More now vs. Less later

[REatc]

Clickbait title with some truth to it. Here is the pickle. Myself and my girlfriend have $5000/month after taxes to invest. 401k’s are already maxed. We will be moving in 3-5 years to a lower of cost living state to increase quality of life, however we will be making $1000/month less after taxes. The question is would it be better to go all in for investing with the $5000/month and try to get the biggest stache possible before moving, or pay off the house in 3 years and have no housing cost in our new state. If we had no housing cost, our $4000/month investable income would increase to $5000/month. Our house currently has an interest rate of 5.125%, we have been looking into refinancing but I’m skeptical if it’s worth it, especially if we pay the house off.

I’m very familiar with paying off a house vs investing arguments. However, I think a guaranteed 5% return over the next 3 years would be hard to beat during in our 10 year current bull market. I’m not so much asking about housing vs invest question, as I am of where would my money be most effective now if I’m guaranteed to lose some income relatively soon. 

[maizefolk]

The question is would it be better to go all in for investing with the $5000/month and try to get the biggest stache possible before moving, or pay off the house in 3 years and have no housing cost in our new state.

I don't quite follow how these two are linked to each other.

Whether you put money into your mortgage now, or put the same money into investments, isn't the same equally available to buy a house for cash when you move to your LCOL permanent home (if that is what you choose to do)?

[REatc]

 I have this weird illusion in my brain that once money goes into my taxable account, it can’t come out until I RE no matter what. So yes theoretically yes it would be the same amount of money. I was thinking more along the lines of separate accounts for either pay off house “account” and use that cash for the new house, vs taxable account for RE and only take money out for RE not whatever else.
Maybe I’m over thinking it...

[use2betrix]

At a 5.125% interest rate, in this market, I would be socking away towards that after all your tax advantaged eligible accounts are maxed.

This is a personal question dependent on the person, but that rate is pretty high for a mortgage and a solid guaranteed return in this market sounds like a no brained.

I think that the mortgage argument is usually more focused on interest rates under 4%.

[Telecaster]

Clickbait title with some truth to it. Here is the pickle. Myself and my girlfriend have $5000/month after taxes to invest. 401k’s are already maxed. We will be moving in 3-5 years to a lower of cost living state to increase quality of life, however we will be making $1000/month less after taxes. The question is would it be better to go all in for investing with the $5000/month and try to get the biggest stache possible before moving, or pay off the house in 3 years and have no housing cost in our new state. If we had no housing cost, our $4000/month investable income would increase to $5000/month. Our house currently has an interest rate of 5.125%, we have been looking into refinancing but I’m skeptical if it’s worth it, especially if we pay the house off.

I’m very familiar with paying off a house vs investing arguments. However, I think a guaranteed 5% return over the next 3 years would be hard to beat during in our 10 year current bull market. I’m not so much asking about housing vs invest question, as I am of where would my money be most effective now if I’m guaranteed to lose some income relatively soon.

I think you are making this too complicated. 

By "have no housing cost in our new state" it sounds like you are really saying you would pay off your current house, sell it, and then buy an equivalent house with cash in your new location.  But that also implies that new house is identical in cost to the old house (taking into account transaction costs).  That identical house part seems unknowable.  If you are moving to a lower cost of living area, your new house would likely be lower in cost as well. 

What you are really asking is where is the best place to park money you might need in 3-5 years.  In that case, a bond fund or equivalent is likely the best choice.  I personally wouldn't put money I was going to need soon into my house, especially if I needed that money to move. 

Another thing is that since you are familiar with the pay off your mortgage vs. don't pay off your mortgage arguments, you are aware that at today's interest rates paying off your mortgage is almost always a terrible decision.  So you almost certainly want to get a mortgage for your new place anyway. 

The question to refinance or not is pretty easy.  Just look at the interest savings over the life of the loan vs. the refinance costs. 

[REatc]

Telecaster: You are correct about about your point of paying off our current house, selling it, and buying a new house in the new state. I would consider it a wash price wise since we would like to live in a slightly nicer house with land.

I wouldn’t agree with the best place for me to park my money for 3-5 years. I would equate it more to an analogy. The tortoise and the hare. The tortoise is the housing payment, the hare is the taxable account. Does it make more sense to be the hare, and have a large taxable account before moving to a lower income, then “coasting” to pay down the new house. Or does it make sense to be the tortoise, pay down the current house slow and steady, move to the new state, buy a nicer house in cash, then play catch up on the taxable account with more disposable income.

I think the refinance is sort of option 3 but more in line with having a large taxable account first. I’ve done the math multiple ways and it seems to be a middle ground solution
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[Telecaster]

I wouldn’t agree with the best place for me to park my money for 3-5 years. I would equate it more to an analogy. The tortoise and the hare. The tortoise is the housing payment, the hare is the taxable account. Does it make more sense to be the hare, and have a large taxable account before moving to a lower income, then “coasting” to pay down the new house. Or does it make sense to be the tortoise, pay down the current house slow and steady, move to the new state, buy a nicer house in cash, then play catch up on the taxable account with more disposable income.

Again you are making this too complicated.  You (and no one else) knows if the tortoise or hare will win in your three to five year timeline. 

You want money to pay cash for a house in 3-5 years.  You are asking where to invest current monies in order to meet that goal.

There are three basic choices:

1) Pay down the mortgage, which is almost always a bad idea, and is definitely a bad idea if you need to access the money at some undefined point in the future.  There are about 4.6 million reasons why you don't want to do this. 

2) Invest in bonds which has a low rate of return, but the money is there when you need it.  Which has a definite value.

3) Invest in the market.  Downside is the money might not all be there when you need it.  But there would have to be a pretty bad downturn if the market is lower 3-5 years from now than it is today.  Definitely could happen, no question.  I understand if you definitely need the money on a certain date you might not want to do this.  But it is not crazy, and it isn't even particularly risky. 

But there are other options.  You could do a combination of 2) and 3).   You could get a mortgage on your new place, and pay it down later. 

It really comes down to the what you think is the best place to park money for the next 3-5 years.  One of the deciding factors is how much you think you will depend on having a certain amount of cash available.  If you need a certain amount on X day, then bonds.  Next comes stocks, last is putting in your house.   

[maizefolk]

Agreed with Telecaster, you are making this more complicated than it needs to be. You're imposing an arbitrary rule on yourself that it is okay to liquidate home equity to make other purchases you need for your desired lifestyle but it is not okay to liquidate other types of assets/savings.

Look, analogies to the tortoise and hare generally indicates a person has already made a value judgement about what is good and what is bad. If you really want to pay off your mortgage right now nothing terrible will happen.

But it is also the case that if you invest that money in stocks or bonds and use that to money, plus your existing home equity, to put a house for cash in 5 years nothing bad will happen.

It is also true that if you invest money in the stock market now, buy a new house with a mortgage, and just continue investing while paying down the new mortgage nothing bad will happen.

So if you are looking for reassurance that the choice you already want to do at a gut level won't blow up in your face, go for it. If you are looking for reassurance or evidence that the choice you already want to do is clearly the best option (like the tortoise), I'm afraid that isn't something I, or probably other folks here, are going to be able to offer.

[wageslave23]

You can refinance right now with all the fees included in the rate at about 4.25%.  So no risk even if you sell or pay off mortgage in a year.  I would refinance regardless of where you decide to put your money.  Then maybe put half towards the refinanced mortgage and invest half so that you are hedging your bets a little bit.

[partgypsy]

You can refinance right now with all the fees included in the rate at about 4.25%.  So no risk even if you sell or pay off mortgage in a year.  I would refinance regardless of where you decide to put your money.  Then maybe put half towards the refinanced mortgage and invest half so that you are hedging your bets a little bit.

If they are able to with original lender recast to a lower interest rate, definitely do that. Otherwise it is probably not worth refinancing house, with attendant fees, you know you are selling in 3 years.

What would I do? If you know you are moving make sure you have an emergency fund in place, 3 months salary. The rest is personal preference. If you would rather have the money working for you for you later, in retirement, or by paying down mortgage have lower costs after you move by having lower/no mortgage.

[Metalcat]

You really are making it way more complicated than it needs to be and that's what's getting in the way of your decision making.

It really isn't about more or less later, it's really just about where to put your money for now.

Putting it towards your mortgage now doesn't have anything to do with whether or not you choose to buy a house in cash next time. You could put everything on the mortgage right now, sell, dump all that into a taxable account and start over with a new mortgage if you wanted to.

You're making this complicated by assigning future behaviour to current behaviour. Putting money in a taxable account doesn't mean it can't be spent later. Putting money on your mortgage right now doesn't mean it can't be invested later. Neither option locks you into anything, so don't create a pretend paradigm where it does, because then you aren't actually making decisions based on real consequences.

There's no tortoise, there's no hare, there's just $5K/mo and a few options as to where to put it for the next little while.

If you want to put it on your mortgage and definitely won't need access to that capital before you sell, then it's a totally reasonable option.

As for what you do with that capital once you sell, don't try to make that decision for your future self now. I guarantee you that they will know better what's best than you do right now.

[Dicey]

Agreed. Here's another way to look at it. Google the "time value of money", then start plugging in numbers. The sooner you get your investments rolling, the fewer dollars you will actually have to save to hit your FIRE number.

[ericrugiero]

First, what is the current mortgage amount?  5.25% of $50,000 is not nearly as big a deal as 5.25% of $400,000.  If the number is higher it's worth refinancing regardless of what you do because the payback is so quick.  (1% difference in rate of $200,000 is $2000/year which would be about your closing costs.)  If it's a pretty small amount then it may not make sense to refinance if you plan to pay it off soon. 

Personally, I wouldn't put the money in bonds.  That would return less than the 5.25% or even the lower rate you could refinance to.  You would be better off to pay down the mortgage. 

You could roll the dice and put some or all the money in stocks.  Historically, you will come out ahead most of the time by investing but there is some risk.  This is the "mathematically correct" answer but it's higher risk. 

[REatc]

Malkynn: You are right, it is just money with options at the end of the day. It’s all going toward my NW which is going toward my FI plans. I’m not sure why I was associating or thinking about now vs later as separate events, they are both necessary for my FI journey.

ericrugiero: It’s 5.125% on about 159,000 left on the loan. So it’s not that small or big of a loan. I could knock it out in under 3 years. We setting up a meeting soon with a bank to see potential rates, a reasonable rate we could get i believe is 3.6% for 30yr and 3.2% for 15 yr.

[partgypsy]

Sorry it's not called recasting your loan, I'm not sure what it is called. A few years into our first mortgage the interest rates came down. We approached out bank and asked if they could lower our interest rate, and they did. We did have to pay some fees (600) but we didn't have to pay all the fees associated with a traditional refinance. I have no clue whether banks still do this, but I do think it is helpful to ask original lender what they can do for you (re lowering interest rate), so you stay with them versus refinance to different lender. Your mortgage interest rate seems high. However I don't know if you are at the beginning or the end of your mortgage. Refinancing pays off most at the start of the mortgage.
Here is a refinance calculator to see if a refinance makes sense for you.
https://www.nerdwallet.com/mortgages/refinance-calculator

[Car Jack]

I think you're making things harder than you have to.

Put your extra money into either.

When you sell the house and move, you'll get someplace else and need money.  You can then take the money and use it.

c/n:  It really doesn't matter.

[Dicey]

Sorry it's not called recasting your loan, I'm not sure what it is called. A few years into our first mortgage the interest rates came down. We approached out bank and asked if they could lower our interest rate, and they did. We did have to pay some fees (600) but we didn't have to pay all the fees associated with a traditional refinance. I have no clue whether banks still do this, but I do think it is helpful to ask original lender what they can do for you (re lowering interest rate), so you stay with them versus refinance to different lender. Your mortgage interest rate seems high. However I don't know if you are at the beginning or the end of your mortgage. Refinancing pays off most at the start of the mortgage.
Here is a refinance calculator to see if a refinance makes sense for you.
https://www.nerdwallet.com/mortgages/refinance-calculator

It used to be called a streamline re-fi. I did the same thing a couple of times. $500 and boom, my interest rate was lowered a full point. Totally worth looking into.

[macmoneysaver]

I think another aspect has to do with your overall financial situation.  If your emergency fund is a credit card and you cannot afford to make 2 mortgage payments at the same time, paying off the mortgage for the full 3-5 years is not good.  You could be cash poor.  However, stocks are too volatile for that short of period, and the returns from bonds are too low.  Paying off mortgage is your best guaranteed return.  So how do you rectify these two opposing forces?

When I knew I was going to move to a LCOL area in 3 years, I paid off everything on the house for 2 years.  Then, with one year to go, I socked it into a high yield savings account online (Think Ally or Synchrony).  That way, I ensured I had 6 months of runway to pay 2 mortgages if needed, but also got a guaranteed return that was higher than bonds and less volatile than stocks.