Author Topic: Age Old Question: Pay down mortgage or invest?  (Read 1435 times)

Gimesalot

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Age Old Question: Pay down mortgage or invest?
« on: July 01, 2014, 09:26:31 AM »
My husband and I just bought a house.  We are having a tough time figuring out if we should pay extra on our mortgage or is we should just invest the money.  Here are the details:

Triplex House Loan amount: $219,600 at 4.5%
Current rental income: $1800 per month
Rental income in December: $2100 per month (section 8 tenants leaving and renovations)
Payment: $1939 per month (including $65 PMI)

When we first started looking at houses, we agreed that we didn't want to pay more than $2000 a month with everything included.  At that time, we were looking at single family homes.  Soon we realized that there was no way that we could hope to buy a house in a decent area, (less than 15 miles from work), for that amount.  We switched gears and bought a triplex.
At that point we said that we would use the rental income plus the $2000 we were planing to spend in order to pay the mortgage in approximately 10 years.  This would make our monthly payment $3939.  Now I am having doubts...

Should I add the extra amount to the mortgage or just invest in some index ETFs?


Cheddar Stacker

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Re: Age Old Question: Pay down mortgage or invest?
« Reply #1 on: July 01, 2014, 09:47:25 AM »
This is a good read on the subject.

http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

Also do a search on the forum if you haven't already. There are a ton of discussions about this and arguments on both sides. It's really a personal choice, and you tend to either go with the psychological peace of mind win (pay mortgage), or go with math and historical returns (invest). The tipping point is somewhere in the 4-6% range, anything below you should invest, anything above you should pay down, anything within that range is a tough choice.

I'd rather invest, but in your given situation the one thing that stands out is the mention of PMI. That's not a very high PMI payment, and it's tax deductible for the rental portion of the building (assuming you're living in one of the units), but it might be smart to pay down the mortgage until PMI is gone before investing the extra funds.

Good luck!

welliamwallace

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Re: Age Old Question: Pay down mortgage or invest?
« Reply #2 on: July 01, 2014, 09:58:59 AM »
It's highly likely that any additional payments towards your mortgage will net you 5.5-6% annualized ROI at least since you have PMI. Read this whole post for some information on calculating that. (And the ROI goes up if you sell the property before the mortgage is up)

http://forum.mrmoneymustache.com/investor-alley/pmi-or-investing/msg279072/#msg279072

In general, a guaranteed 5.5% or 6% return is preferred over the much more risky investing in equity market.