Author Topic: Attack Mortgage or save for next investment?  (Read 16682 times)

Taylor

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Attack Mortgage or save for next investment?
« on: February 14, 2012, 08:15:20 AM »
Hello All,
Thanks MMM for creating this forum. I look forward to using it to further build the 'stache. Here's my question for the Frugality Board of Directors:

Last month I bought my very first home (yay!). It's a 2BR/2Bath condo that I bought for 67.5K and put 20% down in cash. That leaves my mortgage at 54K at 4.50%APR. I have a roommate, and with her contribution all my PITI, HOA and utilities (including internet and cable) come to $270 per month. Before I moved, I was paying $650 a month in rent.

So this frees up a lot of money every month for me. What does The Board think I should do with this money? Pay down the mortgage faster? Save and start an IRA (I don't have retirement accounts yet, I have no employer match and I'm 27). Should I save it for my next investment? (I'd really like to buy another condo to rent out).

Open to all suggestions. Constructive criticism welcome, but feel free to praise as well :)

arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #1 on: February 14, 2012, 08:24:50 AM »
It really depends on a number of things, most notably your risk tolerance. Many people think that you can do better than 4.5%, while others would take the guaranteed 4.5% return.

There are - literally - millions of words written about this exact topic. Google "pay down my mortgage or invest" and you'll get enough reading material to keep you busy for a while. There are really a number of factors. Having money in home equity is less liquid, but the mortgage interest does allow for tax write off.   There are pros and cons on both sides. In my opinion, like I said, it really does come down to risk tolerance.

I'm guessing most Mustachians would think you should start your next investment rather than paying down the mortgage.  I would agree.
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StaceStache

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Re: Attack Mortgage or save for next investment?
« Reply #2 on: February 14, 2012, 08:36:38 AM »
I'm in a very similar situation. I live in a 2BR/2.5BA townhouse with an outstanding balance of about $60,000 (bought last year at 83.5 with a 20% downpayment). I actually emailed MMM about this very scenario a few months back. I have between 1000-2000 each month of discretionary income (after maxing out my Roth) and wondered whether I should be attacking my mortgage, investing, or somewhere inbetween. MMM suggested to me basically that I go the inbetween amount, investing outside of my Roth AND paying down my mortgage.

My plan of attack with my discretionary income is threefold:

1. Invest a set amount each month into some index/mutual funds (right now I'm doing 300/month)
2. Save in cash a small amount (200-300) for my short-term savings goals (travel/miscellaneous)
3. Use the rest of my discretionary income for that month to pay down my mortgage (minimum payment of 500, could be up to 1500 or so depending on other factors). I want to pay off my mortgage within 4 years (I eventually want to move but keep the townhouse as a rental).

I like the guaranteed, safe return of paying down my mortgage. Also, I just hate owing ANYONE money. However, I'm not going to put ALL my eggs in the mortgage prepayment basket, and this is why I have a fixed amount going into cash/short-term savings, and another fixed amount being invested automatically each month, beginning to build my stache!

I have my amortization schedule set up in excel so that I can see the effect my additional mortgage payments have on the balance, and love playing with the numbers to see how quickly I can have it paid off! (I am an accounting nerd if you can't tell by the previous statement). It's good motivation to see that 0 balance in just a couple of years, and helps me keep trucking on my mortgage prepayments. Just think of how much cash that will free up once it's paid off!

StaceStache

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Re: Attack Mortgage or save for next investment?
« Reply #3 on: February 14, 2012, 08:43:37 AM »
I should have noted better in my above post that I recommend investing in a Roth IRA (and maxing it out if possible!) BEFORE making any mortgage prepayments! I max mine out each month (416.66/month=5,000/year) before following my 3-fold plan of attack. I definitely think you should be investing in some form or fashion before making prepayments.

nyx

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Re: Attack Mortgage or save for next investment?
« Reply #4 on: February 14, 2012, 09:06:22 AM »
From a pure math perspective, you're probably better off investing elsewhere. Hopefully you can make more than 4.5% in the market, especially when you consider your mortgage interest tax deduction. Liquidity is a good thing.

That said, I'm being somewhat irrational and paying down my 3.375% mortgage with the money left over after maxing Roth/401k. I have a nice cash cushion in a savings account to keep some liquidity. Like StaceStache says, I just hate the feeling of owing anyone money. I also like the idea of removing the biggest bill from my monthly budget for the rest of my life. At the moment I don't even live in my house (I've been traveling for the past 2 years) so even if I never move back it'll be a nice income stream.

What makes you feel more comfortable? Vastly reduced housing costs or having investments that will cover your housing costs?

trammatic

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Re: Attack Mortgage or save for next investment?
« Reply #5 on: February 14, 2012, 09:13:18 AM »
For the truly Mustachsian, a Roth IRA is kinda backwards, since you expect to have much lower income in retirement than while you're building the 'stache.

I like to think of diversification...right now you have 13.5k in real estate assets.  Do you have any other assets?  If not, I'd contribute elsewhere to diversify assets.

chrissyo

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Re: Attack Mortgage or save for next investment?
« Reply #6 on: February 14, 2012, 09:19:32 AM »
I'm a somewhat risk averse person, so I opted for the mortgage payoff option. Better yet, we were able to find a lender offering an 'offset' mortgage, which allowed us to have all of our savings (and even checking accounts) forego their usual 0-1% interest while not paying interest on the equivalent value of the mortgage. It was a win-win for a guaranteed return, accelerated the rate at which we became debt-free/financially independent and having liquidity to take money out of our house if need be.

I'll add, however, that we were also investing through our retirement accounts (401K and IRA equivalents), so we weren't focusing solely on paying off the mortgage. I think there is some sort of middle ground (as suggested by StaceStache). If you're already contributing to equity accounts, I'd probably pay off the mortgage ASAP. It's a fairly small amount, and if targeted aggressively, could be paid of very soon, freeing up an even bigger amount of income to invest elsewhere.


arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #7 on: February 14, 2012, 09:21:29 AM »
For the truly Mustachsian, a Roth IRA is kinda backwards, since you expect to have much lower income in retirement than while you're building the 'stache.

I like to think of diversification...right now you have 13.5k in real estate assets.  Do you have any other assets?  If not, I'd contribute elsewhere to diversify assets.

Diversification is overrated.

Good point about the ROTH. Still not a terrible idea, as the contribution limit is so low it won't suck up much of your investments anyways.

Also for the truly Mustachian ANY retirement savings that's designed to be accessed after 59 1/2 is silly (72t excluded). You should be retiring way before then. Unless, of course, you are becoming a Mustachian late in life.

For many, finance is about more than numbers. It's comforting to have a paid off home.

To me, in a Mustachian mindset, it's all about the numbers, do I'd load up on low interest mortgage debt now while you can and use that money to make some money!  But it really does depend on the person.  Like I said, it comes down to risk tolerance.

I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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MEJG

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Re: Attack Mortgage or save for next investment?
« Reply #8 on: February 14, 2012, 09:36:19 AM »
For the truly Mustachsian, a Roth IRA is kinda backwards, since you expect to have much lower income in retirement than while you're building the 'stache.


While this is true the other thing to remember about Roths is you can pull out your contributions at any time with no penalty.  So they can be used as a vehicle for both later retirement investments AND midterm goals/ emergency money that isn't in cash.

salmp01

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Re: Attack Mortgage or save for next investment?
« Reply #9 on: February 14, 2012, 10:02:20 AM »
I have a couple thoughts…

If you’re income is fairly high you may want to consider contributing to a tax deferred IRA so you can reduce your income taxes.  If your income is fairly low do not do this especially if your employer doesn't contribute.

If you have a decent amount of money saved I’d recommend purchasing another condo and moving into it.  That way you’ll get a better rate from the lender (owner occupied loans are usually a point lower). Once you move you can rent out your old property and let the landlording begin! 

KMB

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Re: Attack Mortgage or save for next investment?
« Reply #10 on: February 14, 2012, 10:05:35 AM »
I'm a somewhat risk averse person, so I opted for the mortgage payoff option. Better yet, we were able to find a lender offering an 'offset' mortgage, which allowed us to have all of our savings (and even checking accounts) forego their usual 0-1% interest while not paying interest on the equivalent value of the mortgage. It was a win-win for a guaranteed return, accelerated the rate at which we became debt-free/financially independent and having liquidity to take money out of our house if need be.


Chrissyo, does this mean that if you had a mortgage with a balance of 100k and kept 30k in your bank account, interest payments on your mortgage would only apply to 70k? If so, what were the rest of the terms of this mortgage, and where can I find one? If I didn't have that quite right, can you explain how this works a little further?

Matt K

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Re: Attack Mortgage or save for next investment?
« Reply #11 on: February 14, 2012, 10:42:37 AM »
I have nothing useful to say, I just wanted to add: To Taylor and StaceStache, wow, I'm a bit jealous.

I discovered MMM after I'd purchased my house, but some Mustachian thinking went into the purchase. You got homes for under $100k (plus your ongoing condo fees).

My freehold house cost me $300k (3brd, 1 bath, renovated to add a second). Condo fees are so high around here that to equal the same monthly outlay, I'd be buying a $240k condo.

Average house price in the area is well over $400k. I'm a 17km bike ride to work (which since I'm a pansy, I drive in teh winter), and this is as close as we could afford to live (thankfully the Mrs is oly a 4km bike ride to work, and all the shopping we could ever need is within 3km).

You can't even buy a trailer in a trailer park around here for less than $100k.

Taylor

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Re: Attack Mortgage or save for next investment?
« Reply #12 on: February 14, 2012, 10:47:48 AM »
Thanks everyone for your comments, they are really helpful. In response to some (especially Psalmela), my income is fairly low (38K BEFORE taxes) so I'm leaning towards using that extra money to buy my first investment property (which I've been wanting to do for a while). I'm excited by the prospect of making a little cashflow rather than paying down my mortgage right now. I'm young and not very risk-averse right now since my mortgage is easily affordable with a roommate.

Taylor

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Re: Attack Mortgage or save for next investment?
« Reply #13 on: February 14, 2012, 10:52:00 AM »
I have nothing useful to say, I just wanted to add: To Taylor and StaceStache, wow, I'm a bit jealous.

I discovered MMM after I'd purchased my house, but some Mustachian thinking went into the purchase. You got homes for under $100k (plus your ongoing condo fees).

My freehold house cost me $300k (3brd, 1 bath, renovated to add a second). Condo fees are so high around here that to equal the same monthly outlay, I'd be buying a $240k condo.

Average house price in the area is well over $400k. I'm a 17km bike ride to work (which since I'm a pansy, I drive in teh winter), and this is as close as we could afford to live (thankfully the Mrs is oly a 4km bike ride to work, and all the shopping we could ever need is within 3km).

You can't even buy a trailer in a trailer park around here for less than $100k.

I agree that I was very influenced by MMM (and ERE) when thinking about my first home purchase. There are also some crazy deals out there right now (my condo was 'worth' over 100K 5 years ago). And I also just don't have the income to buy a house over 150K.

I know I don't want to live in a 68K condo for my whole life (and my boyfriend especially looks forward to our buying a 'proper' house in a nicer neighborhood), but for me at least I know I have a relatively cheap place to live if I need to go to 'plan B'

Ben

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Re: Attack Mortgage or save for next investment?
« Reply #14 on: February 14, 2012, 10:56:34 AM »
Taylor,

I think there is a lot of wisdom in the posts so far.

Personally, I believe a ROTH IRA in one or more low-expense index funds would be a good option for you. You can withdraw the entire principal without penalty for any reason, and the interest will grow tax-free forever. This lets you have a smaller emergency fund, as you can access it in dire circumstances, job loss, etc.

Even if you plan on retiring well before 59, you will still need to have money set aside for the traditional retirement years- and again, the principal can come out beforehand if you need it.

On the other hand, if directing all surplus cash towards eliminating your mortgage or buying a second place to rent will fire you up to save and/or take a burden off of your shoulders (and the ROTH IRA doesn't), then pursue that instead. Or take a middle route like StaceStache recommends.

Ben

newb

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Re: Attack Mortgage or save for next investment?
« Reply #15 on: February 14, 2012, 11:32:13 AM »
I would consider simply doing both. If you put extra on the mortgage, you get a guaranteed 4.5% return on your investment. plus if you invest in tax deferred shelter, you get to pick your choice of funds and pay the goobermint less tax money. its a win-win!

palvar

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Re: Attack Mortgage or save for next investment?
« Reply #16 on: February 14, 2012, 11:52:44 AM »
I would consider simply doing both. If you put extra on the mortgage, you get a guaranteed 4.5% return on your investment. plus if you invest in tax deferred shelter, you get to pick your choice of funds and pay the goobermint less tax money. its a win-win!

This is what I do, and I expect what most people do when they try to decide between investment and debt reduction.  There is nothing that says that all of your additional savings has to go to one task.

Gutless Bastard

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Re: Attack Mortgage or save for next investment?
« Reply #17 on: February 14, 2012, 12:53:36 PM »
If you want to buy an investment property then my thought would be to save up for that and get it done, especially if you can do it in the next couple of years before the rates have a chance to go back up too much.

Edit: Now my response actually addresses the original post.
« Last Edit: February 14, 2012, 01:06:10 PM by Gutless Bastard »

Yabusame

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Re: Attack Mortgage or save for next investment?
« Reply #18 on: February 14, 2012, 01:20:43 PM »
I'm not an American so my understanding of your tax laws and situation may not be relevant but here's what I would do:

1.  Put 15% of everything you earn towards your stache (whatever you want to invest that in, be it Roth IRA or something else)
2.  If you have children, start saving for college
3.  Pay off the mortgage with the remainder.  There is no point keeping the mortgage simply for the tax credit.  You get the same tax credit making an equivalent donation to charity.

Once the kids have gone to college and the house has been repaid, I'd return to the first point and increase my 15% of gross income to whatever I could afford to build that early retirement stache.

Just my tuppence worth from across the pond.

chrissyo

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Re: Attack Mortgage or save for next investment?
« Reply #19 on: February 14, 2012, 02:13:37 PM »
I'm a somewhat risk averse person, so I opted for the mortgage payoff option. Better yet, we were able to find a lender offering an 'offset' mortgage, which allowed us to have all of our savings (and even checking accounts) forego their usual 0-1% interest while not paying interest on the equivalent value of the mortgage. It was a win-win for a guaranteed return, accelerated the rate at which we became debt-free/financially independent and having liquidity to take money out of our house if need be.


Chrissyo, does this mean that if you had a mortgage with a balance of 100k and kept 30k in your bank account, interest payments on your mortgage would only apply to 70k? If so, what were the rest of the terms of this mortgage, and where can I find one? If I didn't have that quite right, can you explain how this works a little further?

Yes - that was exactly what we did. It's referred to as an 'offset mortgage'. I used FirstDirect, which is an online-only subset of HSBC here in the UK. Unfortunately I'm yet to find a similar option in the US (both because I'm not currently living there and when I _do_ move, I don't intend to need another mortgage). If I come across anything States-side, I'll let you know! (similarly, if you or anyone else find one, it's worthwhile posting here to share the knowledge)

Gerard

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Re: Attack Mortgage or save for next investment?
« Reply #20 on: February 14, 2012, 05:43:32 PM »
In Canada, National Bank’s All-in-One and Manulife’s One are basically offset mortgages, although they're usually sold as a bigger package (your credit card is included). My understanding is that you pay a slightly higher interest rate in return for such a setup. I'm not sure that I understand how this is different from just having a constantly-used HELOC, though.

quakerplain

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Re: Attack Mortgage or save for next investment?
« Reply #21 on: February 14, 2012, 06:49:42 PM »
Attack the mortgage or save for the next investment?

Your response depends on your paradigm. Will the markets recover? Or will the global economy fall off the cliff?

One of my colleagues has had one job in his life. He is fully vested into the company retirement plan which is wholly based
in paper assets. He lives or dies on the value of the dollar. At the opposite extreme you will find me. I woke up in 2006
and have been digging out of debt with my hair on fire ever since. We were expecting the global financial system to collapse
in October 2008. It did but much slower than we were expecting. We are preppers. Stored food, fuel, the works. Precious
metals; gold silver and lead. We are looking for the dollar to lose reserve currency status. My colleague thinks I am crazy.
I think he is misguided.

Who is right? Time will tell. (I am of course)

Bottom line. If you believe the system will recover and the good times will roll save for the next investment. If you think
we will go the way of Argentina, get out of debt any way you can. Downsize if you must. A cabin with a dirt floor that is
paid for is better than a Mcmansion with a mortgage in the world that I live in.

Oh, and offset mortages? I can tell you all about the heloc shuffle. Double your money by folding it and putting it back
in your pocket. Save up the equivalent of a heloc in a savings account. Three times your monthly take home. Now you
have a heloc. Proceed to pay off your mortgage and save the refi fees.

Or better yet. Send half of what you saved to me for this very expensive bit of advice.

We paid off our mortgage last month. Now we are paying down the 17,000 balance on the HELOC.

foodguy

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Re: Attack Mortgage or save for next investment?
« Reply #22 on: February 15, 2012, 09:35:38 AM »
Consider diversification in terms of your entire portfolio (that is, all the investments/stocks/accounts you own) while also looking at taxable/non-taxable and stocks/bonds/real estate allocations.  You have real estate exposure but no stocks/bonds that I could find in a quick glance over the posts.  The real estate equity can be considered non-taxable in that any gains are protected from taxes (up to a point).

Your income is low enough at 38k that you are in a lower tax bracket.  If you put this extra cash in a Roth, you pay ~25% federal and whatever your state rate is on the contributions only.  It then grows and in 35 years it is all tax free.  Since you are young, you can afford to be aggressive with this money by investing heavy in stocks.  Assume a 7-8% rate of return far exceeds your mortgage rate, especially considering the fact that the mortgage has tax advantages.  Plus you can start this immediately and it doesn't seem that you have any retirement savings as of yet (time to get moving on this area... NOW).  If you get in a pinch (and I mean a serious pinch), there are rules for tapping the Roth before age 59.5.

If you were to save for an investment property, you'll have to run the numbers on your own as I don't know enough about your specific situation.  Consider the fact that any investment property will carry a higher interest rate on a mortgage as the risk associated is higher.  If you were to setup the property in such a manner as to protect yourself from liability you are looking at attorney's fees, incorporation costs (LLC?), accountants fees (cause you aren't going to want to do the taxes on that bad boy), maintenance, and property taxes.  What kind of income would this property then generate on a monthly basis?  Also consider that you won't be able to buy this property immediately, as I would assume you would need 20% down to get any property that you won't be living in.

If your concern lies in the fact that properties are cheap now and you want to get in an investment now, take a little faith in that the housing market isn't going anywhere any time soon.  In the large scale, people just don't have any money to spend on a house.  Credit is still tight except for those with excellent balance sheets.  The opportunities for investment will always be there.  The one thing that won't be there for you is time.

My $0.02, invest in the Roth, and do it TODAY.  In 35 years, consider how liquid a house or investment property is vs an account with money in it.
« Last Edit: February 15, 2012, 09:37:11 AM by foodguy »

lac

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Re: Attack Mortgage or save for next investment?
« Reply #23 on: February 15, 2012, 11:19:07 AM »
Hi everyone, here's my first post.

We decided to pay down the mortgage as quickly as possible.  There were a couple reasons, one being jobs were a little unstable and we were afraid we'd find ourselves in a situation where we couldn't pay the mortgage.  I believe this decision helped cement our mindset into our lifestyle to live below our means.  The mortgage interest impact to our taxes was so minimal toward the end that paying interest was like throwing money away.  All in all, I'm very glad we made this decision.  Living frugally for a few years to pour our money here was smart for us.

Now that we've been mortgage free for almost 8 years, we have been able to save so much more money leading to more investment opportunities.

We also made an investment in a second home/20 acres.  I'm hoping the housing market improves soon.

Taylor

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Re: Attack Mortgage or save for next investment?
« Reply #24 on: February 15, 2012, 11:37:34 AM »
Thanks again everyone for your thoughts, they are very much appreciated. I ccan tell that people here at MMM are investment pros (or at least not novices like me).

I will have 10K in cash in a few more months (savings left over from when I bought the house), and I think I will use half to start a Roth IRA and set up automatic monthly payments to that. Although it doesn't 'light my fire' as much as saving for a rental does, it's probably wise and will officially start the growing of my 'stache.

The other 5K I will leave in savings as emergency money and add to it to buy a cheap condo to test the waters of landlording (around here you can get a cheap one for around 35K). My goal would be to have the rent cover the mortgage and throw off at least $100 per month to me. Looking at condos near me, this is doable with putting 20-25% down payment.

A question about Roth IRAs: Are they like an Index Fund or can I pick what kind of portfolio I want? I'd like to be more heavy into stocks while I am young and then slowly move to more stable things like bonds.


StaceStache

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Re: Attack Mortgage or save for next investment?
« Reply #25 on: February 15, 2012, 11:51:32 AM »
A question about Roth IRAs: Are they like an Index Fund or can I pick what kind of portfolio I want? I'd like to be more heavy into stocks while I am young and then slowly move to more stable things like bonds.

You can invest whatever you want to invest in.

I have my Roth IRA with Vanguard - no annual fee (if you opt for paperless statements) and their funds have a super low expense ratio. You can pick stocks/mutual funds/whatever to invest your money in under your Roth Account.

I'm personally in a Target Date Fund - I chose my Target retirement date as 2055 (I'm in my early 20s) and so currently the fund is 90% stock funds (Vanguard Total Market Index and Total International Index) and 10% bonds. As you get closer to the "Target Date" (whatever it may be), the fund automatically moves you into a higher percentage of bonds to make it less risky for you. Here's the link to show you what a target date fund at Vanguard would look like if you're interested https://personal.vanguard.com/us/funds/snapshot?FundId=1487&FundIntExt=INT#hist=tab%3A2

I love the Roth. No taxes on my earnings or withdrawals?! Awesome. And I can always tap into it earlier than retirement age if I need to with no penalties (as long as I'm only tapping what I've contributed and NOT the earnings portion).

palvar

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Re: Attack Mortgage or save for next investment?
« Reply #26 on: February 15, 2012, 12:00:44 PM »
We paid off our mortgage last month. Now we are paying down the 17,000 balance on the HELOC.

Why did you pay off your mortgage before your line of credit?

arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #27 on: February 15, 2012, 12:21:35 PM »
We paid off our mortgage last month. Now we are paying down the 17,000 balance on the HELOC.

Why did you pay off your mortgage before your line of credit?

I'd assume because the mortgage was at a higher interest rate than the HELOC...
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

foodguy

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Re: Attack Mortgage or save for next investment?
« Reply #28 on: February 15, 2012, 02:41:47 PM »
...and I think I will use half to start a Roth IRA and set up automatic monthly payments to that.

You aren't required to do automatic payments into a Roth, though they are useful.  The only limit to contributing to a Roth is $5000 per year ($6000 if you are over 50 years old).  If you have the money sitting around, you can deposit $5000 in a Roth IRA all at once and that will be your contribution for 2012. To get even more confusing, you can actually designate this $5000 check to apply to tax year 2011 provided you do it before Apr 17, 2012, thus allowing yourself to another $5000 contribution check for tax year 2012 (which can be done any time prior to April 15, 2013 - or whatever the tax filing deadline is).

A Roth IRA is simply a type of account.  Much like a savings account, it comes attached with rules, the biggest being you can't withdraw the funds except for specific purposes or uses until the year you turn 59.5 years old.  There are numerous exceptions.  Once you open this account, which can be through you local bank or any number of brokerage houses (think Scottrade, Vanguard, TD Ameritrade, etc.)  Once opened and you have made a contribution (the $5000 check deposit above), you can then take that $5000 and invest in stocks, bonds, mutual funds, or whatever the place that you have opened with offers.  Personally I use Scottrade and have my contributions distributed throughout mutual funds and ETFs.

For all the where-for-art-thous of IRAs from a tax standpoint and general principals on how they work, check out IRS Publication 590 available on the IRS website.

AJ

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Re: Attack Mortgage or save for next investment?
« Reply #29 on: February 15, 2012, 02:54:56 PM »
If it were me, I would put the extra funds in an opportunity fund.

One of the worst feelings is finding a screaming deal on an investment (rental, business, stocks in March '09, etc.) and not being able to take advantage of it because you are cash-poor. You can always plunk your savings into the mortgage later if you want, but you can't go the other way without a lot of hassle and expense.

Think of it as your emergency fund for investments :) A really good  (time sensitive) deal always feels like an emergency to me anyway :)

Physics

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Re: Attack Mortgage or save for next investment?
« Reply #30 on: February 15, 2012, 06:11:37 PM »
So it is pretty clear from all of these excellent responses there there is certainly no single "right" answer to this one.  But I can add what we did.

We aggressively paid down our mortgage, in fact we now own our house completely as of December.  How good is that feeling?  Really fucking good.  As long as I can pay property taxes my family will always have a place to live.  That is peace of mind.  We pulled really hard during the 2nd half of last year to finish it up but in hindsight none of it was really a sacrifice, I was just as happy living Mustachian extreme. 

As such, we continued saving 75-80% of our income during January and February and fully funded our 2011 and 2012 Roth contributions.  Granted I will admit this is made possible by our behavior and pretty good software engineer style income.  That said, the income makes it easier, the behavior makes it possible.

So I guess I'll just come out and recommend you do what I did, as it worked out great and I would do it again in the same way.  Pay down the mortgage, enjoy the huge reduction in fixed expenses when you are done, and keep kicking ass.  When it is paid off, enjoy having one less thing in your life to worry about, and one less external entity that you have to deal with in any way.  Shift to an aggressive investment phase, with all that extra "not having a mortgage" money you have lying around every month.  Your emergency fund can now be less, since your fixed costs are less!

The fact you are even considering these options means you are in a good place, keep it up!
« Last Edit: February 15, 2012, 07:27:01 PM by Physics »

Patryn

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Re: Attack Mortgage or save for next investment?
« Reply #31 on: February 16, 2012, 01:53:58 PM »
I am about to pay off my home so I will obviously recommend paying it off.  The way I looked at it is that paying the mortgage is a guaranteed return and if someone offered to loan me money with my house as collateral so that I could invest that money in the stock market I'd say no every time.

I chose to get the max from my 401k match and put the rest of my investment money into the house.  Then once the house is paid off and I am truly debt free I will feel comfortable risking my money in the stock market.

During my mortgage repayment I kept cash available in an FDIC insured online savings account to cover 2 years of expenses...  probably way too ultra conservative but I didn't want to lose my job then lose my house and all the extra equity I was building in it.

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Re: Attack Mortgage or save for next investment?
« Reply #32 on: February 17, 2012, 09:19:48 AM »
So it is pretty clear from all of these excellent responses there there is certainly no single "right" answer to this one.  But I can add what we did.

We aggressively paid down our mortgage, in fact we now own our house completely as of December.  How good is that feeling?  Really fucking good.  As long as I can pay property taxes my family will always have a place to live.  That is peace of mind.  We pulled really hard during the 2nd half of last year to finish it up but in hindsight none of it was really a sacrifice, I was just as happy living Mustachian extreme. 

As such, we continued saving 75-80% of our income during January and February and fully funded our 2011 and 2012 Roth contributions.  Granted I will admit this is made possible by our behavior and pretty good software engineer style income.  That said, the income makes it easier, the behavior makes it possible.

Physics, you are the man.  We are trying to follow the same path -- $77k owed on the home with a scheduled payoff date of 1/1/2014.
So I guess I'll just come out and recommend you do what I did, as it worked out great and I would do it again in the same way.  Pay down the mortgage, enjoy the huge reduction in fixed expenses when you are done, and keep kicking ass.  When it is paid off, enjoy having one less thing in your life to worry about, and one less external entity that you have to deal with in any way.  Shift to an aggressive investment phase, with all that extra "not having a mortgage" money you have lying around every month.  Your emergency fund can now be less, since your fixed costs are less!

The fact you are even considering these options means you are in a good place, keep it up!

Physics

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Re: Attack Mortgage or save for next investment?
« Reply #33 on: February 17, 2012, 09:26:44 AM »
During my mortgage repayment I kept cash available in an FDIC insured online savings account to cover 2 years of expenses...  probably way too ultra conservative but I didn't want to lose my job then lose my house and all the extra equity I was building in it.

This is an important thing to note if you do decide to pay off your mortgage.  Until you are DONE paying it off, you are effectively taking on more and more risk, as you have more and more funds tied up in a not so liquid asset that effectively has a lien on it.  Your mortgage company doesn't care whether you owe 100k or 5k, if you don't pay on time, they can attempt to foreclose, until you actually owe $0.  That said, when you hit $0 owed and own your house outright, a huge risk disappears overnight!

arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #34 on: February 17, 2012, 09:31:46 AM »
This is an important thing to note if you do decide to pay off your mortgage.  Until you are DONE paying it off, you are effectively taking on more and more risk, as you have more and more funds tied up in a not so liquid asset that effectively has a lien on it.  Your mortgage company doesn't care whether you owe 100k or 5k, if you don't pay on time, they can attempt to foreclose, until you actually owe $0.  That said, when you hit $0 owed and own your house outright, a huge risk disappears overnight!

Um, you do realize that you get any extra proceeds from a foreclosure? 

So if your house is worth 250k, and you owe 20k, and they have to foreclose and sell it, they'll take 20k, and expenses, and give you the 220k-ish that's left.
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Physics

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Re: Attack Mortgage or save for next investment?
« Reply #35 on: February 17, 2012, 09:37:38 AM »
Sure, but you are the last to get paid.

I agree you don't lose everything, but it is still a pretty risky scenario, in general.  Particularly in a down housing prices market.

If your house is "worth" $250k, and you've paid $245k in principle, but the bank decides to short sell it for $200k, reap their $5k owed and stick you with the rest, then your just had $50k disappear.

I will grant that I'm hugely oversimplifying this, and it is even more unlikely that our fellow mustachians would ever put themselves in this position!

arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #36 on: February 17, 2012, 11:04:01 AM »
the bank decides to short sell it for $200k

Banks don't short sale. Homeowners do, and banks agree to take less than what is owed.  In the case we are talking about, there is no underwater mortgage, but actual equity, so a short sale wouldn't be possible.
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If you want to know more about me, this Business Insider profile tells the story pretty well.
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Physics

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Re: Attack Mortgage or save for next investment?
« Reply #37 on: February 17, 2012, 11:14:01 AM »
Agreed, I attributed the verb to the wrong party there.

I suppose people don't know if they have an underwater mortgage until they are forced to sell in a strict timeline.  If there is real equity, then you may not lose money on the deal, but even then there is a risk of having to sell your house when you don't want to.   But again I doubt anyone here would every get into that position. 

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Re: Attack Mortgage or save for next investment?
« Reply #38 on: February 21, 2012, 12:38:08 PM »
Thanks everyone for the opinions, advice, and for sharing bits of your experience. I have some number-crunching to do, but it's clear that there is a wealth of information here for all of us to mine and apply towards our own goals :)

Taylor

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Re: Attack Mortgage or save for next investment?
« Reply #39 on: February 22, 2012, 10:51:07 AM »
I would pay off the mortgage.  From the numbers you're providing I would bet you could scratch enough together to have it paid for in 1 year.  I wouldn't expect to get the 4.5% return in 1 year.  Who cares anyway, because with the additional cash flow freed up 1 year from now you can back fill those investments plus 4.5% in just a few months.

Well I never provided any numbers on income, and I definitely cannot pay this off in one year. For the record, I make 31k after taxes. I'm not nagging at you, Matt, but one part of the MMM community that does annoy me is that it seems (I could be wrong on this, just what it seems to me) to be populated with people that make really high salaries and so they then assume there is lots of wiggle room in someone's budget. There really is a ceiling to what one can save when your salary isn't a computer programmer's.

ok, sorry,  little rant over.

arebelspy

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Re: Attack Mortgage or save for next investment?
« Reply #40 on: February 22, 2012, 10:58:47 AM »
Well I never provided any numbers on income, and I definitely cannot pay this off in one year. For the record, I make 31k after taxes. I'm not nagging at you, Matt, but one part of the MMM community that does annoy me is that it seems (I could be wrong on this, just what it seems to me) to be populated with people that make really high salaries and so they then assume there is lots of wiggle room in someone's budget. There really is a ceiling to what one can save when your salary isn't a computer programmer's.

ok, sorry,  little rant over.

Definitely hard to pay off 54k when you only make 31k.

I do think Mustachians might make that assumption of wiggle room in the budget to throw at debt, investing, or wherever you want to invest it.

That being said, most should have that wiggle room.  The median household income in America is just above 50K/yr, and most spend more than that.  If they were spending 20-30k, like they should, they would have that wiggle room.

You are quite below the median.  You definitely need to focus on increasing your income.  Possibly a much better use of your time than worrying about saving a few dollars on your mortgage interest.

Regardless, the question of "pay off mortgage or invest" is valid whether it'll take you a year or ten years to pay it off, and there have been some good responses here.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Taylor

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Re: Attack Mortgage or save for next investment?
« Reply #41 on: February 22, 2012, 11:13:09 AM »
I of course appreciate all of the comments on this thread, they have been very, very helpful and point me in good directions. I think there is 'wiggle room' for most people, and I definitely found a lot myself about 2 years ago that allowed me to save up my down payment for the condo.

I do have a side business that right now is covering its costs (yay), but occasionally I need to put some of my own money into it.

Thanks for the reply and tolerating my little rant moment :) Sometimes I get frustrated at my low income, but it does open up some great opportunities for increasing my badassity skills :) I also realize that I chose my profession (social worker) and I love my job so much. I'd rather help people for a living and make less than hate my job making widgets for people to consume or making bigger profits for some company.

 

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