Author Topic: Invest or pay down mortgage to refinance  (Read 1341 times)

Running_the_jewels

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Invest or pay down mortgage to refinance
« on: September 15, 2015, 10:53:17 AM »
Hey all - I am a 36 year old on my way to FIRE (roughly 5 more years).  I have a question about what to do with some money.

Here are the facts.

I live in Seattle and purchased a home (2 miles from my work, 1 mile from my wife's work) for just over 600K (believe me it was the best we could do).  The mortgage is a 30 year jumbo loan at 4% APR for right around 500K.

I am selling the condo we used to live in and expect to have around 140K in proceeds from that sale. 

Here is my question.  In purely financial terms, does it make more sense to put the 140K towards the mortgage I just got and then refinance as a non-jumbo 15 or 30 year loan (should be able to get roughly 2.9-3% APR or 3.6% APR respectively), or just to invest it in my current strategy (lazy portfolio using vanguard ETFs)?

Thanks!

ajaxlupis

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Re: Invest or pay down mortgage to refinance
« Reply #1 on: September 15, 2015, 11:03:11 AM »
Invest the money for sure.  If you're 36 you have a long time to deal with the ups and downs of the market.  The market averages 6-8% return with a lot of volatility (which you can deal with because you're young).

At current rates you can get a 3.6% mortgage as you said, plus the interest is tax deductible, so that might make it effectively 3% or so.  Basically you're borrowing at 3% to get a 6-8% return.  That's a pretty sweet deal.

Running_the_jewels

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Re: Invest or pay down mortgage to refinance
« Reply #2 on: September 15, 2015, 11:12:26 AM »
That makes sense.  I might be making the situation more complex than it is, but I was viewing this as more of the following:

Currently there is 500K debt at 4%.  By paying 140, the rate on the remaining 360 drops by up to 1%.  So, the equivalent on the upside would have to be 4% * 140 + 360*1%.

If I am thinking about this right, it works out to about 6% total return on the repayment - with locked funds and guaranteed return (there will be some additional loss from transaction costs). 

I just wanted to see if I was missing something.

nereo

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Re: Invest or pay down mortgage to refinance
« Reply #3 on: September 15, 2015, 11:27:30 AM »
That makes sense.  I might be making the situation more complex than it is, but I was viewing this as more of the following:

Currently there is 500K debt at 4%.  By paying 140, the rate on the remaining 360 drops by up to 1%.  So, the equivalent on the upside would have to be 4% * 140 + 360*1%.

If I am thinking about this right, it works out to about 6% total return on the repayment - with locked funds and guaranteed return (there will be some additional loss from transaction costs). 

I just wanted to see if I was missing something.
what you are missing is that your mortgage is indexed to the year that you bought it (i.e. it is an inflation hedge). 
The "6-8% historical returns" in the market are adjusted for inflation. 

As long as you expect market returns over the next two decades to be anywhere close to historical averages it makes sense to invest the $140k.  You can always revisit this later if you invest the money and decide to pay down/off the home... a bit more convoluted to take money OUT of a home to invest later.