Afternoon ladies and gentlemen. This is my first post in the forum. I discovered the MMM website about a month ago and am pleased to see other people living life like I do. I have always been a saver, diyer, and expense minimizer. After going to grad school and then a 1 year stint with Americorp I took my first job earning a decent salary in December 2011. I graduated college and grad school with no debt, but do feel like I am a little behind in the retirement asset department. I am 28, have about $75,000 in cash and retirement funds (mostly retirement funds). After a bonus I will make roughly $60,000 this year and am on track to save between 40% to 50% of my after tax income. I will teeter between the 25%/15% tax bracket depending on how I finish the year out investing in my 401K. No debt other than a 15 year home mortgage I took out two years ago with a current balance of $85,181 and rate of 2.99%. Now that we have the run down on where I am currently, I am seeking some advice.
My mortgage has monthly PMI cost of $44.01. If I pay the mortgage down by $5,101.38; I will be under 80% loan to value and can eliminate my PMI payment. It is scheduled to reach 80% in exactly a year with normal payments so I would save $528.12 in PMI and $152.53 in interest over the next year by paying this off. That is a $680.65 return or 13.3%.
My question is, how can I evaluate whether to pay down the mortgage or invest the money in low cost index funds? My initial thoughts are that paying it into the mortgage is a sure win, while investing in stocks might be better in the long run as I can take advantage of compounding (as the PMI is scheduled to end in a year I will only benefit from interest savings in the years after).
I would likely try and ream my loan if I paid it down, so I can keep the favorable rate for the full term of the loan and invest the difference in payment amount, as opposed to having the loan pay off early.
Thanks so much for the help.