Author Topic: How much to pay off house vs invest  (Read 4676 times)

fiveoh

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How much to pay off house vs invest
« on: March 21, 2012, 12:38:49 PM »
I'm going to try and make this short and simple but if I leave out some info thats needed, let me know.

My wife and I recently paid off some debt and decided to trim the budget to try and commit more income to retirement(hopefully early!).  We now have approx 2k a month extra to invest/pay off debt. 

The only debt we have left is the mortgage.  We owe approx 125k and it has a 5.25% interest rate.  My unoffcial plan is to pay off the current house early, move into a different home(would like to get a little way out of the city and pay lower taxes!) and rent the current one.  Even if we stay in our current home, I'd still like to pay it off early. 

Anyway my thought was to put 1k a month towards paying down the mortgage and 1k a month in investment accounts.  My main worry for doing it this way is passing up the opportunity for growth in the stock market(although more risk associated with it vs guaranteed 5.25% from mortgage debt).  So I have been considering doing 1500 income and 500 mortgage instead. 

What do you guys think?   

Oh im lower 30s and still plan to work at least 15 more years if that matters. 

arebelspy

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Re: How much to pay off house vs invest
« Reply #1 on: March 21, 2012, 08:41:33 PM »
Refinance to a lower interest rate (right now you should be able to get in the 3s, and there's no cost refis too, like the PenFed one).

Then stick it all in the market.

YMMV, results and advice will vary.  Good luck.
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MacGyverIt

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Re: How much to pay off house vs invest
« Reply #2 on: March 22, 2012, 04:12:48 AM »
You didn't mention how if it all you benefit tax-wise from the mortgage write off. If there's a tax benefit as as arebelspy recommended, you can lower your interest rate, you'll likely get better returns by investing. Just visited my financial planner a couple of days ago and the money broke down to getting a 13% return over the last two years, so in a case like that why pay off a low interest loan when those little green employees can work to make me more money in the market. This would also help to generate revenue towards your second country home. My two cents, best of luck!

Physics

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Re: How much to pay off house vs invest
« Reply #3 on: March 22, 2012, 06:09:30 AM »
You didn't mention how if it all you benefit tax-wise from the mortgage write off. If there's a tax benefit as as arebelspy recommended, you can lower your interest rate, you'll likely get better returns by investing. Just visited my financial planner a couple of days ago and the money broke down to getting a 13% return over the last two years, so in a case like that why pay off a low interest loan when those little green employees can work to make me more money in the market. This would also help to generate revenue towards your second country home. My two cents, best of luck!

Only thing, I'll mention for your consideration is just because you got a 13% annual return the past two years doesn't predict anything.  Look at the two year period preceding that one, the market lost 20%.

That said, I agree the market on average, goes up, so in the grand scheme of things, it is probably better to invest, but just hope you don't invest right before the next 20% drop. (Instead invest right after! But who knows when that is!)

fiveoh

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Re: How much to pay off house vs invest
« Reply #4 on: March 22, 2012, 07:16:42 AM »
Rates in the 3's for 30 year loans?  I'd prefer to keep a 30 year loan vs 15 since my job can be iffy at times.   

Any suggestion on where to look for this?

I do get a tax reduction from the mortage and using some calcualtors it lowers my rate to about 3.75%, after the tax benefit is factored in.


I guess i'm still a little scared about the market since 2008 which is why I was planning on doing 50/50. 

I appreciate the replies.

fiveoh

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Re: How much to pay off house vs invest
« Reply #5 on: March 22, 2012, 08:12:11 AM »
Actually after using some calculators, it appers going to a 15 year loan with a rate below 4% would only increase our monthly payments by $200.  Now I just have to figure out where to do it at.  Our local credit union is offering 4% for 15 years... are there much better deals than that?

sol

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Re: How much to pay off house vs invest
« Reply #6 on: March 22, 2012, 08:23:14 AM »
Our local credit union is offering 4% for 15 years... are there much better deals than that?

Even though rates have spiked in the past few weeks, you can still find 3.5% for 15 year fixed mortgages if you have good credit.  If your loan is ultimately owned by Freddie Mac or Fannie Mae (most are, now) and you bought your house before May of 2009, you can refinance through the HARP program regardless of your equity, without paying PMI, and in most cases without even having it appraised or inspected.  Tis the deal of a lifetime for the lucky few.

fiveoh

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Re: How much to pay off house vs invest
« Reply #7 on: March 22, 2012, 09:10:24 AM »
Actually I went here:

http://www.fanniemae.com/loanlookup/

and it said my home was owned by them.  We closed in mar 09 on it.  Where do I get more info on the HARP program?   

fiveoh

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Re: How much to pay off house vs invest
« Reply #8 on: March 22, 2012, 09:16:12 AM »
Well I did some googling and found this in the requirements:

•You must have negative home equity (you owe more on your mortgage than your home is worth), but your mortgage cannot exceed 125% of the value of your home.

That does not apply to me so I guess I dont qualify for HARP.

sol

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Re: How much to pay off house vs invest
« Reply #9 on: March 22, 2012, 09:42:51 AM »
•You must have negative home equity (you owe more on your mortgage than your home is worth), but your mortgage cannot exceed 125% of the value of your home.

That rule is no longer in effect, and you can now refi with equity below 100%.  I think (though I could be wrong) that there is an 80% LTV floor, though, on the thought that anyone with greater than 20% equity won't need the additional help anyway.

Despite having put down 20% several years ago, my equity is at like 85% now due to falling values, and several banks offered me a refi through the DU Refi Plus program, which is part of HARP.  Sadly I closed right AFTER the May 2009 deadline, so I'm still stuck.  MMM retired early on the strength of well-timed real estate decisions, but some of us are suffering through negative equity even as we overpay our monthly mortgages.

Their rationale for the May 2009 cutoff was that loans closed after May 2009 had more stringent underwriting and were closed after home prices had finished falling most of the way, which was true in most of the country.  Those of us in the PNW, though, saw our values continue to decline for another eight months or so past when everybody else was recovering, just like we saw our values continue to rise for about eight months as the rest of the country was entering the downturn.  So sad for us.

But it's not all complainypants and whininess.  I can still refi to a 15 yr fixed, I just have to drop an additional 20k or so into principle to hit the 80% LTV ratio to qualify.  So now I'm trying to decide if it's worthwhile to pull that 20k out of taxable accounts that are returning like 5% after taxes to lower my mortgage rate from 4.875 to 3.5.  At rates that low the loan is virtually free after taxes and inflation, but it hurts to yank 20k out of active production to do it.  I might be better off leaving it invested in the market, growing my taxable account to the point where I can just clear the mortgage entirely.  The decision is going to turn on my taxable savings rate, and how long it will take to grow that taxable account large enough to pay off the mortgage while carrying the 4.875%, compared to how long it would take after refinancing to a 15yr to get the rate down.

So ultimately I'm facing the same decision as the original poster.  How much to pay on the mortgage vs how much to invest?  Just keep in mind that you can lower your mortgage rate considerably by going to a 15 year, and if you're already maxing your tax deferred accounts and have extra income to apply to the mortgage then the decision is complicated by the change in rates.

If you're not yet maxing your 401k and Roth IRA, though, I would recommend letting the mortgage ride.  The tax advantages of your retirement accounts combined with the tax advantage of deductible mortgage interest make prepaying your mortgage a pretty silly idea for most people until you've hit the IRS limits on your shelters.

fiveoh

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Re: How much to pay off house vs invest
« Reply #10 on: March 22, 2012, 12:23:12 PM »
I appreciate the well informed reply!   

My wife and I both max our Roth IRAs.  I have a SEP thru work which I can not contribute too(employeer contributes to every year but this varies depending on how our small company does) and she has a pension plan so no 401ks for either of us.  I did recently switch my insurance to an HSA plan and have considered maxing that but as far as I know there is no way to get around the 69.5 age requirement for that unless it is for health reasons.   

I've been contributing to a taxable investment account lately but I need to look into more ways to reduce taxes(Although we are in the 15% bracket but every bit helps).   

You say there is an 80% LTV floor meaning you have to have above that to refi thru HARP or below that?   Ours is between 75-77 I think.   

Thanks again for all the great info, you guys have given me a lot to think about/consider!

sol

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Re: How much to pay off house vs invest
« Reply #11 on: March 22, 2012, 12:54:43 PM »
and she has a pension plan so no 401ks for either of us.

I'm also dealing with factoring a pension into my retirement plans.  If you can get your expenses down low enough that you pension alone will cover them, then you really only need to save enough money to last you until the pension kicks in.  It has made my planning much easier to calculate things this way.

Quote
I did recently switch my insurance to an HSA plan and have considered maxing that but as far as I know there is no way to get around the 69.5 age requirement for that unless it is for health reasons.   

I don't know of any way either, but I generally don't sweat it.  I can either use the money at 69.5, or leave it in the HSA to use on end-of-life care, or I can just die and let the amount pass to my beneficiaries.  There are worse ways to leave an inheritance. 

Besides, the pre-tax contributions and tax-free growth seem like more than adequate compensation.

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You say there is an 80% LTV floor meaning you have to have above that to refi thru HARP or below that?   Ours is between 75-77 I think.   

If you're below 80% LTV then you don't need HARP.  You can get 3.5% on a 15yr with good credit and avoid paying PMI.  HARP is designed for people who can't refinance because declining home values have made them ineligible to refinance.  If you're at 75%, HARP doesn't offer you anything you can't get anyway without HARP.