Pay off mortgage or invest?

[somepeopleschildren]

Long time lurker first time poster!

Here's the classic conundrum:  Pay off house or invest?  I'm hung up because our interest rate is 3.2% and worry that paying it off takes money away from investing.

If we dove into it, the house would be paid for in 5 years.  We plan on living here for 14(ish) years until our kids are through with school.

Thoughts?

[Psychstache]

With the minimal information given, I say invest.

I have had a 3.75 mortgage for 5 years and haven't given one extra penny to the back for it and I don't plan to.

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[nereo]

You have a 3.2% interest rate (assuming fixed). 
To me, it's a no brainer to invest.  The case becomes even more compelling if you have extra headroom in your tax-advantaged accounts.

As always, the 'investment order' is a great reference (link embedded to full post).
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra.     

[Brother Esau]

I would not pay the mortgage off early and invest the extra $. I recently refinanced to a 15 year fixed at 3.25%. I'm investing all extra $.

[Acastus]

The question is, do you want a guaranteed 3.2% return or take the risk of stocks and try for 8% ish? Taxes don't really count anymore, unless  you have a McMansion and pay lots of interest. If you would put the money in a bank account instead, paying the house is better, but you can probably do a lot better by investing it.

If you are approaching retirement, eliminating the cost of a mortgage allows you to have a smaller withdrawal. This can simplify retirement income calculations and anxiety enough to make it worthwhile to pay off the mortgage.

I plan to carry my mortgage for a few years into retirement, then eliminate it by downsizing.

[nereo]

The question is, do you want a guaranteed 3.2% return or take the risk of stocks and try for 8% ish? Taxes don't really count anymore, unless  you have a McMansion and pay lots of interest. If you would put the money in a bank account instead, paying the house is better, but you can probably do a lot better by investing it.

no and no.
1) it's not a guaranteed 3.2% return.  The real return will be 3.2% - inflation (whichever value makes the most sense under the OP's conditions).  A 3.2% return could very well be a 0-1% return, particularly over multi-year time frames. This is important but often overlooked.

2) Taxes DO count - just (perhaps) not the mortgage interest deduction. If the OP is not fully maxing out all tax-advantaged accounts, investing it there vs paying down a mortgage will most definitely have tax implications.

[alanB]

If you are not at Step 8 of the Investment Order, do not even think about paying off mortgage early.  If you pay state tax you are probably still better off investing in a 529. 

In early retirement you have fixed expenses (i.e. mortgage) and variable expenses (i.e. eating out).  If your portfolio is hit particularly hard by sequence of returns risk, it is relatively easy to reduce variable expenses.  If you want to be extra conservative you can pay off mortgage ahead of time to minimize fixed expenses.  That will reduce the amount needed for a 4% SWR, but it will probably still take you longer to reach that amount compared to the larger amount you would have needed if you had just invested.  Over the course of your life you will very likely accumulate more wealth if you do not pay off your mortgage, if that matters to you.

My opinion is if you are really worried you should pick 1 of the following 3:
1) pay off mortgage early
2) invest in a conservative portfolio
3) work longer to save up to <4% SWR

If you feel the urge to do all three there is another forum you might like ;P

[Dicey]

Assuming this is a 15, or better still, a 30 year fixed rate mortgage, the answer is a no brainer. Mortgage rates have already crept up a full point more than you are paying.

Have fun with this thread:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

[nereo]

If you feel the urge to do all three there is another forum you might like ;P

touché!

[wawot1]

Don't discount the "how much do I hate being in debt" psychology....if carrying a mortgage is going to bother you, even though you know it may not be the mathematically "correct" answer to maximize net worth in 5 years - then think about paying it down earlier.

Or, if you can't decide, why not split the difference?  Make some extra mortgage payments and also make some extra taxable investments?

[boarder42]

great comments here already - OP i was in your boat a few years ago and was glad this forum opened my mind to set me on the path to not pay down my mortgage and invest instead. 

[Dicey]

Don't discount the "how much do I hate being in debt" psychology....if carrying a mortgage is going to bother you, even though you know it may not be the mathematically "correct" answer to maximize net worth in 5 years - then think about paying it down earlier.

Or, if you can't decide, why not split the difference?  Make some extra mortgage payments and also make some extra taxable investments?

While I can appreciate the balanced approach suggestion... Let me assure that having more money than you ever dreamed possible far surpasses the psychology you cite. It would suck more to have no mortgage, yet still have to worry about how to pay for a new roof/HVAC/water heater/car/groceries/anything, especially in your old age.

This morning as I was out walking, it occurred to me that if our lovely million dollar house somehow vanished while we were out, we'd be perfectly fine if we had to start over. I was momentarily filled with the craziest sense of elation. That's mind blowing!

I used to have a very powerful Inner Bag Lady who was so much like @lhamo's they might have been twins. I'm happy to report that my IBL hasn't been heard from in years.

If you want to "kill the mortgage", do it this way. Put all the extra payments into a low-cost index fund a la jlcollinsnh. The magic of compound interest will make your money grow even faster. Then, when you have enough in your investment account, you can pay that mortgege off in one fell swoop. Most likely by then you won't want to do it, because you'll understand how much better it feels to have so much money working so you don't have to.  Along the way, don't leave money on the table by failing to get your employer's full match if you're lucky enough to have one.

Your future self is going to be so, so happy!!!!

[boarder42]

Don't discount the "how much do I hate being in debt" psychology....if carrying a mortgage is going to bother you, even though you know it may not be the mathematically "correct" answer to maximize net worth in 5 years - then think about paying it down earlier.

Or, if you can't decide, why not split the difference?  Make some extra mortgage payments and also make some extra taxable investments?

While I can appreciate the balanced approach suggestion... Let me assure that having more money than you ever dreamed possible far surpasses the psychology you cite. It would suck more to have no mortgage, yet still have to worry about how to pay for a new roof/HVAC/water heater/car/groceries/anything, especially in your old age.

This morning as I was out walking, it occurred to me that if our lovely million dollar house somehow vanished while we were out, we'd be perfectly fine if we had to start over. I was momentarily filled with the craziest sense of elation. That's mind blowing!

I used to have a very powerful Inner Bag Lady who was so much like @lhamo's they might have been twins. I'm happy to report that my IBL hasn't been heard from in years.

If you want to "kill the mortgage", do it this way. Put all the extra payments into a low-cost index fund a la jlcollinsnh. The magic of compound interest will make your money grow even faster. Then, when you have enough in your investment account, you can pay that mortgege off in one fell swoop. Most likely by then you won't want to do it, because you'll understand how much better it feels to have so much money working so you don't have to.  Along the way, don't leave money on the table by failing to get your employer's full match if you're lucky enough to have one.

Your future self is going to be so, so happy!!!!

agreed the security met by having a large amount of cash invested that could be tapped when needed far outweighs a paid off home. 

[FreshPrincess]

Don't discount the "how much do I hate being in debt" psychology....if carrying a mortgage is going to bother you, even though you know it may not be the mathematically "correct" answer to maximize net worth in 5 years - then think about paying it down earlier.

Or, if you can't decide, why not split the difference?  Make some extra mortgage payments and also make some extra taxable investments?

While I can appreciate the balanced approach suggestion... Let me assure that having more money than you ever dreamed possible far surpasses the psychology you cite. It would suck more to have no mortgage, yet still have to worry about how to pay for a new roof/HVAC/water heater/car/groceries/anything, especially in your old age.

This morning as I was out walking, it occurred to me that if our lovely million dollar house somehow vanished while we were out, we'd be perfectly fine if we had to start over. I was momentarily filled with the craziest sense of elation. That's mind blowing!

I used to have a very powerful Inner Bag Lady who was so much like @lhamo's they might have been twins. I'm happy to report that my IBL hasn't been heard from in years.

If you want to "kill the mortgage", do it this way. Put all the extra payments into a low-cost index fund a la jlcollinsnh. The magic of compound interest will make your money grow even faster. Then, when you have enough in your investment account, you can pay that mortgege off in one fell swoop. Most likely by then you won't want to do it, because you'll understand how much better it feels to have so much money working so you don't have to.  Along the way, don't leave money on the table by failing to get your employer's full match if you're lucky enough to have one.

Your future self is going to be so, so happy!!!!

agreed the security met by having a large amount of cash invested that could be tapped when needed far outweighs a paid off home.

This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

[neo von retorch]

I happen to be quickly approaching that milestone where my total invested money equals my remaining mortgage.

I just played out the mental model of paying off the mortgage with my investments, and it left me feeling hollow and scared inside. "You mean I have NOTHING invested. No money. Just a house?" No thank you!

[Dicey]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

[neo von retorch]

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

This (emphasized portion) is sort of true. I think what the vast majority of people don't realize is that it's the long-term nature of a mortgage that makes it so well-suited to being left alone.

If you have a 3-4% car loan over 60 months... the odds of doing better in the stock market are pretty good, but the odds of the market going through a correction and leaving you worse off (by the end of the 60 month period) are pretty good, too. The sure thing of 3-4% over 60 months is (often enough) worth it.

So we advocate "no debt" even on relatively low interest car loans, and turn around and shout "leave your mortgage debt alone!" Because over a 15-30 year period... the odds that total market index fund returns exceed your mortgage interest are exceedingly good.

(The above might be some kind of reverse justification projection for the urge I currently have to pay off a 3.5% student loan and maybe even a 1.49% car loan... just to get rid of debt and simplify things, despite the possibility of "having less money instead of more!" Though, with less than $3k on the SL and less than $10k on the auto loan, the overall net change in worth over 20 years is not gigantic...)

[FreshPrincess]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone. 

[boarder42]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone.

This is an incorrect way of looking at it - you do not need 25x your mortgage payment to FIRE ... you need 25x all other expenses plus the balance remaining on your mortgage - using a tool like cFIREsim to simulate carrying a mortgage and actually increases your chances of success by 5% give or take.  The reason you dont need 25x the PI portion of the payment is b/c

1. your mortgage does not index with inflation
2. your mortgage will be paid off at some point even if taken to full term 30 years or whatever you have. 

[FreshPrincess]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone.

This is an incorrect way of looking at it - you do not need 25x your mortgage payment to FIRE ... you need 25x all other expenses plus the balance remaining on your mortgage - using a tool like cFIREsim to simulate carrying a mortgage and actually increases your chances of success by 5% give or take.  The reason you dont need 25x the PI portion of the payment is b/c

1. your mortgage does not index with inflation
2. your mortgage will be paid off at some point even if taken to full term 30 years or whatever you have.

Ok. Fair.  And I didn't explain myself well.  But that's technically what that 800k number is... it's my FI number, minus the remaining mortgage balance.  So, I  think we are saying the same thing.  You're just saying it better.

[boarder42]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone.

This is an incorrect way of looking at it - you do not need 25x your mortgage payment to FIRE ... you need 25x all other expenses plus the balance remaining on your mortgage - using a tool like cFIREsim to simulate carrying a mortgage and actually increases your chances of success by 5% give or take.  The reason you dont need 25x the PI portion of the payment is b/c

1. your mortgage does not index with inflation
2. your mortgage will be paid off at some point even if taken to full term 30 years or whatever you have.

Ok. Fair.  And I didn't explain myself well.  But that's technically what that 800k number is... it's my FI number, minus the remaining mortgage balance.  So, I  think we are saying the same thing.  You're just saying it better.

but in all likelihood you'll arrive at 1.4MM prior to 800k if you have to use 600k to pay down the house.  So your statement then doesnt make sense when you say its the difference between x and y you're making it sound like you need to save more but you've already saved it- also cashing out that 600k will come with capital gains that hit causing you to need to save a bit more, even when we dont account for the fact that the market gains will get you there faster.

[FreshPrincess]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone.

This is an incorrect way of looking at it - you do not need 25x your mortgage payment to FIRE ... you need 25x all other expenses plus the balance remaining on your mortgage - using a tool like cFIREsim to simulate carrying a mortgage and actually increases your chances of success by 5% give or take.  The reason you dont need 25x the PI portion of the payment is b/c

1. your mortgage does not index with inflation
2. your mortgage will be paid off at some point even if taken to full term 30 years or whatever you have.

Ok. Fair.  And I didn't explain myself well.  But that's technically what that 800k number is... it's my FI number, minus the remaining mortgage balance.  So, I  think we are saying the same thing.  You're just saying it better.

but in all likelihood you'll arrive at 1.4MM prior to 800k if you have to use 600k to pay down the house.  So your statement then doesnt make sense when you say its the difference between x and y you're making it sound like you need to save more but you've already saved it- also cashing out that 600k will come with capital gains that hit causing you to need to save a bit more, even when we dont account for the fact that the market gains will get you there faster.

Nope.  1.4 is carrying the mortgage payment into RE.  800+mortgage balance is less than that.  I'm pretty early into my mortgage.

[boarder42]

<Snip. Its up there if you wanna read it.>
This.  My husband and I had this talk.  I talked him into investing and then re-evaluating when we have enough to cover the mortgage entirely. What we do with the mortgage on that day will be based on what our life looks like on that day.  No missed growth opportunity or facepunches necessary.

OMG! She gets it, she gets it! Hooray! [Insert much clapping here.] One down, thousands left to go...

Oh, and neo's just cross-posted. Two down... or maybe they were already among the clappers...

What cracks me up is this decision doesn't involve much math either. Do you want to have more money or less? The answer is easy, if you take it logically.

<takes a bow>

now at the risk of ruining all my good will... I have created spreadsheet after spreadsheet to determine when we CAN pay it off and not impact my 'stache too much.  That date is somewhere between year 6-7 of my savings plans (we are still in year 1 - but were far ahead of most people my age.  I used to work in retirement plans and knew the importance of saving).  If I pay it off in a lump sum and continue my savings as business as usual, I will be able to recoup the "lost balance" pretty quickly. making general assumptions, of course.

And yes, recouping that sucks... but carrying a mortgage and not carrying a mortgage into retirement is the difference between needing about 800k and needing about 1.4 million to be financially independent.  so... i do want it gone.

This is an incorrect way of looking at it - you do not need 25x your mortgage payment to FIRE ... you need 25x all other expenses plus the balance remaining on your mortgage - using a tool like cFIREsim to simulate carrying a mortgage and actually increases your chances of success by 5% give or take.  The reason you dont need 25x the PI portion of the payment is b/c

1. your mortgage does not index with inflation
2. your mortgage will be paid off at some point even if taken to full term 30 years or whatever you have.

Ok. Fair.  And I didn't explain myself well.  But that's technically what that 800k number is... it's my FI number, minus the remaining mortgage balance.  So, I  think we are saying the same thing.  You're just saying it better.

but in all likelihood you'll arrive at 1.4MM prior to 800k if you have to use 600k to pay down the house.  So your statement then doesnt make sense when you say its the difference between x and y you're making it sound like you need to save more but you've already saved it- also cashing out that 600k will come with capital gains that hit causing you to need to save a bit more, even when we dont account for the fact that the market gains will get you there faster.

Nope.  1.4 is carrying the mortgage payment into RE.  800+mortgage balance is less than that.  I'm pretty early into my mortgage.

correct so did you read what i wrote - 800+mortgage balance is what you need to FIRE - the mortgage payment does not add to you total needed to FIRE.  Your statements contradict each other ... either way paying it down will net you less safety in FIRE than carrying it with you using 800k plus whatever is remaining on your mortgage.