Author Topic: Pay mortgage principal or invest  (Read 1573 times)

jamesbond007

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Pay mortgage principal or invest
« on: June 27, 2016, 03:37:02 PM »
Hello Mustachians,

I am pretty sure this questions has been done to death may times. But I want to present my situation.

I bought a house worth $440K with 20% down at 4% in January 2016 with a 30-yr mortgage. I don't have a problem making monthly payments ($2475 PITI+HOA). I also have about $70K cash. It is way too much than what I need for emergencies. So I was wondering about opening a vanguard personal investment account and invest there about $50K and keep $20K truly liquid readily available. I also plan to pay $20K every year towards my principal so I will be out of mortgage in about 9 years.

PITI+HOA is the single biggest expense of mine. I have a daughter who is 2 years old and my wife is a home maker.

What do you suggest I do? Pay off the $50K towards principal (I will continue to pay $20K every year according to my plan) or continue with $20K per year according to my plan(and invest the $50K now in vanguard) or make an extra monthly payment of about $600 along with my mortgage (Don't pay extra 20K eveyr year and instead invest everything in vanguard)?

Please advise.

Thanks.

Mother Fussbudget

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Re: Pay mortgage principal or invest
« Reply #1 on: June 27, 2016, 05:30:32 PM »
Invest. Don't tie up a large portion of your liquid capital into a house. A house is an asset, but it's not liquid - you can't easily get that cash back out. (without selling or renting)

Instead, consider:
1) Max out your 401K contribution to get the dual benefit of saving pre-tax dollars, and reducing taxable income.
2) Max out your HSA account (must have a HDHP to have an HSA account).
3) Max out a T-IRA or ROTH IRA contribution.
4) Invest the $50K in a taxable account.
5) Add $100-to-$200 extra principle payment each month.  OR... calculate how much you would need to pay on the mortgage to pay it off just before you reach your FIRE date. 

I understand wanting to pay off the house early, but every worker-dollar you sink into a house is a worker-dollar that's not "out there working for you" bringing back growth and dividends.

slugline

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Re: Pay mortgage principal or invest
« Reply #2 on: June 27, 2016, 10:31:16 PM »
As far as the effect on your net worth is concerned, paying off debt is like buying an investment with a guaranteed after-tax rate of return equal to the interest rate of the loan. It's better than leaving it languishing in a savings account, but historically not as good as the stock market, especially if you still have tax-sheltered accounts to access low-cost index funds.

jamesbond007

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Re: Pay mortgage principal or invest
« Reply #3 on: June 28, 2016, 10:13:34 AM »
Great. I am maxing out on my 401K currently but I don't have HSA setup. I will switch to a HSA starting Jan 2017 when I can change my insurance elections provided by my employer. I am currently saving about 50% of my net income and I plan to be FI in about 16 years. I was probably making an emotional decision when I asked this questions. Thanks for your responses you both. I will do the calculation to see how much extra I should pay to pay off my mortgage around the time I plan to be FI.