Author Topic: Pay mortgage or invest it?  (Read 7533 times)

crucialink

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Pay mortgage or invest it?
« on: February 05, 2014, 10:47:04 AM »
I have 60,000 left on my mortgage. And I have some stock vesting from work very soon. Should be around $30,000 in cash value. Should I put it towards my mortgage or invest it in a Vanguard fund? My mortgage was a 15 year with 4.85 rate. I pay two payments of $937 each month right now.

SunshineGirl

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Re: Pay mortgage or invest it?
« Reply #1 on: February 05, 2014, 10:51:44 AM »
I'm a fan of paying off the mortgage, and it seems to be a goal of yours, so why not?

sherr

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Re: Pay mortgage or invest it?
« Reply #2 on: February 05, 2014, 11:22:19 AM »
A lot of people have this question, both here and on the internet at large. See here for an example: https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

The gist of it is that the stock marked is probably a better choice mathematically, especially at a 4.85 % interest rate on your mortgage. However to many (most?) people having a paid off home grants a psychological ease that is worth more than the mathematical interest rate alone. So it depends on what you want. You want the mathematically optimal choice? Then you should probably invest (although no one sees the future clearly...). You really want to be debt-free and get the extra cash flow benefits of not having a mortgage payment? Then put it towards the mortgage. Either way you're not making a bad choice, it's simply a matter of preference.

foobar

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Re: Pay mortgage or invest it?
« Reply #3 on: February 05, 2014, 12:38:59 PM »
There are 2 schools of thought
1)pay down your mortgage and sleep well at night
2) They are handing out  2.5-4% mortgages these days. Get as much of that cash as you can and dump it in the stock market. You should do a lot better over the long run.

If you were given 100 chances to make this choice, 2 would be the no brainer. Given you only get to play once, there is some logic for 1. And of course you can always split the different. 15k in house will cut a ton of time off your repayment schedule.


I have 60,000 left on my mortgage. And I have some stock vesting from work very soon. Should be around $30,000 in cash value. Should I put it towards my mortgage or invest it in a Vanguard fund? My mortgage was a 15 year with 4.85 rate. I pay two payments of $937 each month right now.

KingCoin

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Re: Pay mortgage or invest it?
« Reply #4 on: February 05, 2014, 01:22:19 PM »
Given that there's no "right" answer, and you're torn on which to do, I'd split it 50/50.

Verdo

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Re: Pay mortgage or invest it?
« Reply #5 on: February 05, 2014, 02:03:53 PM »
Given that there's no "right" answer, and you're torn on which to do, I'd split it 50/50.

I ran into this recently and ended up doing the 50/50.  You feel good about paying off the mortgage and at the same time feel good about contributing to the investment.  It gives you the feeling of having less risk because of the mortgage as well.  As you're coming to the end of the life of the mortgage you can also evaluate using dividends to contribute to paying off the mortgage even faster.

AdrianC

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Re: Pay mortgage or invest it?
« Reply #6 on: February 06, 2014, 09:32:17 AM »
Given that there's no "right" answer, and you're torn on which to do, I'd split it 50/50.

This.

I'd pay off the mortgage, but for us it was a no-brainer. We hated having debt. If you're conflicted split it 50/50.

soccerluvof4

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Re: Pay mortgage or invest it?
« Reply #7 on: February 06, 2014, 09:52:18 AM »
I agree with a few of the others. The fact that you are questioning it 50/50 is probably easiest for you to digest. I  personally would get rid of mortgage as soon as possible. I love being mortgage free However your doing a great job on that so really simply your comfort level. Great Job

Numbers Man

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Re: Pay mortgage or invest it?
« Reply #8 on: February 06, 2014, 10:03:15 AM »
If that $30k of stocks is your only liquid asset, I wouldn't put it toward the mortgage. Worse case scenario is you lose your income but have a $30k balance on your house and can't make the mortgage payment.

It's better to apply that $30k of stock proceeds to the mortgage once you have the mortgage balance down to $30k.

Allen

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Re: Pay mortgage or invest it?
« Reply #9 on: February 11, 2014, 04:50:13 PM »
When does the cash flow argument make sense to prioritize things like low interest mortgages and student loans over 'mathematically superior' investing options? 

Lets say you are 100% maxed in all tax deferred accounts.  Your next marginal dollars are chosen between paying off mortgage or investing in after tax accounts.  What cash-flow or risk situations would cause someone to logically choose to pay the mortgage?

sherr

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Re: Pay mortgage or invest it?
« Reply #10 on: February 12, 2014, 08:10:52 AM »
When does the cash flow argument make sense to prioritize things like low interest mortgages and student loans over 'mathematically superior' investing options? 

Lets say you are 100% maxed in all tax deferred accounts.  Your next marginal dollars are chosen between paying off mortgage or investing in after tax accounts.  What cash-flow or risk situations would cause someone to logically choose to pay the mortgage?

It all comes down to how risk-adverse you are. The risk in this case being that if you choose to put all your money into investments instead of paying down the mortgage there may come a time when you loose your job and the stock market tanks all at once. So you'd be out of a job and still have to pay the mortgage, and the money you take out of your after-tax accounts to pay the mortgage and eat would have lost value compared to when you put it in. In that situation it would have been better to pay off the mortgage instead of investing (especially if you can pay it off entirely); you would have paid down your debt with your money while it was still at its original (higher) value and your reduced expenses while you are unemployed would mean you don't need to withdraw as much from your investments while the stock market is depressed.

So I don't know if there's ever a situation where you can sit down and analyse things and decide that it's objectively better to pay down the mortgage instead of investing because there will always be a lot of predictions about the future involved. The same type of lower-risk-vs-higher-reward evaluation applies when you are deciding what your asset allocation should be (eg stock vs bond decisions and the like). It all depends on how risk-adverse you are, what your predictions of the future are (or if you decide not to try to predict the future), and what makes you feel most secure.

There's not really a right or wrong answer, you have to figure out what works for you and run with it.

GlassStash

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Re: Pay mortgage or invest it?
« Reply #11 on: February 12, 2014, 03:00:09 PM »
When does the cash flow argument make sense to prioritize things like low interest mortgages and student loans over 'mathematically superior' investing options? 

Lets say you are 100% maxed in all tax deferred accounts.  Your next marginal dollars are chosen between paying off mortgage or investing in after tax accounts.  What cash-flow or risk situations would cause someone to logically choose to pay the mortgage?

It all comes down to how risk-adverse you are. The risk in this case being that if you choose to put all your money into investments instead of paying down the mortgage there may come a time when you loose your job and the stock market tanks all at once. So you'd be out of a job and still have to pay the mortgage, and the money you take out of your after-tax accounts to pay the mortgage and eat would have lost value compared to when you put it in. In that situation it would have been better to pay off the mortgage instead of investing (especially if you can pay it off entirely); you would have paid down your debt with your money while it was still at its original (higher) value and your reduced expenses while you are unemployed would mean you don't need to withdraw as much from your investments while the stock market is depressed.

So I don't know if there's ever a situation where you can sit down and analyse things and decide that it's objectively better to pay down the mortgage instead of investing because there will always be a lot of predictions about the future involved. The same type of lower-risk-vs-higher-reward evaluation applies when you are deciding what your asset allocation should be (eg stock vs bond decisions and the like). It all depends on how risk-adverse you are, what your predictions of the future are (or if you decide not to try to predict the future), and what makes you feel most secure.

There's not really a right or wrong answer, you have to figure out what works for you and run with it.

Wouldn't paying down half of the mortgage still leave the OP with mortgage payments? I think of a worst case scenario (loss of job and stock market tanking) as a need for an adequate EF. Investments above and beyond, in my mind, don't have the dire consequences described here. If the OP is left without a job and no money to pay the mortgage, perhaps a better EF should be the topic of discussion.

PeteD01

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Re: Pay mortgage or invest it?
« Reply #12 on: February 12, 2014, 04:13:18 PM »
When does the cash flow argument make sense to prioritize things like low interest mortgages and student loans over 'mathematically superior' investing options? 

Lets say you are 100% maxed in all tax deferred accounts.  Your next marginal dollars are chosen between paying off mortgage or investing in after tax accounts.  What cash-flow or risk situations would cause someone to logically choose to pay the mortgage?

It depends not just on cash flow but also on where you are with your market investments.
If you are where you want to be with your investments at the time when the question arises, you should logically pay the mortgage. If your investments are underfunded for that particular point in time you should invest more.
This presupposes an overall financial plan.
For example, my retirement plan includes an income floor with a bridge to social security and pension, a rental property, a payed off mortgage and 500k upside portfolio. The last few years pushed my market investments ahead of schedule so I funded my guaranteed income and I'm halfway through with the mortgage. If the market goes down, I will switch gears.
I think all that is pretty logical and does not require a crystal ball, but only in light of the overall financial plan.

Peter

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Re: Pay mortgage or invest it?
« Reply #13 on: February 12, 2014, 04:27:55 PM »
When does the cash flow argument make sense to prioritize things like low interest mortgages and student loans over 'mathematically superior' investing options? 

Lets say you are 100% maxed in all tax deferred accounts.  Your next marginal dollars are chosen between paying off mortgage or investing in after tax accounts.  What cash-flow or risk situations would cause someone to logically choose to pay the mortgage?

Term of the note. Life expectancy. Economic conditions.

My father is 70, mother is 69. Retired by circumstance, not choice. I don't know all the facts, but I would guess they owe $90K on their condo, and they have about $200K in an IRA. They are collecting social security $3K/month, making $1K/month of self-employed income, and drawing $1K/month from IRA. The IRA draw is strictly to pay down the mortgage.

I've recently encouraged my father to consider leaving the IRA alone, and to pay the mortgage as scheduled. They are getting by on the $4k/month and can pay the scheduled mortgage just fine, so the IRA draw is simply to hedge against the risk of stock market declining in the short term. I think it's hurting them in the long run, but my father's concern is he earns the $1K/month, and he earns over $2K of the SocSec money. If he dies before my mother, she will no doubt have some survivor benefits, but he doesn't want to leave her with a mortgage. Both are in relatively good health.

I think these are logical reasons to pay the mortgage, jut not the most optimal thing to do mathematically in my opinion.

sherr

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Re: Pay mortgage or invest it?
« Reply #14 on: February 14, 2014, 09:12:23 AM »
Wouldn't paying down half of the mortgage still leave the OP with mortgage payments? I think of a worst case scenario (loss of job and stock market tanking) as a need for an adequate EF. Investments above and beyond, in my mind, don't have the dire consequences described here. If the OP is left without a job and no money to pay the mortgage, perhaps a better EF should be the topic of discussion.

That's why I specified "especially if you can pay it off entirely." Even if it's not completely paid off with a lower remaining balance you may be able to refinance to a lower monthly rate if the need arises. Additionally every extra payment you make on your mortgage reduces the amount of time you have to spend with the higher monthly expenses cause by the mortgage, so it still reduces your overall cashflow requirements if not your immediate cashflow requirements.

I'm not a big fan of Emergency Funds. Every dollar that you have in a non-volatile savings account is another dollar that you could have out working for you (investment) or reducing your expenses (mortgage payment). I keep only a couple thousand in cash for true emergencies, I don't think it's worthwhile to have the 6-months-of-expenses or whatever the normal advice is in emergency funds. See MMM's article on "springy-debt" for a more full discussion of the topic.

It depends not just on cash flow but also on where you are with your market investments.
If you are where you want to be with your investments at the time when the question arises, you should logically pay the mortgage. If your investments are underfunded for that particular point in time you should invest more.
This presupposes an overall financial plan.
For example, my retirement plan includes an income floor with a bridge to social security and pension, a rental property, a payed off mortgage and 500k upside portfolio. The last few years pushed my market investments ahead of schedule so I funded my guaranteed income and I'm halfway through with the mortgage. If the market goes down, I will switch gears.
I think all that is pretty logical and does not require a crystal ball, but only in light of the overall financial plan.

I can't say I'd agree. Just because you are "on plan" with whatever you've decided your plan is doesn't mean it's any less mathematically advantageous to invest in the stock market or that the benefits of paying off the mortgage are greater than they would otherwise be. You are still faced with the same choice, but you're simply ignoring it because you feel your investments are "good enough." Your crystal ball is still present, merely obfuscated by current value numbers and a lot of initial crystal-ball gazing at plan creation time. But like I said, it's whatever makes you happy, so feel free to keep doing that too.

Shor

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Re: Pay mortgage or invest it?
« Reply #15 on: February 14, 2014, 09:32:04 AM »
Just for clarification since I don't have a mortgage nor have I paid down on an existing loan without payint if off:
If you put extra money in to your mortgage, clearly it reduces your debt owed and the interest accumulation for what's paid down.
 Does this also delay the next payment for the house until the mortgage catches up to the payment schedule?
Or do the minimum payments carry on as usual regardless of what you've paid down and the mortgage gets paid off X years sooner on minimum payments from there on.

Thanks. I always thought that loans will carry on with minimum payments regardless of how much you pay down, except my roommate had piled money in to his car loan, and the minimum payments stopped getting charged until recently when the loan caught back up to the payment schedule (so the entire loan will still end at the same expected date if it's not paid off in full.) Is this a special situation for his loaner, or is this how all loans would typically occur with early payments?

OlDogface

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Re: Pay mortgage or invest it?
« Reply #16 on: February 14, 2014, 12:56:01 PM »
I faced the mortgage/invest decision some years ago. Fixed VA, 4%. I did both - pay additional towards the principle on mortgage and invest. My simple solution was to  calculate the necessary additional principle payments to payoff my mortgage 6 months prior to my FI/Retirement date. (The 6 months "cushion" was nothing more than an arbitrary decision to give me 6 months of cash in the bank (equal to the principle plus interest) upon FI.) All "left over" money went towards investment accounts (max 401k, max Roth, then whatever remained to taxable accounts). I am happy with my decision.

Consider paying your mortgage bi-weekly rather than monthly. This will have the affect of paying one additional payment each year towards the principle. Most lenders can set this up for you - for a few dollars.

fmzip

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Re: Pay mortgage or invest it?
« Reply #17 on: February 14, 2014, 01:26:41 PM »
I just had the same dilemma....

My choice, I refi'd with a Penfed 2.49% 5 year home equity loan instead of paying it off.

https://forum.mrmoneymustache.com/ask-a-mustachian/no-brainer-use-my-heloc-to-pay-off-my-mortgage/

nicknageli

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Re: Pay mortgage or invest it?
« Reply #18 on: February 14, 2014, 03:33:08 PM »
My choice, I refi'd with a Penfed 2.49% 5 year home equity loan instead of paying it off.

Dang.  Very clever.

Leisured

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Re: Pay mortgage or invest it?
« Reply #19 on: February 15, 2014, 10:35:42 PM »

Crucialink, I do not know your age, state of health, and job security. Assuming you are in good health, have a secure job, and that you still have many years of work ahead of you, I suggest investing the $30K in Vanguard or similar as you suggested.

You should spend all your working years with moderate debt, to amass investments as quickly as possible. You must be confident that your job is secure, and you must have confidence in your health,

First, keep a float of say $15K in your bank account so that in an emergency you can get the money quickly. I am retired and have never invested in a mutual fund, but I understand that you can get money out of a fund quickly if you need to, so the fund can be regarded as an emergency piggy bank. Correct me if I am wrong.

Once your mortgage is down to, say, $5000, keep the mortgage, and redraw more money and invest in a share fund or index fund. The value of the loan does not rise, but the value of the fund will rise, over time. The interest is tax deductible.

Use your mortgage to borrow against your house and buy, say, $30K in your existing Vanguard, or something similar. You are borrowing to buy assets, not for consumption, so your house is safe. You now have $60K in a fund, and a loan for $30K. If you lose your job and sell part of the fund to pay off the loan, the investments are unlikely to have suffered a large fall in value, particularly if you have held them for a few years. Your house is near enough to being paid off.

Once you are close to paying off the investment loan of $30K, borrow $50K, so you now have $110K of investments, and a loan of $50K and a house. As your assets increase, your financial position becomes more secure.

Once you are close to paying off the investment loan of $50K, repeat the process.

You should spend all your working years with moderate debt, to amass investments as quickly as possible. I stress again that you must be confident that your job is secure, and you must have confidence in your health.

I am Australian and know nothing about American retirement or superannuation arrangements, but you need to consider these matters.

I hope this helps.

Rural

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Re: Pay mortgage or invest it?
« Reply #20 on: February 16, 2014, 05:51:08 AM »
Just for clarification since I don't have a mortgage nor have I paid down on an existing loan without payint if off:
If you put extra money in to your mortgage, clearly it reduces your debt owed and the interest accumulation for what's paid down.
 Does this also delay the next payment for the house until the mortgage catches up to the payment schedule?
Or do the minimum payments carry on as usual regardless of what you've paid down and the mortgage gets paid off X years sooner on minimum payments from there on.

Thanks. I always thought that loans will carry on with minimum payments regardless of how much you pay down, except my roommate had piled money in to his car loan, and the minimum payments stopped getting charged until recently when the loan caught back up to the payment schedule (so the entire loan will still end at the same expected date if it's not paid off in full.) Is this a special situation for his loaner, or is this how all loans would typically occur with early payments?

Shor, this probably deserves its own thread, but the short version of the answer is "it depends." With mortgages, though, the conventional advice is to be sure to specify that extra payments are to be applied toward principal if that's what you want; otherwise some lenders will apply to future payments and keep charging all the interest. But again, it varies. Be sure to read the paperwork whenever you do get a loan like this.

PeteD01

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Re: Pay mortgage or invest it?
« Reply #21 on: February 16, 2014, 09:08:06 AM »

It depends not just on cash flow but also on where you are with your market investments.
If you are where you want to be with your investments at the time when the question arises, you should logically pay the mortgage. If your investments are underfunded for that particular point in time you should invest more.
This presupposes an overall financial plan.
For example, my retirement plan includes an income floor with a bridge to social security and pension, a rental property, a payed off mortgage and 500k upside portfolio. The last few years pushed my market investments ahead of schedule so I funded my guaranteed income and I'm halfway through with the mortgage. If the market goes down, I will switch gears.
I think all that is pretty logical and does not require a crystal ball, but only in light of the overall financial plan.

I can't say I'd agree. Just because you are "on plan" with whatever you've decided your plan is doesn't mean it's any less mathematically advantageous to invest in the stock market or that the benefits of paying off the mortgage are greater than they would otherwise be. You are still faced with the same choice, but you're simply ignoring it because you feel your investments are "good enough." Your crystal ball is still present, merely obfuscated by current value numbers and a lot of initial crystal-ball gazing at plan creation time. But like I said, it's whatever makes you happy, so feel free to keep doing that too.


You are right in saying that the math does not change and that one is still faced with the same choice. However, the existence of an overall financial plan and goals should influence the kind of choice one makes.

An overall financial plan does not require one to sit down at some point and use a crystal ball.
It is actually a process which is determined by your assets and risk tolerance. (I am not talking about the silly risk tolerance assessment tool used for investment advice) I mean the risks which extend to others which one is really not entitled to take unless these others truly understand them and agree with accepting them. An overall financial plan requires one to sit down with your SO and find out where you are. I can tell you that our conversations went immediately beyond any mathematical projections upon where the highest returns were to be found. It got pretty detailed and actually very actionable very quickly.

When you are just starting out in your career, all you need to do is to show up for work, load up on term life, health and disability insurance and start pouring money into market investments and pay your premiums.
The biggest risk you are facing is an underfunded retirement and mathematical projections are in agreement with your plan.

I am much farther down the road and my investments now make up a much larger part of my assets particularly when compared with my future earning power. I have also found that my wife does not relate to market investments as I do. Whereas I am quite comfortable with letting things ride and adjust spending on the go, my wife does not relate to this at all. If I died tomorrow, there would be no one to manage the investments. My wife also puts a premium on being FI as soon as possible - much more than I do.

So the plan had to change because valuations are allowing it. What needed to be done was easily quantifiable: basic cost of living to be covered with guaranteed income, pension, social security, and rental income. The mortgage is covered by my life insurance from work. But for FI with both of us alive, the mortgage has to be payed off as it is the FI limiting factor.

Now, my wife also is very eager to do some traveling during retirement - but at this time valuations do not support setting aside a potentially very large but basically not really quantifiable sum for travel expenses. Naturally, the funds marked for these kinds of expenses remain in the market.
But again, at some point, valuations may support setting aside the fun funds as well.

What you have here is an individualized retirement plan which at this time includes deferred annuities insuring a sufficient floor income. The need for these insurances may decrease over time, again depending on investment returns.

If I was on my own, my plan would develop along different lines. I am much more comfortable with mathematical projections and would just let the investments float some more. For my wife this would be akin to gambling.

In my view an overall financial plan is a work in progress and the more assets are already accumulated the less it should depend on market projections. This assumes a mechanism of assessing what constitutes enough. Sitting down with your SO and going through your expenses, assets and insurance needs as well as attitudes toward investing can give you surprisingly quantifiable goals.
Of course, all these things are value judgements but that is not a negative.

Compare that to a strictly mathematical approach where there is only one value judgment: more is always better.
My wife has a different opinion: enough is better than more. Maybe not perfectly logical but most certainly perfectly sane.

I recommend to sit down with your SO before making a decision about paying the mortgage vs market investments. You may be surprised how small the role of projected ROI is in the decision process.

Peter