Author Topic: Mortgage Payoff vs Investing  (Read 4701 times)

Jessamine

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Mortgage Payoff vs Investing
« on: June 10, 2016, 03:54:17 PM »
More of a lurker than a poster here.  I started reading MMM about a year ago, but didn't start reading the forums until much later.  I'd like to get some opinions (and maybe validation) on how to move forward in my situation.

Mortgage:
Home Assessment: 360,000 (purchased for 246,000, 20% down in 2010)
Initial Balance: 160,000 (refinanced in Sep 2015)
Interest Rate: 2.375% for the 1st 5 years, max 2% increase yearly thereafter up to a max 7.375%
Monthly Payment: 621.84
Additional Principal: 1,500 (goal to pay off before the 1st rate increase)
Current balance: 121,000

Other savings:
401k: 1500/month with 4% employer match (On track to max)
Roth IRA: 5500 (already maxed for the year)
HSA: On track to max for the year (2,450 with 900 employer contribution)

Assets:
E-Fund: 10,000 (~3 months spending inclusive of additional principal, 5 without)
Bank: 10,000 (~600 earmarked for charity, 5,500 earmarked for next year's IRA contribution, the rest in savings at 0.75% until I transfer into my taxable account--usually wait for 5k increments.)
Taxable Accts: 24,000 (half in FSTVX, half in various stocks from old ESPP and when my parents managed the account when I was a minor that I never touched)
401K: 11,000 (2050 retirement fund)
Traditional IRA: 20,000 (12K FSGDX, 5K FSTVX, rest cash from recent rollover)
Roth IRA: 24,000 (half FSTVX, half FSRVX)
HSA: 4,200 (0.65% interest)
I-Bonds: 20,000 purchased for 15k 8-10 years ago; tentatively earmarked for mortgage pay-off before the first mortgage rate increase

Expenses:
I've tried several methods of budgeting and have used Mint for years, but no strategy seems to stick.  My recurrent expenses (cell phone, utilities, insurance, etc.) are fairly constant, but my miscellaneous expenses are wildly variable depending on season and month--I am not mustachian by any means--but I have applied some mustachian principals to my life (e.g., canceling internet/cable package in favor of a cheaper internet-only package from a local provider).  I am satisfied with this current lifestyle and am not particularly motivated to change it.  I am paid biweekly, and I do ensure that my monthly expenses are always less than 2 paychecks.  The "extra" 2 paychecks per year, plus bonuses and anything else I save each month go directly into a savings account and then transferred into a taxable investment account as i accumulate 5k increments.  I am aiming to treat any future raises as "bonus" and moving them directly to savings as well, to help against lifestyle inflation.

Goals:
- FIRE by 2026 with ~35k yearly spending (875k invested)
- Be mortgage free (my only debt)

Current Plan (looking for feedback):
- Pay off mortgage before rate increase in 2020
- All former P&I payments to taxable account starting 2020 after mortgage payoff
- Reduce 401k contributions to minimum for employer match and contribute the difference to taxable account starting ~2018 (TBD depending on the balance and allowing this to grow on its own until I reach 60)
- Continue to max rIRA and HSA (my MAGI is not anywhere low enough to qualify for a deductible tIRA contribution)
- Figure out if I can roll the current tIRA into my 401k to take advantage of backdoor Roth if I need to in the future.  If not, maybe do a one-time rollover to HSA.
- Purchase another home in a lower COL area for retirement and either sell or rent out current home (TBD-, currently not accounted for in FIRE plan).  With current comps, I could probably sell for 360k (and invest the proceeds for a nice extra cushion) or rent out for 1600/month, but who knows what will happen in 10 years.

Given a rather involved homebrew spreadsheet, these numbers should work out assuming I only contribute  to my taxable and sheltered accounts for the next 10 years per the above plan and a 7% return, NOT including raises, bonuses, etc. over the years.  I know there are methods of moving moneys from a pre-tax to post-tax account,, but the more I read about them from this and other forums, the more apprehensive I am about doing something wrong and getting heavily penalized, hence the plan to reduce 401k contributions (losing the tax benefit) in favor of an accessible, taxable account in the coming years.

I am certainly face-punch worthy in regards to my spending (I'm deliberately not giving numbers), particularly from mustachian standards.  That said, given my current savings plan, I am not currently motivated to reduce my monthly expenses, even though it would mean a shorter time to FIRE.  My current lifestyle and hobbies brings me immense satisfaction that I am not willing to part with.  I would, however, welcome thoughts on the mortgage payoff plan vs. investing strategy.
« Last Edit: June 13, 2016, 10:35:17 AM by Jessamine »

hodor

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Re: Mortgage Payoff vs Investing
« Reply #1 on: June 10, 2016, 05:22:20 PM »
There are good arguments on both sides of the fence and scenarios can happen which would make either better. You need to work out what sits right for you.

I am Australian and the Vanguard Australian Shares ETF pays dividends above my mortgage interest rate (taxes, re-borrowing and a few things make it a little more complex, however the general idea is the income is higher than the expense). Dividends have been reasonably stable in the past (more so that prices at least) which gives more comfort, so while interest rates are below the dividends I am comfortable investing while paying down my mortgage at a slower rate (which I still make extra payments on).

It doesn't have to be all one or the other.

There are numerous threads on this so have a look around.

trashmanz

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Re: Mortgage Payoff vs Investing
« Reply #2 on: June 10, 2016, 05:26:53 PM »
Why do you say you are face punch worthy but then plan for 35K a year spend?  35K a year spend is not facepunch worthy I don't think.  If you are spending much more than that currently and don't want to give it up, it would seem prudent to evaluate whether you really will be holding to 35K spend in retirement?  Just something that seemed curious to me, not sure your reasoning on that. 

MDM

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Re: Mortgage Payoff vs Investing
« Reply #3 on: June 10, 2016, 06:40:50 PM »
Mortgage:
Initial Balance: 160,000 (refinanced in Sep 2015)
Interest Rate: 2.375% for the 1st 5 years, max 2% increase yearly thereafter up to a max 7.375%
Monthly Payment: 621.84
Additional Principal: 1,500 (goal to pay off before the 1st rate increase)
Current balance: 121,000
Jessamine, kudos for understanding your situation well.

Quote
401k: 750/month with 4% employer match (On track to max)
Max the employer match or contribute the full $18K allowed?

Quote
HSA: 4,200 (0.65% interest)
See https://www.bogleheads.org/forum/viewtopic.php?f=1&t=192950 for some other possibilities here.

Quote
I-Bonds: 20,000 purchased for 15k 8-10 years ago; tentatively earmarked for mortgage pay-off before the first mortgage rate increase
What interest rate are you getting on the I-Bonds?  How bad would it be if your mortgage jumped to 4.375% for a year?

Quote
Goals:
- FIRE by 2026 with ~35k yearly spending (875k invested)
- Be mortgage free (my only debt)
Consider FIRE with ($875K plus the remaining mortgage principal) invested.

Quote
Current Plan (looking for feedback):
- Reduce 401k contributions to minimum for employer match and contribute the difference to taxable account starting ~2018 (TBD depending on the balance and allowing this to grow on its own until I reach 60)
You do need a way to cover the five years of a Roth pipeline start-up.  Don't know whether reducing 401k contributions to the minimum is necessary for that, but you have a spreadsheet.  Would Roth 401k contributions be better than taxable?

Quote
I know there are methods of moving moneys from a pre-tax to post-tax account,, but the more I read about them from this and other forums, the more apprehensive I am about doing something wrong and getting heavily penalized, hence the plan to reduce 401k contributions (losing the tax benefit) in favor of an accessible, taxable account in the coming years.
Have you read http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/? 

Quote
I would, however, welcome thoughts on the mortgage payoff plan vs. investing strategy.
On the one hand you are assuming a 7% return on investments, while on the other hand putting extra money into a 2.375% mortgage loan.  There is no law that says your reasoning has to be consistent, but...?


Systems101

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Re: Mortgage Payoff vs Investing
« Reply #4 on: June 10, 2016, 07:50:54 PM »

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I-Bonds: 20,000 purchased for 15k 8-10 years ago; tentatively earmarked for mortgage pay-off before the first mortgage rate increase
What interest rate are you getting on the I-Bonds?  How bad would it be if your mortgage jumped to 4.375% for a year?

This stood out to me as well.  Look up the rates, because if they are pre-April 30. 2008 they carry a fixed interest that can't be reproduced today...
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #5 on: June 10, 2016, 09:11:01 PM »
Why do you say you are face punch worthy but then plan for 35K a year spend?  35K a year spend is not facepunch worthy I don't think.  If you are spending much more than that currently and don't want to give it up, it would seem prudent to evaluate whether you really will be holding to 35K spend in retirement?  Just something that seemed curious to me, not sure your reasoning on that.

Hmm.  That is a good point.  That is something I was planning on re-evaluating at the end of this year--how much I spent through the course of the year.  I was going to do that evaluation at the end of this year, but I closed some accounts which I didn't close out appropriately on Mint, so I lost a ton of transactions for last year.  Given my current budget with no mortgage and more fun-spending than I have now, I came up with $35k, but I do have to re-evaluate that as I get closer to FIRE with increasing RE taxes and condo fees, etc.  I should have a much better idea toward the end of the year.

As for facepunch worthiness, that's more to do with comparing what other folks are doing on this forum that I'm just not as motivated to do--I drive a lot more than I need to in a city with robust public transportation and everything within easy walking/biking distance simply due to convenience.  I do spend a lot of money on stuff that's entirely unnecessary and could be called frivolous.  I tend to fluctuate between eating out a lot to making home cooked meals, but much more eating out than not.  I recognize there are tons of areas where I could save but don't due to sheer laziness.  That's where the facepunching I think comes in.

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #6 on: June 10, 2016, 09:37:22 PM »
Mortgage:
Initial Balance: 160,000 (refinanced in Sep 2015)
Interest Rate: 2.375% for the 1st 5 years, max 2% increase yearly thereafter up to a max 7.375%
Monthly Payment: 621.84
Additional Principal: 1,500 (goal to pay off before the 1st rate increase)
Current balance: 121,000
Jessamine, kudos for understanding your situation well.

Thank you

Quote
Quote
401k: 750/month with 4% employer match (On track to max)
Max the employer match or contribute the full $18K allowed?

Both--my own contribution of 1500/month = 18k/year.  Since that number is well above 4% my salary, I get a full match of 4k on top of my contribution as well, for a total of 22k/year.

Quote
Quote
HSA: 4,200 (0.65% interest)
See https://www.bogleheads.org/forum/viewtopic.php?f=1&t=192950 for some other possibilities here.

I will take a look.  It is worth stating that the bank that my employer uses charges $6/month if I want to invest the money.  Vanguard index funds are available, but the $6 is steep unless I invest a large enough amount that the gains outweigh the fee.

Quote
Quote
I-Bonds: 20,000 purchased for 15k 8-10 years ago; tentatively earmarked for mortgage pay-off before the first mortgage rate increase
What interest rate are you getting on the I-Bonds?  How bad would it be if your mortgage jumped to 4.375% for a year?

$5k each in Mar2006, Mar2008, and Jun2008.  They were earning all of nothing up to a year ago, and now I think the cumulative rate for the 3 bonds is around 2.4%--around the same as my mortgage interest.  Unless the rates jump, I'm not gaining or losing by using it to pay down the mortgage.  When I pull them out, however, I will owe taxes on the gains (I think they're taxed as income, so 28% bracket).

Quote
Quote
Goals:
- FIRE by 2026 with ~35k yearly spending (875k invested)
- Be mortgage free (my only debt)
Consider FIRE with ($875K plus the remaining mortgage principal) invested.

Do you mean cash out re-fi at a low, fixed rate and have a mortgage into RE?  The current plan is mortgage free by 2020 given the ARM, but I do see that long term market gains will likely outpace any interest I owe assuming rates remain as low as they are now.

Psychologically, the idea of having as large a debt as a mortgage with no work-income is scary to me, particularly if the numbers turn out to be off on the low side.

Quote
Quote
Current Plan (looking for feedback):
- Reduce 401k contributions to minimum for employer match and contribute the difference to taxable account starting ~2018 (TBD depending on the balance and allowing this to grow on its own until I reach 60)
You do need a way to cover the five years of a Roth pipeline start-up.  Don't know whether reducing 401k contributions to the minimum is necessary for that, but you have a spreadsheet.  Would Roth 401k contributions be better than taxable?

Quote
I know there are methods of moving moneys from a pre-tax to post-tax account,, but the more I read about them from this and other forums, the more apprehensive I am about doing something wrong and getting heavily penalized, hence the plan to reduce 401k contributions (losing the tax benefit) in favor of an accessible, taxable account in the coming years.
Have you read http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/? 

Yes, I have.  I also read a post by (I think) GoCurryCracker.  I understand the concept and I actually have a separate sheet with the same numbers, but detailing out a pipeline strategy, but I can't seem to get the numbers to work while also remaining in the lowest tax brackets.  I suppose I still have time to read more and learn more about it, and another 10 years before I need to put it into practice

Also, thanks for the Roth 401k suggestion--my company does offer one, and I completely forgot it was an option because I was intent on lowering my taxes now, since they'll almost certainly be lower in retirement.

Quote
Quote
I would, however, welcome thoughts on the mortgage payoff plan vs. investing strategy.
On the one hand you are assuming a 7% return on investments, while on the other hand putting extra money into a 2.375% mortgage loan.  There is no law that says your reasoning has to be consistent, but...?

Absolutely!  The dilemma is that the loan is not fixed, and potentially goes up after 5 years and every year thereafter.  The worst case scenario puts the interest rate at 7.375% by 2023 at which point payoff definitely outweighs the investment return.  If I could get a guaranteed 7% on investments for the next 8 years, of course I would put the extra cash into the market and then pull out just enough to pay off the loan once the interest rate hits 7.375, but there's no short-term guarantee of that.  I guess I'm wondering if there is a more strategic way to balance the pay off with investing and split that $1500 differently to get a higher overall return, rather than putting it all toward the loan.
« Last Edit: June 13, 2016, 10:35:42 AM by Jessamine »

MDM

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Re: Mortgage Payoff vs Investing
« Reply #7 on: June 10, 2016, 10:33:00 PM »
Both--my own contribution of 750/month = 18k/year.  Since that number is well above 4% my salary, I get a full match of 4k on top of my contribution as well, for a total of 22k/year.
Perhaps it is $750/paycheck (biweekly)? That would put you at $18K after 24 paychecks, and presumably the company payroll program won't allow you to overcontribute.

Quote
Quote
Consider FIRE with ($875K plus the remaining mortgage principal) invested.
Do you mean cash out re-fi at a low, fixed rate and have a mortgage into RE?  The current plan is mortgage free by 2020 given the ARM, but I do see that long term market gains will likely outpace any interest I owe assuming rates remain as low as they are now.
Psychologically, the idea of having as large a debt as a mortgage with no work-income is scary to me, particularly if the numbers turn out to be off on the low side.
...
I guess I'm wondering if there is a more strategic way to balance the pay off with investing and split that $1500 differently to get a higher overall return, rather than putting it all toward the loan.
It is a slight variation on the "Retirement amount needed = 25 * retirement annual expenses" equation. 
Instead, consider "Retirement amount needed = 25 * retirement annual expenses + remaining mortgage principal".  In other words, have enough invested that you could withdraw some and pay off the mortgage and still have enough invested to meet the 25X target.

The "invest vs. pay mortgage" is a guessing game.  The longer you have - if historical trends are predictive - the more likely the market return will be better than 2.375% and even 4.375%.  That is the closest one can get to "strategic" - you pays your money and you takes your chances.

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I understand the concept and I actually have a separate sheet with the same numbers, but detailing out a pipeline strategy, but I can't seem to get the numbers to work while also remaining in the lowest tax brackets. 
...I was intent on lowering my taxes now, since they'll almost certainly be lower in retirement.
What do you think your marginal rate (see https://www.bogleheads.org/wiki/Marginal_tax_rate) will be in retirement?

Any 28% savings you can get now by using traditional will be worth it if your withdrawal marginal rate is only 15%.

If your withdrawal marginal rate gets up to 25%, and you can put the full $18K into your Roth 401k, then the Roth could actually be better than traditional.  Depends on several things.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth#Maxing_out_your_retirement_accounts.

Goldy

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Re: Mortgage Payoff vs Investing
« Reply #8 on: June 11, 2016, 06:55:50 AM »
I have a very similar situation.  We recently purchased a house with a loan for 200k at 2.5% fixed for 5 years with capped increases of 2% until 7.5%.  I used to make a large effort to pay extra on the mortgage because I was worried about rates increasing but I have since changed my tune a bit.

If I were you I would take the 1500 and invest it for a few reasons.  First, you are only paying 2.3% before tax so it's really only 1.6% after the tax credit.  My bank is paying 1% and I would be totally comfortable paying the difference to keep that money liquid.  Secondly, you are assuming rates will go up drastically and I don't think that is a realistic assumption.  We had an arm on my last house and I was going through the same though process as you, heavy payments to get the principal down before the rate adjustments started kicking in.  However, those adjustments would start right now and they were nowhere near what I was budgeting for.  I think my new rate was going increase to 2.75.

If you want to retire early with nearly a million dollars in invested assets you need to get your butt in gear and not lock money away in a house.  This is where the time in the market can really help you hit your goals. 

What I have decided to do was increase my investments instead of paying off the mortgage but I also kept an extra 450 going to the mortgage just to appease that half of my brain that wanted to see the balance drop faster.  It doesn't always need to be a choose between one or the other, maybe you can do both.

Retire-Canada

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Re: Mortgage Payoff vs Investing
« Reply #9 on: June 11, 2016, 08:43:32 AM »
Not sure I understand...how are the mortgage rate increases determined once you reach year 6? You say up to 2% increase annually and max of ~7.4%.

I'm on a variable rate mortgage can change  anytime, but is currently at 1.95% with a balance of $340K.

My plan is not pay extra on the mortgage because I'll do better investing that money in the stock market and until I pay off the mortgage having a balance of $300K or $50K is pretty much the same. I am investing the extra money I could have dumped into my mortgage into accounts I can access anytime without penalty. Much of it in a tax free account I can liquidate with no tax consequences.

I'll keep doing that and enjoy my investment returns. If rates were to climb considerably I would sell investments and pay off the mortgage once I have enough extra $$ set aside. If rates stay low I may decide to take out some of the equity I am building in the house at my current [unaccelerated] payment schedule and invest it in the market.

Blissful Biker

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Re: Mortgage Payoff vs Investing
« Reply #10 on: June 11, 2016, 09:20:26 AM »
For me, I recognise that the decision to pay off the house was partly emotional.  Perhaps I could have made more returns in the market, but I sure sleep well at night knowing our family is secure in our lovely little home regardless of what challenges arise.  And the flowers in my garden look all the more beautiful since we cleared the mortgage.

While the house is only about 1/3 of our net worth, to me it is a treasure and brings me joy and peace of mind.

 

Retire-Canada

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Re: Mortgage Payoff vs Investing
« Reply #11 on: June 11, 2016, 09:49:53 AM »
For me, I recognise that the decision to pay off the house was partly emotional.  Perhaps I could have made more returns in the market, but I sure sleep well at night knowing our family is secure in our lovely little home regardless of what challenges arise.  And the flowers in my garden look all the more beautiful since we cleared the mortgage.

While the house is only about 1/3 of our net worth, to me it is a treasure and brings me joy and peace of mind.

Until that last mortgage payment there you didn't own the house. So whether the "extra" money funds your TFSA or goes against your mortgage is irrelevant from an ownership stand point until you can pay the house off completely. You might well have reached that goal faster by investing the money and paying off the house in a lumpsum when your mortgage was due vs. paying extra each month.

The decision to pay extra or invest isn't about dragging out the time until you own the property it's about optimizing the utility of your money and giving you more choices.

If you have a $200K mortgage and pay it off vs. having $200K in investments which grow each year as you pay off your mortgage normally there is no deficit in security for the later option.  Even if the market drops 30% or 40% it's not like there is any fear you can't make your monthly mortgage payments from your investments.

It would be easy to argue that the family with $200K extra in investments is more secure because if they have a family emergency that is very expensive they have a ready source of liquid money they can tap into.

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #12 on: June 13, 2016, 09:38:27 AM »
Perhaps it is $750/paycheck (biweekly)? That would put you at $18K after 24 paychecks, and presumably the company payroll program won't allow you to overcontribute.
I was using 1500/month* to simplify the numbers.  I'm actually getting 18000/26 deducted per pay check.  The company does automatically stop contributions when I hit the limit and will true-up their match at the end of the year.  *fixed from 750 to 1500!)


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What do you think your marginal rate (see https://www.bogleheads.org/wiki/Marginal_tax_rate) will be in retirement?

Any 28% savings you can get now by using traditional will be worth it if your withdrawal marginal rate is only 15%.

If your withdrawal marginal rate gets up to 25%, and you can put the full $18K into your Roth 401k, then the Roth could actually be better than traditional.  Depends on several things.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth#Maxing_out_your_retirement_accounts.
Ah-ha!  Now I see where I got derailed--I was thinking tax bracket (actually 25%, not 28%) and not marginal rate (currently 12.something).  Looks like I might have to go back and look again to figure out the marginal tax rates.  I appreciate the additional perspective--thank you!
« Last Edit: June 13, 2016, 10:36:21 AM by Jessamine »

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #13 on: June 13, 2016, 09:46:02 AM »
Not sure I understand...how are the mortgage rate increases determined once you reach year 6? You say up to 2% increase annually and max of ~7.4%.

I'm on a variable rate mortgage can change  anytime, but is currently at 1.95% with a balance of $340K.

ARMs (adjustable rate mortgages) are usually a fixed rate for a term (determined when you apply for the mortgage) and then change periodically (most commonly yearly) thereafter based on of indexed mortgage rate plus margin.  It could technically go down (to a minimum of 2.25, for my particular mortgage) as well.  They are typically geared toward people who do not plan on staying in a home long-term (i.e., who sell before the rate adjusts) or for someone looking for a lower interest rate and payment because they are either going to pay it off quickly or are expecting their future income to rise commensurate with the rate increases.

I prefer to go with the worst case scenario for calculations, but chances are it will not increase so quickly.  That's certainly something to keep in consideration when deciding on the benefit of paying down the principal over investing--thank you for the perspective!

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #14 on: June 13, 2016, 09:51:26 AM »
For me, I recognise that the decision to pay off the house was partly emotional.  Perhaps I could have made more returns in the market, but I sure sleep well at night knowing our family is secure in our lovely little home regardless of what challenges arise.  And the flowers in my garden look all the more beautiful since we cleared the mortgage.

While the house is only about 1/3 of our net worth, to me it is a treasure and brings me joy and peace of mind.

Until that last mortgage payment there you didn't own the house. So whether the "extra" money funds your TFSA or goes against your mortgage is irrelevant from an ownership stand point until you can pay the house off completely. You might well have reached that goal faster by investing the money and paying off the house in a lumpsum when your mortgage was due vs. paying extra each month.

The decision to pay extra or invest isn't about dragging out the time until you own the property it's about optimizing the utility of your money and giving you more choices.

If you have a $200K mortgage and pay it off vs. having $200K in investments which grow each year as you pay off your mortgage normally there is no deficit in security for the later option.  Even if the market drops 30% or 40% it's not like there is any fear you can't make your monthly mortgage payments from your investments.

It would be easy to argue that the family with $200K extra in investments is more secure because if they have a family emergency that is very expensive they have a ready source of liquid money they can tap into.

Unfortunately, we don't have the benefits of TFSAs in the US but based on a quick internet search, they appear similar to a Roth IRA in the US except we can't carry over unused contributions from a previous year.  I do agree that having additional liquid (or invested) funds is preferable for major emergencies, and is definitely something I will start considering as well-thanks!

Slee_stack

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Re: Mortgage Payoff vs Investing
« Reply #15 on: June 13, 2016, 10:06:56 AM »
For me, I recognise that the decision to pay off the house was partly emotional.  Perhaps I could have made more returns in the market, but I sure sleep well at night knowing our family is secure in our lovely little home regardless of what challenges arise.  And the flowers in my garden look all the more beautiful since we cleared the mortgage.

While the house is only about 1/3 of our net worth, to me it is a treasure and brings me joy and peace of mind.

Until that last mortgage payment there you didn't own the house. So whether the "extra" money funds your TFSA or goes against your mortgage is irrelevant from an ownership stand point until you can pay the house off completely. You might well have reached that goal faster by investing the money and paying off the house in a lumpsum when your mortgage was due vs. paying extra each month.

The decision to pay extra or invest isn't about dragging out the time until you own the property it's about optimizing the utility of your money and giving you more choices.

If you have a $200K mortgage and pay it off vs. having $200K in investments which grow each year as you pay off your mortgage normally there is no deficit in security for the later option.  Even if the market drops 30% or 40% it's not like there is any fear you can't make your monthly mortgage payments from your investments.

It would be easy to argue that the family with $200K extra in investments is more secure because if they have a family emergency that is very expensive they have a ready source of liquid money they can tap into.
This is my general viewpoint as well.  Everything is not automatically rainbows and unicorns with a paid mortgage.  It is simply a shuffle of value from one asset area to another.

It is rare when an emotional decision (improved peace of mind with no mortgage) is the better choice over a logical one (better return on all assets).

Calculating that risk and return across all assets is a guessing game of course.

However, I think if a mortgage is <4% and you are not approaching RE, chances are you will do better investing the cash.

MDM

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Re: Mortgage Payoff vs Investing
« Reply #16 on: June 13, 2016, 10:16:21 AM »
I'm actually getting 18000/26 deducted per pay check.
Got it: ~$1500/month then.

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What do you think your marginal rate (see https://www.bogleheads.org/wiki/Marginal_tax_rate) will be in retirement?
Ah-ha!  Now I see where I got derailed--I was thinking tax bracket (actually 25%, not 28%) and not marginal rate (currently 12.something).  Looks like I might have to go back and look again to figure out the marginal tax rates.  I appreciate the additional perspective--thank you!
Marginal is often (but not always) the same as "bracket".

Marginal is NOT your "effective" or "average" rate.

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #17 on: June 13, 2016, 10:39:25 AM »
I'm actually getting 18000/26 deducted per pay check.
Got it: ~$1500/month then.
Ugh, math! Fixed to 1500/month.

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What do you think your marginal rate (see https://www.bogleheads.org/wiki/Marginal_tax_rate) will be in retirement?
Ah-ha!  Now I see where I got derailed--I was thinking tax bracket (actually 25%, not 28%) and not marginal rate (currently 12.something).  Looks like I might have to go back and look again to figure out the marginal tax rates.  I appreciate the additional perspective--thank you!
Marginal is often (but not always) the same as "bracket".

Marginal is NOT your "effective" or "average" rate.
Hmm... terminology.  Then perhaps it would make more sense to look at effective tax rate as far as deciding whether to put funds into a deductible or non-deductible account?

MDM

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Re: Mortgage Payoff vs Investing
« Reply #18 on: June 13, 2016, 01:25:30 PM »
Hmm... terminology.  Then perhaps it would make more sense to look at effective tax rate as far as deciding whether to put funds into a deductible or non-deductible account?

Unfortunately, "effective rate" is one of those clear, simple, and wrong answers to the somewhat complex problem of Roth vs. traditional.

See https://www.bogleheads.org/wiki/Traditional_versus_Roth#Marginal_tax_rates and https://www.kitces.com/blog/understanding-marginal-tax-rate-vs-effective-tax-rate-and-when-to-use-each/.

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Re: Mortgage Payoff vs Investing
« Reply #19 on: June 13, 2016, 10:24:05 PM »
Man, I wish this forum had better search capabilities. This question has been asked and answered many times in the past and there are a lot of great posts on the topic. Somewhere. Sigh.

MDM

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Re: Mortgage Payoff vs Investing
« Reply #20 on: June 13, 2016, 11:05:27 PM »
Man, I wish this forum had better search capabilities. This question has been asked and answered many times in the past and there are a lot of great posts on the topic. Somewhere. Sigh.

There are some references in http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/.

Jessamine

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Re: Mortgage Payoff vs Investing
« Reply #21 on: June 14, 2016, 08:10:02 AM »
Man, I wish this forum had better search capabilities. This question has been asked and answered many times in the past and there are a lot of great posts on the topic. Somewhere. Sigh.

I've seen all sorts of questions for mortgage payoff vs. investing as well, but they all deal with fixed, low  rate mortgages as far as I saw (sorry if I missed some), whereas my question was specific for an ARM which I think is less commonly encouraged on this forum.

Dicey

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Re: Mortgage Payoff vs Investing
« Reply #22 on: June 14, 2016, 10:45:05 AM »
The importance of prioritizing retirement savings over early mortgage payoff is the same, ARM or fixed.

Also, conventional wisdom says to always have a fixed rate loan. I had an ARM and refinanced when fixed rates started dropping. Silly me, the ARM would have dropped to about 2% because it was tied to a good index.

Don't be afraid of an ARM. If you sock the difference into investments, you are very likely to be able to pay it off should it adjust too far upward. Once you see the balances in your own accounts blossom though, you're less likely to want to part with that money. Been there, done that, wearing the FIRE t-shirt.

eyePod

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Re: Mortgage Payoff vs Investing
« Reply #23 on: June 14, 2016, 10:49:00 AM »
Honestly, with all of your investments, the mortgage is kind of the next step. The hard part about optimization is that you don't know what the future holds for a lot of variables. And that peace of mind has to be worth something. I dream of not having that mortgage payment.