Author Topic: Pay Down Mortgage vs Investing  (Read 1732 times)

FlexibleFrugalGal

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Pay Down Mortgage vs Investing
« on: April 04, 2017, 09:10:28 AM »
Hello all you beautiful Mustachians!

I'm a 28 year old gal living in northeastern Indiana. I am blessed with health, happiness, and a steady job that pays well and has good benefits. I also was fortunately enough to evade student loans and car loans in my pre-Mustachian days, so the only debt I have is my mortgage.

Let's set the stage:
     -I work as a customer service rep at a local insurance agency and I make about $50,000/year pre-tax.
     -I do have high deductible health insurance and an HSA, to which I contribute $200/month. Once my HSA reaches the amount to cover my out-of-pocket maximum ($6,500), I plan to back off my contributions to just cover the amount I use each year for my annual visits. My employer pays 95% of our health insurance premiums, so I only  pay about $7/month, deducted from my paycheck.
     -I do not have a 401(k) option.
     -I'm a homebody, vegetarian, and single so my expenses are pretty low. I'm frugal and don't spend money on crap I don't need. I track my spending and typically my monthly expenses are about $800, excluding the mortgage.
     -My current mortgage payment is $690 but I pay $750.
     -I purchased my home in 2013 and have a mortgage balance of about $110,000 at 4.25% interest. I have no plans or interest to move as I am close to work and plan to live in this house forever, or at least for quite a long time. I can't say I'll never move, but since I have no plans to have a family, I don't need to consider anyone's opinions but mine!
     -I have a Roth IRA with Vanguard with 90% stocks 10% bonds. I max this out ($5,500/yr). I only opened it last year and the current balance is $7616.46, which means I've made $741.47.
     -I recently started another account with Vanguard investing in the Wellesley fund. Currently that has $3161.29. I may move this over to the Wellington fund if my stock/bond balance gets too out of whack (right now it's roughly 75%/25%).
     -For those who don't want to do the math, that means I have a total of $10,777.75 invested. Not a lot, but it's a start and growing all the time.
 
Ideally I'd like to retire by 50. Well, I'd like to retire NOW, but I know that with just one income, I have to make my money work as hard as it can for me. I also know that I likely can't carry a mortgage in to retirement.

So my question/dilemma. I know that you are "supposed" to invest rather than pay down your mortgage, because you'll make more interest investing than you will save by paying off the debt. However... I don't like being in debt. I want to own my home outright. I plan to keep maxing out my IRA and putting at least $100/month in to Wellesley, but would it kill my early retirement plans to put any extra money toward my mortgage?

Thanks for any and all advice!

Mgmny

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Re: Pay Down Mortgage vs Investing
« Reply #1 on: April 04, 2017, 09:25:45 AM »
Are you paying PMI?

My plan is to try to overpay my mortgage until my PMI drops off (about $20k away for me, sop I'm hopeful that i hit it by the end of the summer), then i'll focus more of my money on paying myself and investing.

FlexibleFrugalGal

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Re: Pay Down Mortgage vs Investing
« Reply #2 on: April 04, 2017, 10:24:41 AM »
No PMI.

My mortgage does have an escrow for both insurance and property taxes. Since I'm my own insurance agent, I shop my policy at every renewal to make sure I'm getting a good price on insurance. My property taxes are also fairly low, about $800/year.

frugaliknowit

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Re: Pay Down Mortgage vs Investing
« Reply #3 on: April 04, 2017, 11:12:39 AM »
There's no "correct" answer to your question.

My opinion:  At 28, I would not pay down extra on the mortgage (I am MUCH older and DO...).  However, there's nothing wrong with your doing so; it represents a lower risk tolerance.  The fact that you do not have a 401K points more in the direction of prepaying (since you are limited in the amount of tax advantaged opportunity).

That said, a middle ground would be: Since you ARE prepaying mortgage (kind of equivalent of buying bonds...), you might be more aggressive with your other investing (no/less bonds in your 401K/outside your 401k, maybe more stock funds and less in balance funds...).

BlueHouse

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Re: Pay Down Mortgage vs Investing
« Reply #4 on: April 04, 2017, 12:37:28 PM »
Couldn't the OP invest as much as is allowed into the HSA as a substitute for a 401k?  I don't have an HSA, so I don't know many of the rules, other than it is considered one of the best tax shelters. 

I would max out any tax-advantaged space that is available before saving anywhere else, and I think the HSA counts.

MDM

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Re: Pay Down Mortgage vs Investing
« Reply #5 on: April 05, 2017, 12:39:30 AM »
     -I do not have a 401(k) option.
     -I have a Roth IRA with Vanguard with 90% stocks 10% bonds. I max this out ($5,500/yr). I only opened it last year and the current balance is $7616.46, which means I've made $741.47.
Why Roth instead of traditional?

Mr Mark

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Re: Pay Down Mortgage vs Investing
« Reply #6 on: April 05, 2017, 12:57:44 AM »
There are so many threads on the mortgage vs investment topic.

Wrt your HSA check out the madfientist on how to use this as a pseudo Roth. You can max out the HSA and pay out of pocket for medical but keep the receipts (a photo is allowed). If you need to you can get the money later. Meanwhile the money grows compounding away tax free. 


JLee

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Re: Pay Down Mortgage vs Investing
« Reply #7 on: April 05, 2017, 01:25:36 AM »
Definitely max your HSA every year - it is the best tax-advantaged account there is.  Once you turn 65, you can withdraw from it penalty-free like a Traditional IRA. Before then, you can withdraw to reimburse yourself for medical expenses any time after they occur. For example, if you paid $2k/year out of pocket in medical expenses for ten years, you could then withdraw $20k from your HSA penalty and tax free.