Author Topic: $1200 toward extra mortgage payment or Index Funds?  (Read 1811 times)

onemorebike

  • Bristles
  • ***
  • Posts: 319
$1200 toward extra mortgage payment or Index Funds?
« on: October 30, 2018, 09:58:49 AM »
The title says it all, I've got some extra cash, no debt (except mortgage). Put the money toward reducing the length of the mortgage or put into index funds?

-onemorebike

Cromacster

  • Handlebar Stache
  • *****
  • Posts: 1696
  • Location: Minnesnowta
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #1 on: October 30, 2018, 10:01:17 AM »
Index funds.  Answer is the same for anytime you have the choice between the two.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8011
  • Location: United States
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #2 on: October 30, 2018, 10:02:26 AM »
What's the rate on your mortgage? Is it fixed or variable? What's the current term?

Barring some really outlier answers, I'd go index funds; but I assume you have already maxed out your 401k/403b and IRA. Otherwise, increase pre-tax contributions and use this cash to make up any deficit created by lower take home pay.  (I never know exactly what people mean when they say "I've got some extra cash")

RWD

  • Magnum Stache
  • ******
  • Posts: 3519
  • Location: Mississippi
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #3 on: October 30, 2018, 10:02:56 AM »
What is the interest rate on the mortgage? Check out the Investment Order post to get a sense of what interest rate level you would want to switch from investments to debt payoff. Then [probably] join the club.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #4 on: October 30, 2018, 10:03:06 AM »
Do you have additional space in your tax-advantaged accounts?  eg IRA, 401(k), HSA...

v8rx7guy

  • Handlebar Stache
  • *****
  • Posts: 1391
  • Location: Bellingham, WA
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #5 on: October 30, 2018, 10:47:54 AM »
Depends how much is left on the mortgage and what the interest rate is in my opinion.  Yes, it has been hammered on this forum over and over that it is mathematically superior to invest into index funds rather than pay down your mortgage on a 30-year fixed rate mortgage, this is because for over the course of 30 years it is safe to assume a higher rate of return in the market than what your mortgage interest rate probably is.  However, if you start talking about 1, 5, 10 years remaining on a mortgage, it becomes more likely that your mortgage interest rate will be higher than what you can return in the market during that much shorter period of time.

birdman2003

  • Bristles
  • ***
  • Posts: 314
  • Location: Iowa
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #6 on: October 30, 2018, 10:56:21 AM »
Put it towards the mortgage.  If you say you'll put it to index funds, you probably won't and it will get spent.

I would take a guaranteed 4% rate instead of a 7% or 8% average return.  After the mortgage is gone, your lifestyle will require less cashflow and you can always take out another mortgage if you really miss it.

onemorebike

  • Bristles
  • ***
  • Posts: 319
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #7 on: October 30, 2018, 10:59:06 AM »
401K and 457 are not maxxed, IRA is. I didn't think I could fund that with money that has already been taxed. Am I wrong about that?

Rate is 3.5 with 25 years remaining.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8011
  • Location: United States
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #8 on: October 30, 2018, 11:06:04 AM »
401K and 457 are not maxxed, IRA is. I didn't think I could fund that with money that has already been taxed. Am I wrong about that?

Rate is 3.5 with 25 years remaining.

No, but you can take the equivalent amount of pre-tax money and put it into the tax-advantaged accounts. 

RWD

  • Magnum Stache
  • ******
  • Posts: 3519
  • Location: Mississippi
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #9 on: October 30, 2018, 11:07:46 AM »
401K and 457 are not maxxed, IRA is. I didn't think I could fund that with money that has already been taxed. Am I wrong about that?

Rate is 3.5 with 25 years remaining.

You can put extra money in your 401k or 457 and then use the $1200 on normal living expenses. Money is fungible, after all.

With that rate I would definitely invest, especially since you can use tax advantaged space to do it.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #10 on: October 30, 2018, 11:22:50 AM »
Put it towards the mortgage.  If you say you'll put it to index funds, you probably won't and it will get spent.

That sounds like poor logic to me - poster asks whether to put money towards his/her mortgage of index funds, and you conclude he/she will only follow through if it's 'pay down the mortgage'?  Why?

I would take a guaranteed 4% rate instead of a 7% or 8% average return.  After the mortgage is gone, your lifestyle will require less cashflow and you can always take out another mortgage if you really miss it.

Except it's not a guaranteed rate of return, it's a fixed rate.  The real 'return' will be the fixed rate (here 3.5%) minus inflation. Which means its probably going to be around 1.5%, maybe less.

Yes, cashflow will improve once the mortgage is gone, but the likelihood of ever 'catching up' to where the OP would be investing additional money in his/her tax-advantaged accounts is vanishingly small.  If the OP takes out another mortgage in the future it will be in future dollars and future rates, not in 2013 dollars (yes, that makes a huge difference).

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 14062
  • Age: 38
  • Location: Toronto, Ontario, Canada
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #11 on: October 30, 2018, 11:38:24 AM »
Index funds.  Answer is the same for anytime you have the choice between the two.

Really?

If you have a 35% mortgage rate, you would choose to put the money towards index funds?

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #12 on: October 30, 2018, 11:42:44 AM »
Index funds.  Answer is the same for anytime you have the choice between the two.

Really?

If you have a 35% mortgage rate, you would choose to put the money towards index funds?

No one here has a fixed 35% mortgage rate, and if they did they certainly wouldn't have $1,200 extra lying around.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8011
  • Location: United States
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #13 on: October 30, 2018, 11:43:54 AM »
Put it towards the mortgage.  If you say you'll put it to index funds, you probably won't and it will get spent.

That sounds like poor logic to me - poster asks whether to put money towards his/her mortgage of index funds, and you conclude he/she will only follow through if it's 'pay down the mortgage'?  Why?


Agree, seems like if you aren't likely to put the money in an index fund, you are just as unlikely to send the extra mortgage payment. Either way, if it's your inclination to "just spend it", you'd just spend it.

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 14062
  • Age: 38
  • Location: Toronto, Ontario, Canada
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #14 on: October 30, 2018, 11:48:16 AM »
Index funds.  Answer is the same for anytime you have the choice between the two.

Really?

If you have a 35% mortgage rate, you would choose to put the money towards index funds?

No one here has a fixed 35% mortgage rate, and if they did they certainly wouldn't have $1,200 extra lying around.

Probably true.

But he said that the answer was the same any time you have a choice between the two.  In the 80s mortgage rates were above 20%.  I'd posit that it would probably be better to pay off even a 10% mortgage rate than invest the money in index funds.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #15 on: October 30, 2018, 11:52:15 AM »
Index funds.  Answer is the same for anytime you have the choice between the two.

Really?

If you have a 35% mortgage rate, you would choose to put the money towards index funds?

No one here has a fixed 35% mortgage rate, and if they did they certainly wouldn't have $1,200 extra lying around.

Probably true.

But he said that the answer was the same any time you have a choice between the two.  In the 80s mortgage rates were above 20%.  I'd posit that it would probably be better to pay off even a 10% mortgage rate than invest the money in index funds.

At 10% I'd probably do the same.  However, in the early 80s, 10y bonds had yields as high as 15%, and were in the double-digits for years.  So I'd have to weigh that as well.  If I had a 10% fixed-rate mortgage and bonds started paying 12.5% again, guess where my money is going:
Spoiler: show
Yup, hookers and blow, because the economy is already in the toilet.

birdman2003

  • Bristles
  • ***
  • Posts: 314
  • Location: Iowa
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #16 on: November 02, 2018, 12:09:32 PM »
Since I started paying extra principal payments on my mortgage (March 1st, 2018) I have saved $352 in interest.
If I had invested my extra payments in VTI instead, my brokerage account would have lost $1,150.

I would strongly encourage the extra payments on your mortgage.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #17 on: November 02, 2018, 12:24:04 PM »
Since I started paying extra principal payments on my mortgage (March 1st, 2018) I have saved $352 in interest.
If I had invested my extra payments in VTI instead, my brokerage account would have lost $1,150.

I would strongly encourage the extra payments on your mortgage.
You are judging this on a 7 month time frame?  Seriously??

Since I took out my mortgage in 2012 I would be lightyears behind had I decided to forgo funding my tax-advantaged accounts.

Judge the effects over relevant time scales (i.e. the length of the entire mortgage), not what the market had done in the last few months.

RWD

  • Magnum Stache
  • ******
  • Posts: 3519
  • Location: Mississippi
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #18 on: November 02, 2018, 12:49:07 PM »
Since I started paying extra principal payments on my mortgage (March 1st, 2018) I have saved $352 in interest.
If I had invested my extra payments in VTI instead, my brokerage account would have lost $1,150.

I would strongly encourage the extra payments on your mortgage.
You are judging this on a 7 month time frame?  Seriously??
Right? If we're going to use anecdotes then we bought our house in April 2016 and VTI is up 36% (about 13% annual return) since then! Kicks the crap out of our 3.125% mortgage rate!

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1671
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #19 on: November 02, 2018, 02:14:29 PM »
Depends on a number of factors:  Age, amount of mortgage balance, whether you are currently investing in bonds, and the investment term.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10897
  • Age: 61
  • Location: NorCal
Re: $1200 toward extra mortgage payment or Index Funds?
« Reply #20 on: November 02, 2018, 03:17:02 PM »
401K and 457 are not maxxed, IRA is. I didn't think I could fund that with money that has already been taxed. Am I wrong about that?

Rate is 3.5 with 25 years remaining.
Jesus H. Christ, as my grandma used to say. Invest it and don't look back. Your future self will thank you.