The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Derek on March 03, 2014, 02:30:13 PM
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Just wondering if I should continue to overpay mortgage vs save in a Vanguard Total Stock Market Index. Owe 350k at 2.875%. Have 12 years left to pay in 15 yr mortgage. In 28% tax bracket. Have been overpaying about 30k extra a year. It seems to make more sense investing due to the higher expected return. Investment would be in a taxable account as I have maxed out our retirement accounts. What is your opinion?
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I'd invest if I was you. Your mortgage rate is really low, and you'd easily make more than that percentage in average returns by investing.
This topic comes up often:
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
https://forum.mrmoneymustache.com/ask-a-mustachian/pay-off-mortgage-or-invest-7871/
https://forum.mrmoneymustache.com/ask-a-mustachian/a-most-mustachian-mortgage-mire/
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Just wondering if I should continue to overpay mortgage vs save in a Vanguard Total Stock Market Index. Owe 350k at 2.875%. Have 12 years left to pay in 15 yr mortgage. In 28% tax bracket. Have been overpaying about 30k extra a year. It seems to make more sense investing due to the higher expected return. Investment would be in a taxable account as I have maxed out our retirement accounts. What is your opinion?
Note that I'm not a financial adviser and this isn't advice, only what I would do. Depends on your time horizon, risk appetite and a bunch of other things, but were it my choice I would definitely invest in the market. In fact, I would argue that purely from an investment standpoint your 2.875% mortgage is probably one of the worst investments you can make since the price of your house may take a hit when interest rates finally go up. You're expecting stocks to return less than 2.875% over 12 years? Even accounting for the 2008 crash, the stock market (as measured by VTI) has doubled over the last 10 years. If it's mean reversion you're worried about (i.e. we had a great year last year so expected returns in the future will be lower), I would argue that we're still mean returning to the upside as we recover from the recession. Another way to think about it is this: best case scenario in the "invest in your mortgage" category is you pay off your mortgage tomorrow, in which case you've bought yourself a 12 year $350k bond returning 2.875%, maybe less if the value of your house goes down, and increased your tax liability (no more mortgage deduction). The 10 year government bond rate is 2.75%, so you're probably better off buying even just Uncle Sam's debt than paying down your mortgage, since you'd be diversified away from your house and still getting a mortgage interest deduction.
So I think it's highly unlikely that paying off you're mortgage will outperform stocks. That said, this is a highly personal decision that hinges on your situation, goals, etc and performance isn't everything. If paying off the house will get you FI faster or let you sleep at night, maybe it's the best thing for you to do.
Edit: sorry, misread your post. You're saying that it makes sense to invest in the market than the mortgage. I agree.
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Just wondering if I should continue to overpay mortgage vs save in a Vanguard Total Stock Market Index.
I wouldn't. I'd split that up between Total US Market (VTSAX) and Total International (VTIAX) instead. ;^)