Balance Between Mortgage/Investing

[jamstu17]

Hello all,

I've been reading MMM, gocurrycracker, etc for several months now and find myself to be very similar to them.

I am struggling with whether the decision to pay down my mortgage or just invest like crazy.

Here is my general situation:
- Income: 60k after taxes/5000 take home per month
- Mortgage balance: $260,000 @ 3.65% on 30 year. I'm making the standard payments ($1500/month)
- 401k: $13,000 (adding roughly 6k per year with 9% of pay going in, including employer match)
- Roth IRA: 12,000
- Random investment account: 12,000
- Cash: $9,000
- Health Saving Account: $6,500 (I add 4,500 per year - 375/month, and my employer adds 1900 per year, to basically max it out)

Note: I tithe 10% of my adjusted gross income, which is around $7,000/year

So the PMI on my mortgage is 92 bucks per month ($1100/year), and it goes away once the mortgage reaches a balance of $240,000

I am currently putting 6% to work in the 401k, with 3% match, and then 375 per month to my HSA.

I am trying to build up my cash reserve right now, as my wife loves the feeling of security having $10,000 in the bank, and then we ideally want to have our checking account just getting enough to cover all of our expenses ($3000), which means having 13,000 laying around total. As of now $4,000 short of that and are just trying to save that up.

So my plan is as follows:
1. Save up 4,000 for emergency fund
2. Continue to put 6% to 401k and also the money to my HSA as described already
3. Put everything extra on the home until the PMI is gone.
4. Once the PMI is gone, I get a little more breathing room (92 per month/1100 per year) and then I can either keep paying extra on the home or investing it.

I know being younger, mid twenties, compound interest is my friend, so I am really tempted to just invest all I can after that. I figure if I do that for the next 10-15 years I can be ready to Early retirement, which basically means to keep working for me, but take a lot more vacation days. I just want to get there in the best way and most efficient way and am not sure how much to allocate to the home and how much to investing.

 What are your thoughts? Let me know if any more details are needed.

I will say, that I normally tithe at the end of the year, so in addition to saving 4k to get our ideal emergency fund, I need to save about 6k for tithing by December.
So that kind of puts step 3 above to right around the start of 2018.

[Scortius]

Oh boy, here we go again!

Take a look around, there are a few of these discussions going on right now in other threads.

In summary, I would argue that the math strongly backs up the idea that not paying off your mortgage and investing that extra money long-term is a significantly better financial decision.  In fact, with a 3.65% rate, you may not even need to aggressively pay down to 20% to quickly dump the PMI.

Many people seem to prefer paying off their mortgage early for emotional reasons.  If that is you, by all means go for it.  No one gets to tell you how to value your time and money. 

If you care about safety in the face of a calamity, paying off the mortgage early will not make things 'safer' for you in the event of a catastrophic loss of your job when compared to investing the money.  Further, paying off the mortgage early could completely cripple you in the event of a catastrophic real estate market crash in a way that investing the money would not.

In the end, it's your decision.  If you care about the bottom line, you should not pay off early.  If you like the idea of a paid off house, know that it's probably coming at a loss of money, but that it may be worth it to you anyway.

[somers515]

I am struggling with whether the decision to pay down my mortgage or just invest like crazy.

Why not both?  Invest some each month and pay down a little extra principal each month or at the end of the year or whatever.  Make up an investment plan that you are comfortable with.

The longer your time horizon is the more investing in equities is usually the right answer.  Good luck!

[jamstu17]

Thanks for the replies, both of you. I apologize as the first response leads me to believe that this is a common scenario. Being my first day in the forums, I only perused page 1 and 2 of this section.

Anyways, my expenses are pretty bare bones as of now, ranging between 2800 and 3200 depending on the month, which includes the principal being paid on the home too.

There is not a lot for me to cut out, which makes getting rid of the PMI attractive, as there is not a lot I can do to save an extra $100 a month. Our phones are already only $70 per month, our utilities around $180 (and we are always experimenting how to bring that down), wifi is only $25.

The one thing that might seem unnecessary is our Vivint security system at $65 per month. We got the home in Oct of last year and then got security from them in December.  We are locked in 3 years on that.

We always keep on the lookout for side jobs, especially in the summer, doing remodel work, helping people move, etc. Seems my only option to pay more on the house and invest more is to increase my income or downsize, which isn't super feasible, seeing as we just barely moved in.

But I have thought that when I do pay off PMI, to keep paying the same amount, at 1500 per month and have that extra work for me there and then just invest the rest. Just thought I would see what others thought as my wife and I always go back and forth on our course of action.

[JLee]

IMO one of the first things you should be doing is maxing your 401k at $18k/yr.

[MoonLiteNite]

I personally owe around 50k on my house with a personal loan (so i dont get the tax deductions)

But for me, i have decided to cut all non-tax sheltered investments and pay down the house. Going from around 40k a year to only 26k a year in investments.
Doing this as somewhat of "timing the market", and just really do not want the debt anymore.

I have done the math and i am throwing around 6,000$ in gains, provided the market gives 7% return as normal.

I suggest you do the same, just do the math. See how much of a "loss" you have if you pay down the house first. See how much you save/lose if you pay it down to remove PMI, then go back to 100% towards normal investments. Only thing i can say for certain, is if you have 401k matching, at LEAST take that, because that is 100% free money.

[Meg77]

I like your plan.  It will take you $20K in principal reductions to get rid of PMI, and that $20K "investment" will save you $1100 a year.  That's a 5.5% return on your money - guaranteed - plus as you say it'll give your budget some needed breathing room

Then again, you're not taking advantage of any Roth IRAs, and your 401k may well exceed a 5.5% return over time, especially factoring in the tax benefit you get for contributing. 

It's a toss up.  Does your mortgage company allow you to remove PMI with a new appraisal after a certain period of time?  If so I might just wait for the market value to climb enough to get rid of PMI that way rather than pay extra.  And instead use any extra money to fund Roth IRAs.

[Catbert]

Once you are finished with PMI there is no mathematical reason to pay off the mortgage early.

I know that 3.65% mortgage seems "good but normal rate" to you; however, in the last 60+ years it really is spectacular.  Someday you'll be telling your grandkids that you had a mortgage that low and they'll hardly believe you.  Just like on the other side of things I tell people I once had an 13% mortgage not because I had lousy credit but because that's just how much they charged.  Mortgages may never be that high again but they may never be 3.65% again either.

[frugaliknowit]

"I am currently putting 6% to work in the 401k, with 3% match, and then 375 per month to my HSA....I figure if I do that for the next 10-15 years I can be ready to Early retirement, which basically means to keep working for me, but take a lot more vacation days..."

My $.02:

I think if that's what your plan is, you need to save more.  While your saving rate of 6% plus your HSA is high compared to the average American, I don't think it's early retirement material.

[jamstu17]

So, to clarify a few things:

As of now, at the end of the year, I put in about 6k - 401k, and 6k in HSA, = 12k per year.

The home right now is around 5k per year in principal, plus however much it rises in value. I live in a town that is in the top 5  fastest growing in the US, according to some reports, with the county I'm in experiencing home value appreciate between 6-8% a year, along with the county above me. We have buildings going up like crazy and new companies coming in. Lots of venture capitalism going on around here. So you could conservatively put my home appreciate at 4-5% just a bit above inflation, but still appreciating about 10-15k per year.

As of now, the most recent home to sell in my neighborhood went for $310k with 200 sq feet less than mine (everything else being similar). I think that is a safe number to put on my own place, making 50k in equity.

So with the above accounts and then the home, I am saving around 18-28k depending on how you count it.

In addition, we are saving up our emergency fund to make the wife happy, which needs 4k more. right now we are on a pace of about 500-600 a month.

Once that is done, by the end of the year and barring any emergencies we will knock that number down to maybe 100 a month (to save for our next car) and put the rest either on the home or invest it.

Either way, that puts me at around 25-33k range, again, depending on how you calculate the home value/savings.

I also forgot to mention in my first post, 3k in an employee stock plan.

So with a net worth of just over 100k excluding vehicles, saving between 25-30k+ a year, I expect to be close to Early retirement in 12-15 years with around 400k-600k depending on how markets do.

Keep in mind that my wife will always teach piano (so she says) and therefore always make between 500-1000+ a month which provides a great buffer. At that point in 12-15 years when I feel I have quite a bit of money working for me, I will probably go after the mortgage aggressively to get rid of it.

Also, as the HSA reaches 50k and above (right now half is invested and I will continue to invest more as I put more in, leaving just 5k liquid), I am thinking I will lower my contribution to it (employer would still add 2k per year anyway as long as I work, which would cover most of the expenses I imagine), and start throwing it all to 401k.

I see myself eventually doing similar to MMM, working for fun, even at home depot or doing a trade maybe 20 hours per week to pay the small 1500 a month expenses we have post home payoff and let my money continue to grow. Eventually we would probably relocate somewhere cheaper and downsize, but get a bigger lot.

[JLee]

So, to clarify a few things:

As of now, at the end of the year, I put in about 6k - 401k, and 6k in HSA, = 12k per year.

The home right now is around 5k per year in principal, plus however much it rises in value. I live in a town that is in the top 5  fastest growing in the US, according to some reports, with the county I'm in experiencing home value appreciate between 6-8% a year, along with the county above me. We have buildings going up like crazy and new companies coming in. Lots of venture capitalism going on around here. So you could conservatively put my home appreciate at 4-5% just a bit above inflation, but still appreciating about 10-15k per year.

As of now, the most recent home to sell in my neighborhood went for $310k with 200 sq feet less than mine (everything else being similar). I think that is a safe number to put on my own place, making 50k in equity.

So with the above accounts and then the home, I am saving around 18-28k depending on how you count it.

In addition, we are saving up our emergency fund to make the wife happy, which needs 4k more. right now we are on a pace of about 500-600 a month.

Once that is done, by the end of the year and barring any emergencies we will knock that number down to maybe 100 a month (to save for our next car) and put the rest either on the home or invest it.

Either way, that puts me at around 25-33k range, again, depending on how you calculate the home value/savings.

I also forgot to mention in my first post, 3k in an employee stock plan.

So with a net worth of just over 100k excluding vehicles, saving between 25-30k+ a year, I expect to be close to Early retirement in 12-15 years with around 400k-600k depending on how markets do.

Keep in mind that my wife will always teach piano (so she says) and therefore always make between 500-1000+ a month which provides a great buffer. At that point in 12-15 years when I feel I have quite a bit of money working for me, I will probably go after the mortgage aggressively to get rid of it.

Also, as the HSA reaches 50k and above (right now half is invested and I will continue to invest more as I put more in, leaving just 5k liquid), I am thinking I will lower my contribution to it (employer would still add 2k per year anyway as long as I work, which would cover most of the expenses I imagine), and start throwing it all to 401k.

I see myself eventually doing similar to MMM, working for fun, even at home depot or doing a trade maybe 20 hours per week to pay the small 1500 a month expenses we have post home payoff and let my money continue to grow. Eventually we would probably relocate somewhere cheaper and downsize, but get a bigger lot.

To run the numbers: $400-600k invested (excluding home equity) is going to give you a safe withdrawal rate of $16k to $24k per year (pre-tax, though your taxes will basically be zero at that income level), or 27-40% of your current income.

[frugaliknowit]

So, to clarify a few things:

As of now, at the end of the year, I put in about 6k - 401k, and 6k in HSA, = 12k per year.

The home right now is around 5k per year in principal, plus however much it rises in value. I live in a town that is in the top 5  fastest growing in the US, according to some reports, with the county I'm in experiencing home value appreciate between 6-8% a year, along with the county above me. We have buildings going up like crazy and new companies coming in. Lots of venture capitalism going on around here. So you could conservatively put my home appreciate at 4-5% just a bit above inflation, but still appreciating about 10-15k per year.

As of now, the most recent home to sell in my neighborhood went for $310k with 200 sq feet less than mine (everything else being similar). I think that is a safe number to put on my own place, making 50k in equity.

So with the above accounts and then the home, I am saving around 18-28k depending on how you count it.

In addition, we are saving up our emergency fund to make the wife happy, which needs 4k more. right now we are on a pace of about 500-600 a month.

Once that is done, by the end of the year and barring any emergencies we will knock that number down to maybe 100 a month (to save for our next car) and put the rest either on the home or invest it.

Either way, that puts me at around 25-33k range, again, depending on how you calculate the home value/savings.

I also forgot to mention in my first post, 3k in an employee stock plan.

So with a net worth of just over 100k excluding vehicles, saving between 25-30k+ a year, I expect to be close to Early retirement in 12-15 years with around 400k-600k depending on how markets do.

Keep in mind that my wife will always teach piano (so she says) and therefore always make between 500-1000+ a month which provides a great buffer. At that point in 12-15 years when I feel I have quite a bit of money working for me, I will probably go after the mortgage aggressively to get rid of it.

Also, as the HSA reaches 50k and above (right now half is invested and I will continue to invest more as I put more in, leaving just 5k liquid), I am thinking I will lower my contribution to it (employer would still add 2k per year anyway as long as I work, which would cover most of the expenses I imagine), and start throwing it all to 401k.

I see myself eventually doing similar to MMM, working for fun, even at home depot or doing a trade maybe 20 hours per week to pay the small 1500 a month expenses we have post home payoff and let my money continue to grow. Eventually we would probably relocate somewhere cheaper and downsize, but get a bigger lot.

More of my $.02:

I don't think it's a good idea to figure home appreciation into your saving rate...Doing so assumes the future will be as the present and that you will sell your home as part of your FIRE...

[boarder42]

that 1100 per year on 260k still has your total cost of the loan at sub 4% interest.  you dont pay that down.  keep it open ... be smarter take feelings out.  there is 0 reason to pay it down. unless you want to FEEL safer with out actually BEING safer.

[Dicey]

https://goo.gl/images/ypF8If

^Here's your answer.^

PMI, or more correctly, MI, is the price you pay for buying a house with less than 20% down. There's a better way of getting rid of it. Do nothing. In an appreciating market such as yours, it will go away on its own in a couple of years. In the end, you will come ahead by investing that 20k in a balanced, low-fee portfolio. ^See chart above^.

Here's a paradigm shift to get you there faster: it's not necessary to have 10k, plus 3-4 more in your checking account. Instead, look at the combined total. We keep our EF savings and checking at the same bank. When I do online banking, it shows me the Combined Total, and my Inner Bag Lady (IBL) is assuaged. In fact, she's gobsmacked at how much has accumulated over the years, since she may be paranoid, but she was smart enough to start saving and investing early. ^See chart above.^

Next, counting your employer's contribution in your savings rate is kind of cheating in the Mustachian world, IMO. Worse, it's cheating/tricking yourself. The money you save out of your income is badass, the employer match is only icing on the cake. Seriously, your 6% savings rate is a fine start, but far below MMM bragging rights. To do it correctly, you don't count the match in your savings rate, but you do count it in your overall savings and net worth calculations. Do you see the difference? I hope so.

Also, re-read all of the wise comments by jlee and frugaliknowit. More good stuff there.

[Dicey]

I personally owe around 50k on my house with a personal loan (so i dont get the tax deductions)

But for me, i have decided to cut all non-tax sheltered investments and pay down the house. Going from around 40k a year to only 26k a year in investments.
Doing this as somewhat of "timing the market", and just really do not want the debt anymore.

I have done the math and i am throwing around 6,000$ in gains, provided the market gives 7% return as normal.

I suggest you do the same, just do the math. See how much of a "loss" you have if you pay down the house first. See how much you save/lose if you pay it down to remove PMI, then go back to 100% towards normal investments. Only thing i can say for certain, is if you have 401k matching, at LEAST take that, because that is 100% free money.

Other than the last sentence, there is very little advice in the above comment that I can find to support.

To retire early and optimally, one needs to have tax deferred and taxable savings/investments. One should also have a big cash cushion to avoid liquidating equities in a down market.

FWIW,  I am four+ years into FIRE. Holding onto cheap mortgages, even one with PMI (as it was called then) is a big part of how I got there. After I amassed a big ball o'money and sold a couple of appreciated properties, I paid cash for my current home. It seems counter-intuitive, but it actually costs less money to do it that way. Pay yourself first, kill the mortgage later, much later.

Oh, yes, "do the math" is also good advice. Just make sure you're doing the right math. Long term is what matters most.

[Easye418]

Disregard... didn't realize he put NET income. 

[dandarc]

Disregard... didn't realize he put NET income. 

Gross or net, your original point to minimize housing expense within whatever your parameters are is a good point.  OP didn't give info on why this particular house.  Given the reasonable-ish monthly, nobody's gonna start throwing "too much house!" face punches.

[Tyson]

After you get the PMI gone, why not just invest the extra $$ like crazy into the market, and then pay off the mortgage once your investments are above $240k, if you still feel the mortgage should be paid of ASAP.

[Cwadda]

Do you have an FHA loan or a conventional loan? Will the PMI go away without refinancing? Or will you have to do a refinance.

[jamstu17]

I have a conventional loan and the PMI will come off once reaching 80%. I have considered just paying down still and waiting for the value of the home to rise further, as it could already have appreciated into the 310-320 range, especially by the year's end - and then refinancing it away.

 Unfortunately/fortunately for me, my interest rate at 3.65 is awesome, and unless I got a 15 year mortgage I don't think I could beat it (since there have already been 3 rate hikes since I closed, I believe, with 2 or 3 more coming later in the year?). My payment would barely go down, or it would go up a lot on a 15 year. So, I think I will just take a balanced approach, invest what I can, and put a little extra on the home as I can.

But yes I have thought of increasing my 401k contribution even more, but I really want to get my HSA up there too, especially since we are probably going to be having 3 or 4 more children within the next decade and I may get LASIK soon.

Even with 6 in one and 6 in the other, it's all the same when it comes to taxes. 12k deducted (minus employer match is more like 10k).

My plan is get the pmi off as soon as reasonably possible and then not worry so much about the home until I do reach FI with cash accounts.

[boarder42]

Why your PMI is still an incredibly small portion of your total loan value. Don't refi. Is away. Don't pay it down faster. The thought that PMI is the devil is a product of the same thought about mortgages in general. Do the math what percentage of your total loan value is the PMI really.

[MoonLiteNite]

I personally owe around 50k on my house with a personal loan (so i dont get the tax deductions)

But for me, i have decided to cut all non-tax sheltered investments and pay down the house. Going from around 40k a year to only 26k a year in investments.
Doing this as somewhat of "timing the market", and just really do not want the debt anymore.

I have done the math and i am throwing around 6,000$ in gains, provided the market gives 7% return as normal.

I suggest you do the same, just do the math. See how much of a "loss" you have if you pay down the house first. See how much you save/lose if you pay it down to remove PMI, then go back to 100% towards normal investments. Only thing i can say for certain, is if you have 401k matching, at LEAST take that, because that is 100% free money.

Other than the last sentence, there is very little advice in the above comment that I can find to support.

To retire early and optimally, one needs to have tax deferred and taxable savings/investments. One should also have a big cash cushion to avoid liquidating equities in a down market.

FWIW,  I am four+ years into FIRE. Holding onto cheap mortgages, even one with PMI (as it was called then) is a big part of how I got there. After I amassed a big ball o'money and sold a couple of appreciated properties, I paid cash for my current home. It seems counter-intuitive, but it actually costs less money to do it that way. Pay yourself first, kill the mortgage later, much later.

Oh, yes, "do the math" is also good advice. Just make sure you're doing the right math. Long term is what matters most.

As i said, do the math and KNOW how much you are giving up.
Don't go based on what other internet people tell you, figure out how much money is being thrown out the window when you pay down a house instead of investing, that is the ONLY advice to give to someone.