought no one responded.
Have you tried "Show new replies to your posts."?

Aimza

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #15 on: November 29, 2017, 06:55:27 AM »
MDM - I hadn't noticed that link at the top of the screen until yesterday and that's how I found this post again, lol. I clicked "notify" though and am now getting replies which is awesome!

ChpBstrd - I'm going to put her leftover money (after paying off mortgage) in all "safe" managed funds to try to lessen some of the risk. She is definitely not a gambler and you're right, I don't want to be responsible for her losing all her money.

Michael in ABQ - If I remember correctly, I looked last week and Discover has a 1.something% interest rate on their savings accounts online, so I think I'll have her put the "waiting to be paid mortgage" money in there until February. I personally use Discover so it will be easy for me to give a first-hand account of how it works to her.

Thank you all for the advice!

talltexan

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #16 on: November 29, 2017, 01:09:00 PM »
1% interest is annual.

So for $300,000, you're going to receive about $750 interest over 90 days. With infinitesmal risk.

Aimza

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #17 on: November 29, 2017, 01:18:15 PM »
1% interest is annual.

So for $300,000, you're going to receive about $750 interest over 90 days. With infinitesmal risk.

Sounds good to me!  :)  Maybe she'll get me something nice for Christmas - like a supermarket gift card like she did last year.... I was so happy!

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #18 on: December 04, 2017, 03:25:41 PM »
She could probably retire now if she allocated aggressively. But it sounds like she is very conservative in her allocations, so a paid-off condo and almost $700K invested, PLUS six more years to accumulate, is more than enough.

If she's sure she wants to work those extra six years, definitely pay it off. It's the safe play.
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ILikeDividends

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #19 on: December 04, 2017, 08:24:29 PM »

Her initial thoughts were to just pay off the mortgage and keep the rest in savings. Of course, I told her that savings will not accomplish much for her, so now I've turned her onto investing.


Not enough info to really say, quantitatively.  If it is a fixed-rate, amortized mortgage, it really depends on where she is in the amortization schedule.  An amortized mortgage has the bulk of the compounding effects front-loaded.  For instance, if she just created that mortgage last month, she'd save a whole lot more than she would save if if she was in the last 5 years of a 30-year mortgage.

Then you'd have to contrast whatever effective savings that comes to with the projected compound annualized return of investing in equities, which would be significantly more than a 4.5% APR.  It's the gap between the two, and the investment horizon, that should be informative.

But regardless of where she is in the amortization schedule, equities present a better risk-adjusted return.  But that doesn't matter one bit if she has no tolerance for risk.  That is the prevailing criterion.

No tolerance for risk = pay off the mortgage completely.

Scale any variations of that tolerance to a % of payoff (or no payoff at all) as appropriate.

« Last Edit: December 05, 2017, 12:05:14 PM by ILikeDividends »

soccerluvof4

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Re: Have $400k cash - pay off $318 mortgage or invest?
« Reply #20 on: December 09, 2017, 05:19:57 AM »
Pay it off, if she wanted to in her situation it would be the worst idea to go against the grain and put 15k in Great lakes Credit union or another and get a higher interest rate if she can make the criteria in monthly transactions and perhaps the rest let her divide it up and put in investments equally of 6 months. But if your going to buy a condo which (I wouldnt) in her case just pay for it.
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