Author Topic: Pay off Mortgage & Auto Loans VS Investing  (Read 990 times)

buggystd

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Pay off Mortgage & Auto Loans VS Investing
« on: February 03, 2017, 07:16:24 AM »
I've come into some money and want to pay my house off. I'm being told by financial advisors to invest instead, because I'll make more money longterm. I don't know the exact amount yet, but let's say it is $500K for now.

Going by some of the stuff I've read here, it does sound like investing that would make me more money than I pay in mortgage a month.

I also have two car payments, that I'm considering paying off. 3.25% and 2.49% rates. Again, being advised by people to invest the money instead - so let's say $70K for 4 years. They are saying I could make more investing during that 4 years than I would save in interest. It would also continue to sit there making money past the 4 years.
« Last Edit: February 03, 2017, 08:18:57 AM by buggystd »

frugaliknowit

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Re: Pay off Mortgage & Auto Loans VS Investing
« Reply #1 on: February 03, 2017, 09:41:44 AM »
This can be debated forever.  This is a question of your risk tolerance.  I will just shed light on a few facts:

Paying off the cars is a zero risk after tax return of 3.25%/2.49%, plus a potential psycological gain, plus a potential for better sleep and less administrative work.  Paying off the house is a zero risk after tax return of the mortgage rate * (1-your marginal tax rate), plus a potential psychological gain, plus a potential for better sleep and less administrative work. 

You can also look at this as the equivalent of a "bond, C/D, or equivalent annuity allocation (annuity because you are foregoing the future payment on the loan(s) in return for paying them off)" within your portfolio.

The "expected rate" you would earn investing it yourself (assuming a long enough timeframe) in say, the S&P500 or VTMX or a diversified portfolio would be higher.  The actual rate you earn is not guaranteed in any way. 



 

buggystd

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Re: Pay off Mortgage & Auto Loans VS Investing
« Reply #2 on: February 03, 2017, 10:11:40 AM »
Thank you for the information. It is appreciated.

CindyBS

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Re: Pay off Mortgage & Auto Loans VS Investing
« Reply #3 on: February 03, 2017, 11:27:17 AM »
Something to think about that I don't really ever hear mentioned from the people in the don't pay off a mortgage camp:

Sometime in your life you may have a big crisis that affects every aspect of your life and in those cases, having a paid off car and house will be a blessing.  Some people may argue that you can always sell the house if needed, or liquidate investments - but if you are in crisis, you will most likely not be up to doing either.  It is unrealistic to think you can move in a crisis unless you absolutely have to. 

I speak from experience on this, in July my 13 year old son was diagnosed with cancer.  Our expenses went up, income went way down (I stopped working to care for him).  The month my son was diagnosed we paid every single bill late (first time in 25 years), there is no way we could have time or energy to liquidate an investment.  We still have a mortgage payment, but it is fairly low - mostly due to overpaying the mortgage for years and well thought out refinances.   I wish it was nothing so that we would have more money right now.  We are lucky that contributing to FI was the largest expense we had, and therefore the easiest to roll back.  Debt is an anchor that holds you down, period.  When you are already drowning, it makes it that much worse.

buggystd

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Re: Pay off Mortgage & Auto Loans VS Investing
« Reply #4 on: February 03, 2017, 11:54:44 AM »
That is one of the reasons I was leaning more to paying off now. Thanks for sharing.