Author Topic: Mortgage vs. Market  (Read 1614 times)

dwcassidy

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Mortgage vs. Market
« on: March 06, 2019, 03:00:14 PM »
Mustachians,

My wife and I need your advice.  We're very fortunate to have hyper-local jobs which we both enjoy, we live below our means, and we're fortunate in many ways.  We've come into a large amount of cash ($400k) and we're trying to figure out what to do: pay down our mortgage or invest in the market.  We live in the Bay Area - thus the large mortgage.  Our interest rate is low, approx 3.75%, and the 30 year mortgage ends in 2042.

If we don't do anything differently with the mortgage today, the total interest we will pay is ~$580,000.

If we pay $300,000 right now:
We will no longer have mortgage in 2032 (10 years earlier)
We would save ~$254,000 in interest

If we pay $400,000 right now:
We will no longer have mortgage in 2029 (13 years earlier)
We would save ~$302,000 in interest

The question is - Should we invest more heavily in the market or pay down the mortgage?  If we invest $300-400K in the market and make ~5% a year for the next 10 years we would make an additional $188k - $250k.  In 20 years it would be ~$500k- $660k.

Our current investments are all in various Vanguard low cost funds and we've been dollar-cost averaging $25k each month into Vanguard.  But at this rate, it will take us 1 1/2 years to get that money into the market. 



Thanks for your time and your thoughts!




jps

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Re: Mortgage vs. Market
« Reply #1 on: March 06, 2019, 03:15:43 PM »
What's your current mortgage balance? I think that got left out.

Also, @Dicey probably has some words of encouragement for you.
« Last Edit: March 06, 2019, 03:17:27 PM by jps »

terrifictim

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Re: Mortgage vs. Market
« Reply #2 on: March 06, 2019, 03:34:47 PM »
Don't Payoff Your Mortgage Club - https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Mortgage Payoff Club - https://forum.mrmoneymustache.com/throw-down-the-gauntlet/mortgage-payoff-club!!/

Fiology (Should You Pay off Your Mortgage) - https://www.fiology.com/should-you-pay-off-your-mortgage/

My recommendation is that you go through some of these resources and read from both sides. There's some strong opinions on both sides.

maginvizIZ

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Re: Mortgage vs. Market
« Reply #3 on: March 06, 2019, 03:35:26 PM »
Would you like to save/make 3.75% annually over the course of 30 years, or make 10% annually over the course of 30 years?


It really comes down to risk tolerance.. Psychological side of having a mortgage or not. Some people value simplicity, so paying off a mortgage earlier is better for them.


Strictly looking at numbers... Invest in the market.

Boofinator

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Re: Mortgage vs. Market
« Reply #4 on: March 06, 2019, 03:42:53 PM »
Would you like to save/make 3.75% annually over the course of 30 years, or make 10% annually over the course of 30 years?


It really comes down to risk tolerance.. Psychological side of having a mortgage or not. Some people value simplicity, so paying off a mortgage earlier is better for them.


Strictly looking at numbers... Invest in the market.

It's not quite that simple.

First, are you maxing all tax-deferred assets available? If not, this absolutely comes first.

Once that is out of the way, the big question is: What is your goal? Are you in the accumulation stage and trying to minimize the time to FI? Or are you almost FI, planning on retirement, and in the wealth-preservation stage? If you are in the former, definitely want to invest and get market returns. If you are in the latter, it is a tougher choice, but you may want to still lean toward the market with that low of a mortgage interest rate.

dandarc

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Re: Mortgage vs. Market
« Reply #5 on: March 06, 2019, 04:24:03 PM »
You know what can help you keep making that mortgage payment in lean times? A big pile of money. Your pile of money, in all probability, will be larger if you invest this money rather than pay down the mortgage with it. 3.75% is very cheap money - hold on to that mortgage as long as they'll let you.

If you could pay the whole thing off, or get to where that was very close at least, then there might be a cash-flow argument to be made in favor of paying off, but if your best case scenario is still 13 years of more mortgage payments. I mean, the math would still say invest even if you could pay the place off, but you'd actually be reducing your monthly nut substantially, so there would be at least some upside to paying down the mortgage.

dandarc

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Re: Mortgage vs. Market
« Reply #6 on: March 06, 2019, 04:29:41 PM »
Also, the math also says invest the money immediately - dollar cost averaging is for wimps and on average costs you money vs. lump sum. At the very most spread it out over 1 year, but even that is expected to do worse than investing it all today.

You're generating enough income to have $25K / month to invest and own a very expensive home - $400K can't be that huge a part of your world, and even if it is today, surely it won't be in a few years.

 

Wow, a phone plan for fifteen bucks!