Author Topic: Considering pumping money into my mortgage instead of after-tax investing  (Read 3164 times)

GiantTaco

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Hey folks. I'm a high earner, making enough to cover my expenses, max out the available tax-advantaged accounts every year, and have a lot left over; this discussion is purely what to do in excess of standard savings. A significant portion of my income comes in spikes as my RSUs vest, of which I have one arriving in the next week or so.

  • Age: 27
  • 2018 AGI: $227k
  • House: $475k purchase, $376k mortgage remaining at 4% for 29 years
  • Monthly payments: $1831/mo purely for mortgage, more for escrow and HOA

Based on my finances, I can realistically pay the mortgage off in 4 years, which comes out to a bit over $400k including interest.

I recognize that investing $300k+ will snowball and far outweigh this house in the long term, but I find it hard to analyze on a shorter horizon. In the simplest sense, it's saving 4% vs let's say 10% market returns (yes, it'll be super volatile and unlikely, I know), multiplied by the amount I would put in, over however many years. That 4% drops a bit after itemized returns, and capital gains sort of plays into the investing (even though I wouldn't touch the money for a long time).

This is not a house I plan to be in for even 10 years, which is probably a red flag. But, debt and interest really suck and there are both countable and uncountable benefits to having paid off a major debt, including the cash flow relief.

How silly is this? Thanks in advance.
« Last Edit: February 15, 2019, 09:47:40 PM by GiantTaco »

Tuskalusa

  • Bristles
  • ***
  • Posts: 442
Re: Considering pumping money into my mortgage instead of investing
« Reply #1 on: February 14, 2019, 12:20:33 AM »
Iím not sure Iíd call it silly.  Silly would be running out and Buying a new BMW. Good for not doing that!

Like you, I hate debt. I associate freedom with a house that I own. However, there is a lot to be said for investing for growth. At 27, you have a great time horizon for investments.

What about splitting the difference. Half on the house and half into a taxable account?

matchewed

  • Magnum Stache
  • ******
  • Posts: 4376
  • Location: CT
Re: Considering pumping money into my mortgage instead of investing
« Reply #2 on: February 14, 2019, 06:10:57 AM »
Suboptimal for sure. Mathematically not a good move. In regards to aiming for FIRE it delays it.

Up to you though. I'd run the numbers more specifically in order to understand it better. From what you shared you seem to not have done that.

SwitchActiveDWG

  • Stubble
  • **
  • Posts: 177
Re: Considering pumping money into my mortgage instead of investing
« Reply #3 on: February 14, 2019, 06:22:24 AM »
Suboptimal for sure. Mathematically not a good move. In regards to aiming for FIRE it delays it.

Up to you though. I'd run the numbers more specifically in order to understand it better. From what you shared you seem to not have done that.

This. Run the numbers so you have a better projection for the outcome of each path. It may decrease your desire to push the mortgage so hard when you have it worked out how suboptimal that decision may be.

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 36
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Considering pumping money into my mortgage instead of investing
« Reply #4 on: February 14, 2019, 06:40:28 AM »
Like the others said, you're choosing between a good decision (paying off the mortgage) and a great decision (investing). From that perspective, there's no bad choice. Further, if you can actually pay off the mortgage in 4 years and then begin diverting the firehose of excess income into investments, then you're much more likely to come out ahead than if you were in the position of paying off the mortgage in say, 10 to 15 years. The reason is that the stock market is far more likely to lag 4% returns over a four-year period than over a longer stretch. So, my opinion would be that if you are one of the debt-averse people who simply sleep better a night with a paid-off house, then by all means, pay off the mortgage. But do it with clear eyes, knowing that more likely than not, it will cost you money in the long run.

Greystache

  • Bristles
  • ***
  • Posts: 314
Re: Considering pumping money into my mortgage instead of investing
« Reply #5 on: February 14, 2019, 07:11:18 AM »
I know that market timing is forbidden on this forum, but I would choose avoiding 4% interest rather than investing in an overvalued stock market.

MTBmustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 61
Re: Considering pumping money into my mortgage instead of investing
« Reply #6 on: February 14, 2019, 07:24:15 AM »
I was wondering this same thing a couple months ago, but folks on here convinced me the math makes more sense if you simply invest.


However, interested to hear what other responses you get... it's still on my mind, as I haven't yet maxed my tax-deferred or tax-free retirement vehicles this year and actually gotten to the point of taking action on a brokerage account.

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 36
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Considering pumping money into my mortgage instead of investing
« Reply #7 on: February 14, 2019, 07:32:50 AM »
I know that market timing is forbidden on this forum, but I would choose avoiding 4% interest rather than investing in an overvalued stock market.

Eh, the stock market always seems "overvalued". People have been saying the same thing since I came here in 2013. You don't have a clue what the next 4 years holds. Like I said, though, there's a much better chance that the market lags 4% over a 4-year period than over a 10 or 15-year period. The OP's situation is different from most, in that he has the income to extinguish the mortgage far more quickly than most people.

bacchi

  • Magnum Stache
  • ******
  • Posts: 4631
Re: Considering pumping money into my mortgage instead of investing
« Reply #8 on: February 14, 2019, 08:27:09 AM »
Like I said, though, there's a much better chance that the market lags 4% over a 4-year period than over a 10 or 15-year period. The OP's situation is different from most, in that he has the income to extinguish the mortgage far more quickly than most people.

I don't understand what you're suggesting here.

What does the length of payoff time have to do with market returns vs mortgage payoff returns over the length of a mortgage? How is your "4-year period" not market timing?

talltexan

  • Magnum Stache
  • ******
  • Posts: 3456
Re: Considering pumping money into my mortgage instead of investing
« Reply #9 on: February 14, 2019, 08:32:11 AM »
I'd love to invite you to the "Don't pay off your mortgage" forum to see what we can offer.

Mathematically, keeping your mortgage payments down and putting more money into tax-sheltered accounts like the 401(k) and Health Savings Account will enable you to pull ahead over a long period of time. This depends on your self-control in keeping your saving up and investing with a solid buy-and-hold strategy through all market conditions.

Maenad

  • Pencil Stache
  • ****
  • Posts: 634
  • Location: Minneapolis 'burbs
Re: Considering pumping money into my mortgage instead of investing
« Reply #10 on: February 14, 2019, 08:53:32 AM »
Do you have an emergency fund of at least 6 months expenses, including your mortgage?

If not, this question is academic. Come back once you do. The reason is because while the lower COL after paying off your mortgage adds to your financial security, the risk while you're in the payoff process is higher. If you don't have an e-fund and you lose your job, you could still lose your house, and having a big chunk of the principal paid down doesn't help if you can't make your mortgage payments right now.

I echo the suggestion to do the math. I share the desire to be completely debt-free, so I understand where you're coming from, but weigh that against the extra money you won't be making - only you can decide which one of those matters more to you. Much like a more-conservative, sub-optimal asset allocation, making more money isn't worth it if you can't sleep at night.

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1095
  • Location: Cincinnati
Re: Considering pumping money into my mortgage instead of investing
« Reply #11 on: February 14, 2019, 08:54:28 AM »
I'd love to invite you to the "Don't pay off your mortgage" forum to see what we can offer.

Mathematically, keeping your mortgage payments down and putting more money into tax-sheltered accounts like the 401(k) and Health Savings Account will enable you to pull ahead over a long period of time. This depends on your self-control in keeping your saving up and investing with a solid buy-and-hold strategy through all market conditions.

OP already does "max out the available tax-advantaged accounts every year".

So the decision is between taxable investments versus a 4% mortgage pay off. When faced with a similar situation we did as suggested upthread: 50% to taxable investments, 50% to mortgage payoff, though our mortgage was more like 6.5% iirc. Worked out just fine.

haflander

  • Bristles
  • ***
  • Posts: 335
  • Age: 29
  • Location: Dallas
Re: Considering pumping money into my mortgage instead of investing
« Reply #12 on: February 14, 2019, 09:07:27 AM »
If you don't have an e-fund and you lose your job, you could still lose your house, and having a big chunk of the principal paid down doesn't help if you can't make your mortgage payments right now.

Sorry for my naivete...I've seen this statement several times around here. I've never owned a home before and I've never had CC debt. My only experience with long-term debt is a car loan and SLs. With those two, if you pay extra and get ahead, you can skip payments later. I would usually pay (sometimes a lot) extra, and skip a payment every once in a while if I had a tight month around the holidays or traveling.

It doesn't work this way with a mortgage? You have to pay the payment amount every month, no matter what? Why?? This would be a big factor pushing me more toward the DPOYM crowd once that time comes.

*If this thread get out of hand, I'll delete. Every time I see something like this I cringe, wondering whether a firestorm will descend upon the OP. B42 must be spinning in his MMM grave rn.

MTBmustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 61
Re: Considering pumping money into my mortgage instead of investing
« Reply #13 on: February 14, 2019, 09:20:21 AM »
If you don't have an e-fund and you lose your job, you could still lose your house, and having a big chunk of the principal paid down doesn't help if you can't make your mortgage payments right now.

Sorry for my naivete...I've seen this statement several times around here. I've never owned a home before and I've never had CC debt. My only experience with long-term debt is a car loan and SLs. With those two, if you pay extra and get ahead, you can skip payments later. I would usually pay (sometimes a lot) extra, and skip a payment every once in a while if I had a tight month around the holidays or traveling.

It doesn't work this way with a mortgage? You have to pay the payment amount every month, no matter what? Why?

No, it definitely does NOT work that way. Basically, you can pay down extra principal, which comes off the very end of your mortgage. That shortens the amount of time you have to pay on your mortgage and saves you tons of interest on that principal, but you cannot skip payments later--you're still on the hook for your mortgage payment every single month.

Why? I'm sure they have a reason, but it probably has something to do with banks being greedy bastards.

One upshot of this as well is that paying down a bunch extra on your mortgage early on in the amortization schedule saves you tons of money, but if you were to wait until, say, the last 10 years of your mortgage and started paying extra, you'd save almost no money in interest. Look at the breakdown of your mortgage payment going to principal vs interest, and how it changes over time.

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 36
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Considering pumping money into my mortgage instead of investing
« Reply #14 on: February 14, 2019, 09:34:08 AM »
Like I said, though, there's a much better chance that the market lags 4% over a 4-year period than over a 10 or 15-year period. The OP's situation is different from most, in that he has the income to extinguish the mortgage far more quickly than most people.

I don't understand what you're suggesting here.

What does the length of payoff time have to do with market returns vs mortgage payoff returns over the length of a mortgage? How is your "4-year period" not market timing?

Of course it's market timing. When did I say otherwise?

Here is the reasoning (and numbers) behind my statement. I took a history of total returns (appreciation + dividends) by year for the S&P 500, dating back to 1926. I calculated 4-year, 10-year, and 15-year compound annual growth rates. I then counted the number of periods in which the annual return exceeded 4%. Between 1940 and 2018, there were 16 four-year periods in which annual returns lagged 4%; 9 ten-year periods in which annual returns lagged 4%; and only 4 fifteen-year periods in which annual returns lagged 4%.

I know this is a simplistic way of looking at things. For example, it doesn't take into account future returns of invested money at the end of the given time period, but do you at least understand the point I'm trying to make? Based on historical returns, there is about a 20% chance that paying off a 4% mortgage in four years will leave you better off at the end of that four-year period than of just investing in the S&P. There is only a 5% chance that paying off the same mortgage in 15-years is better than investing in the S&P.

The common theme is that paying off your 4% mortgage early is far more likely to cost money than save money, if the alternative choice is to invest in an index fund.
« Last Edit: February 14, 2019, 01:56:04 PM by Mississippi Mudstache »

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Considering pumping money into my mortgage instead of investing
« Reply #15 on: February 14, 2019, 09:58:33 AM »
If you don't have an e-fund and you lose your job, you could still lose your house, and having a big chunk of the principal paid down doesn't help if you can't make your mortgage payments right now.

Sorry for my naivete...I've seen this statement several times around here. I've never owned a home before and I've never had CC debt. My only experience with long-term debt is a car loan and SLs. With those two, if you pay extra and get ahead, you can skip payments later. I would usually pay (sometimes a lot) extra, and skip a payment every once in a while if I had a tight month around the holidays or traveling.

It doesn't work this way with a mortgage? You have to pay the payment amount every month, no matter what? Why?

No, it definitely does NOT work that way. Basically, you can pay down extra principal, which comes off the very end of your mortgage. That shortens the amount of time you have to pay on your mortgage and saves you tons of interest on that principal, but you cannot skip payments later--you're still on the hook for your mortgage payment every single month.

Why? I'm sure they have a reason, but it probably has something to do with banks being greedy bastards.

One upshot of this as well is that paying down a bunch extra on your mortgage early on in the amortization schedule saves you tons of money, but if you were to wait until, say, the last 10 years of your mortgage and started paying extra, you'd save almost no money in interest. Look at the breakdown of your mortgage payment going to principal vs interest, and how it changes over time.
My lender has three options for payments: the 'base' as determined by the schedule, which must be paid; additional principal; additional escrow.
I don't have the option for 'pay in advance' but wasn't that the default historically?

BTW I'm not following the 'greedy' bastards comment. If you just pay in advance, you still make all scheduled payments (100% of interest is due). If you pay extra principal to make less than all schedule payments, less interest is collected.

bacchi

  • Magnum Stache
  • ******
  • Posts: 4631
Re: Considering pumping money into my mortgage instead of investing
« Reply #16 on: February 14, 2019, 10:46:43 AM »
If you don't have an e-fund and you lose your job, you could still lose your house, and having a big chunk of the principal paid down doesn't help if you can't make your mortgage payments right now.

Sorry for my naivete...I've seen this statement several times around here. I've never owned a home before and I've never had CC debt. My only experience with long-term debt is a car loan and SLs. With those two, if you pay extra and get ahead, you can skip payments later. I would usually pay (sometimes a lot) extra, and skip a payment every once in a while if I had a tight month around the holidays or traveling.

It doesn't work this way with a mortgage? You have to pay the payment amount every month, no matter what? Why?

No, it definitely does NOT work that way. Basically, you can pay down extra principal, which comes off the very end of your mortgage. That shortens the amount of time you have to pay on your mortgage and saves you tons of interest on that principal, but you cannot skip payments later--you're still on the hook for your mortgage payment every single month.

Why? I'm sure they have a reason, but it probably has something to do with banks being greedy bastards.

One upshot of this as well is that paying down a bunch extra on your mortgage early on in the amortization schedule saves you tons of money, but if you were to wait until, say, the last 10 years of your mortgage and started paying extra, you'd save almost no money in interest. Look at the breakdown of your mortgage payment going to principal vs interest, and how it changes over time.
My lender has three options for payments: the 'base' as determined by the schedule, which must be paid; additional principal; additional escrow.
I don't have the option for 'pay in advance' but wasn't that the default historically?

BTW I'm not following the 'greedy' bastards comment. If you just pay in advance, you still make all scheduled payments (100% of interest is due). If you pay extra principal to make less than all schedule payments, less interest is collected.


You can pay in advance, in a sense. My next required payment is April 1 because I made my March payment early. This doesn't change the interest due, of course. It just means I can wait 45 days to make the next payment. (I'm a month ahead because the lender tends to misplace payments and then charge late fees, which means arguing with them for a few weeks.)

Also, the interest on the early payments doesn't show up on the 1099. In other words, you can make 18 payments this year but the 1099 will only show 12 months of interest because interest isn't tax deductible until it's actually due.


JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Considering pumping money into my mortgage instead of investing
« Reply #17 on: February 14, 2019, 11:02:05 AM »

You can pay in advance, in a sense. My next required payment is April 1 because I made my March payment early. This doesn't change the interest due, of course. It just means I can wait 45 days to make the next payment. (I'm a month ahead because the lender tends to misplace payments and then charge late fees, which means arguing with them for a few weeks.)

Also, the interest on the early payments doesn't show up on the 1099. In other words, you can make 18 payments this year but the 1099 will only show 12 months of interest because interest isn't tax deductible until it's actually due.

Okay, I just wanted to clarify for haflander. e.g. If payment 35 is due, you could make payment 35 and 36 at the same time. The next month, the lender sees payment 36 was completed and waits for the subsequent month to expect payment 37. My lender doesn't have that option in their web portal, but I'm sure it could be done by physical check or over the phone...

The one thing I'm not sure about is whether you could make payments 35, 36, 37 as scheduled but also submit an extra 'comp' payment to be applied to any arbitrary scheduled payment. Maybe I could throw it in escrow and, later when I want to, I could then make a transfer from escrow to the balance?...
Haflander, if you have irregular circumstances, seems like it's easier to just have a 'mortgage payments' bucket saved in your own account for this purpose.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3397
  • Location: WDC
Re: Considering pumping money into my mortgage instead of investing
« Reply #18 on: February 14, 2019, 01:07:02 PM »

You can pay in advance, in a sense. My next required payment is April 1 because I made my March payment early. This doesn't change the interest due, of course. It just means I can wait 45 days to make the next payment. (I'm a month ahead because the lender tends to misplace payments and then charge late fees, which means arguing with them for a few weeks.)

Also, the interest on the early payments doesn't show up on the 1099. In other words, you can make 18 payments this year but the 1099 will only show 12 months of interest because interest isn't tax deductible until it's actually due.

Okay, I just wanted to clarify for haflander. e.g. If payment 35 is due, you could make payment 35 and 36 at the same time. The next month, the lender sees payment 36 was completed and waits for the subsequent month to expect payment 37. My lender doesn't have that option in their web portal, but I'm sure it could be done by physical check or over the phone...

The one thing I'm not sure about is whether you could make payments 35, 36, 37 as scheduled but also submit an extra 'comp' payment to be applied to any arbitrary scheduled payment. Maybe I could throw it in escrow and, later when I want to, I could then make a transfer from escrow to the balance?...
Haflander, if you have irregular circumstances, seems like it's easier to just have a 'mortgage payments' bucket saved in your own account for this purpose.

My lender applies any extra payment to principal, UNLESS the extra is as much or more than the entire monthly amount due. 
For instance, if my mortgage is $1000/month and I pay $2000, then January and February are paid off (the bank holds onto the extra $1000 until Feb is due, and there is no advantage to me in paying early.)
If I pay $1999, then January is paid, and $999 goes toward additional principal, which changes the amount of interest I will owe in the long run (not the RATE, just the total interest).  I don't really see the benefit until the mortgage is paid off. 

When I made additional principal pre-payments, I did a no-cost recast so that my mortgage was re-amortized and so my monthly payments decreased without extending the length of the mortgage.  This option is available at least once on almost all home loans.  It is useful if you purchase a house before you sell the previous house and want to apply the first home's equity to the downpayment.  Also useful when you're just not comfortable with your monthly payments and you want to decrease them without paying for a re-fi.

GiantTaco

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Considering pumping money into my mortgage instead of investing
« Reply #19 on: February 14, 2019, 01:25:34 PM »
I wasn't expecting this much discussion overnight and until now, thanks everyone for the input.

To address/readdress a couple points, the money I'm considering here does not require any negative impact to the rest of my finances. 401k, IRA, HSA, efund are all topped up, and I have access to significant funds (without penalty) if I get _really_ desperate.

On the topic of running the numbers: I fully recognize that the gap gets very large over a long period the further I look out. $300k+ invested grows to a significant gap. That being said, I've poked at the numbers for long term _and_ short term, but it's tricky between the spiky RSU income and various tax benefits/liabilities. I'm hoping someone would bring up something I haven't considered for a short-to-medium term.

For example:

Based on historical returns, there is about a 20% chance that paying off a 4% mortgage in four years will leave you better off at the end of that four-year period than of just investing in the S&P. There is only a 5% chance that paying off the same mortgage in 15-years is better than investing in the S&P.

That's pretty interesting, and it might be a supporting point if I decide that the current messiness of U.S. politics makes me uneasy about the next few years.

Effectively, I'm comparing whether the paid-off mortgage and freed-up funds are welcome enough in the short term to make up for the basically-guaranteed large increase in returns over the long term. I make enough that I'll hit FIRE in my mid-30s whether or not I pay off this house.

I'd love to invite you to the "Don't pay off your mortgage" forum to see what we can offer.

It's so funny that this exists! I might stop by.

bwall

  • Pencil Stache
  • ****
  • Posts: 815
Re: Considering pumping money into my mortgage instead of investing
« Reply #20 on: February 14, 2019, 01:31:57 PM »
I know that market timing is forbidden on this forum, but I would choose avoiding 4% interest rather than investing in an overvalued stock market.

+1

YoungGranny

  • Pencil Stache
  • ****
  • Posts: 715
  • Age: 29
Re: Considering pumping money into my mortgage instead of investing
« Reply #21 on: February 14, 2019, 01:36:41 PM »
2 years ago I was faced with the same decision. Over 2 years it'd be smarter to pay the house off and invest after right? Well I decided to choose the optimal strategy of investing the difference with the caveat that when my investment was greater than my mortgage I could always pay it off. Now that I have that lump sum invested I realized I want to leave it over there accruing dividends and interest. In the long-run I know I'm coming out ahead anyway. So why not invest the difference for now and make your own decision in 4 years?

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1562
  • Age: 47
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Considering pumping money into my mortgage instead of investing
« Reply #22 on: February 14, 2019, 02:55:40 PM »
Investing is almost certainly better than early mortgage pay off.  I paid mine off early anyway for psychological reasons.  FI for me is largely about security and peace of mind.

If I was doing it again, I'd put the additional principle into closed end municipal bond funds purchased at a discount to NAV.  In almost every market, you will earn a higher interest rate on the leveraged muni fund than you are paying the mtg company.  The income is tax free and the mtg interest is deductible.  The muni funds all pay monthly so in short order, you have a sinking fund that self liquidates your mortgage but maintains the tax arbitrage.  And you retain the flexibility of being able to sell the munis for funds.  It is much harder (and more expensive) to extract your home equity once created!

MoolahLula

  • Bristles
  • ***
  • Posts: 389
  • Location: Moolastan
Re: Considering pumping money into my mortgage instead of investing
« Reply #23 on: February 14, 2019, 04:15:27 PM »
Youíre definitely not alone in considering this course of action.  I am in the process of refinancing my mortgage into a 10 year so that I:  A. Have a lower interest rate.  B. Can more surely have this place paid off by the time I retire and move to friendlier environs and C. 4% interest just feels like too dang much.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1700
  • One Does Not Simply Work Into Mordor
Re: Considering pumping money into my mortgage instead of investing
« Reply #24 on: February 14, 2019, 11:58:22 PM »
I mostly agree with YoungGranny.

Making many early payments short of paying it entirely is a poor choice. First, it is exchanging the shallow risk of market fluctuations for the deep risk of losing your house. Second, it has lower expected returns. If you have been paying down the mortgage and lose your job, the bank may take your house and all your payments. The potential loss becomes larger the more payments you make, while the buffer against the loss does not grow. If you save and invest the money in a balanced portfolio instead, you have a large and growing buffer in case you lose your job or some other event comes up. 90% of a mortgage is the worst amount to have paid off.

Paying the mortgage all at once (ideally just before you have enough money to quit) is a good choice. Going from 30% to 100% paid off lets you skip the growing risk of a big loss in between. It also allows you to benefit from sequence of returns risk: by doing this you are more likely to sell your stocks to pay off the mortgage when they have been doing well for a long period, and you are unlikely to suddenly have enough money to pay off the mortgage when there is a bear market. So it gives a natural inclination to sell high / buy low.

Investing and never paying the mortgage early is also good depending on your situation. There are pluses and minuses compared to the above. It has higher expected returns but worse sequence of returns risk. It is safer against inflation but less safe to deflation. It may result in higher taxes, as you need more income to make the payments. Legal considerations can also affect the decision.

Humans have two cognitive biases that make them want to pay the mortgage despite the risk: 1) they experience disproportionate anguish from meaningless volatility, and 2) they tend to ignore the possibility of big losses that they have not experienced personally. This makes them more willing to take steady but lower returns, and while they ignore the risk of a "black swan" such as a job loss. I just came across this concept reading "Fooled by Randomness", I am surprised I did not get it before. As an example, there is a poster on Bogleheads forum "KlangFool" who has been unlucky enough to have lost his job several times, and in addition to have strict rules on how much house is affordable, he is also strongly in the "DON"T pay off your mortgage club" because he has personal experience using his investments to stay afloat. A mortgage payment with little too liquidity is a fragile situation.

You can calculate the percentile returns for any rolling time period of the S&P here. Looks like the S&P exceeded 4% more than 60% of the time at 4 year periods. More diversification might improve your odds.
https://dqydj.com/sp-500-historical-return-calculator/

CorpRaider

  • Bristles
  • ***
  • Posts: 439
    • The Corpraider Blog
Re: Considering pumping money into my mortgage instead of investing
« Reply #25 on: February 15, 2019, 06:35:59 AM »
I know that market timing is forbidden on this forum, but I would choose avoiding 4% interest rather than investing in an overvalued stock market.

I don't think it would be irrational to use the inverse/earnings yield for the market based on the CAPE or use like vanguard's expected return calculation as a comp for the guaranteed return of the 4% in interest avoided.  There's a pretty high statistical correlation (historically) between the CAPE levels and forward 10 year returns.  Either way you are making a bet, the outcome of which can only be known in the future. 

If you were going to run a 60-40 allocation you could also use the bond allocation portion of contributions to reduce the mortgage.  It could be viewed as serving a similar role in the portfolio.  Although less liquid, as has been noted...but not totally without liquidity; you can sell, refinance/take out a heloc, rent out a portion, etc....

It is probably more risky, despite what the gold bugs say.  If a Sriracha plant goes in a mile down the road you are going to be nearly wiped out.
« Last Edit: February 15, 2019, 06:42:44 AM by CorpRaider »

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 36
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Considering pumping money into my mortgage instead of investing
« Reply #26 on: February 15, 2019, 06:36:42 AM »
Solid analysis, Radagast. I'm always sympathetic to those who want to pay off mortgages quickly, because that's my gut instinct as well. Rational analysis like yours is what convinced me to pull back on the reigns and focus on investing instead. Two things we both seem to agree on is that 1) there is less risk involved when paying the mortgage off extremely quickly, but 2) it's still very likely to leave you worse off financially than simply investing.

Bird In Hand

  • Pencil Stache
  • ****
  • Posts: 704
Re: Considering pumping money into my mortgage instead of investing
« Reply #27 on: February 15, 2019, 06:46:19 AM »
@Radagast, good post.

Making many early payments short of paying it entirely is a poor choice. First, it is exchanging the shallow risk of market fluctuations for the deep risk of losing your house.

For a lot of people it may be a poor choice because of the risk you cite.  But it's not universally true.  For example, the risk may be extremely low for someone with some combination of an extremely stable job, a large retirement portfolio, or other reliable resources to fall back on -- family, friends, etc.

Quote
90% of a mortgage is the worst amount to have paid off.

Perhaps, but perhaps not.  If that last 10% could easily be covered by existing retirement savings for example, then the risk is overstated.  I'm not saying that it's a wise decision to pay off the mortgage, or that the expected return is particularly attractive, but the risk needs to be contextualized for individual circumstances.

Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1632
Re: Considering pumping money into my mortgage instead of investing
« Reply #28 on: February 15, 2019, 06:53:14 AM »
If you pay off the mortgage, you will then have the mortgage payment (plus the overpayment amount you regularly include) available for other things.  Savings bonds, 529, taxable account.  If you put money into the market instead of into the mortgage, will it yield better returns for you?  The clear and definite answer is......maybe.

The funny thing with paying off your mortgage is that you then have money to decide what to do with next.  It's not like you pay off your mortgage and are doomed to never have investable money again.

I have yet to find anyone who has paid off their mortgage to regret it.  (paid mine off in 2002, and yet, somehow, I've got $2.3M in liquid assets now).

Bird In Hand

  • Pencil Stache
  • ****
  • Posts: 704
Re: Considering pumping money into my mortgage instead of investing
« Reply #29 on: February 15, 2019, 07:16:42 AM »
If you pay off the mortgage, you will then have the mortgage payment (plus the overpayment amount you regularly include) available for other things.  Savings bonds, 529, taxable account.  If you put money into the market instead of into the mortgage, will it yield better returns for you?  The clear and definite answer is......maybe.

The clear historical answer is "almost certainly, and overwhelmingly so for longer periods of time".  I suspect your 'maybe' refers to the chance that the superior market returns may not be true for the future generally speaking, or for a particularly unlucky period of years.

Quote
The funny thing with paying off your mortgage is that you then have money to decide what to do with next.  It's not like you pay off your mortgage and are doomed to never have investable money again.

There is definitely an appeal to the idea of suddenly having a lot more cashflow (to the tune of regular monthly P&I + overpayment amount) when the mortgage is paid off.  But the opportunity cost of not having all that $$ invested in the market the whole time could be large.  Over a hot market period like 2009-2017, the compound returns are enormous, and having one of those periods early on during your FI journey is not something to cast aside lightly.

You might have to slog through a decade of middling market returns until you hit that market jackpot, but accumulating a lot of lower-priced shares during such a period only makes the (inevitable?) hot market all the sweeter.

*Disclaimer: I'll be paying off my mortgage early over the next 1-2 years, and have been making extra principal payments for some time.

Bird In Hand

  • Pencil Stache
  • ****
  • Posts: 704
Re: Considering pumping money into my mortgage instead of investing
« Reply #30 on: February 15, 2019, 07:37:47 AM »
I wasn't expecting this much discussion overnight and until now, thanks everyone for the input.

Hah, you've wandered into the classic, never-ending "to pay off mortgage or not" quagmire.  It's a popular topic -- with fervent adherents on both sides -- in every FIRE-related community I've been a part of.

Quote
To address/readdress a couple points, the money I'm considering here does not require any negative impact to the rest of my finances. 401k, IRA, HSA, efund are all topped up, and I have access to significant funds (without penalty) if I get _really_ desperate.

If you could edit the thread title to say 'instead of after-tax investing' that would make this topic somewhat less controversial.

MrThatsDifferent

  • Handlebar Stache
  • *****
  • Posts: 1863
Re: Considering pumping money into my mortgage instead of investing
« Reply #31 on: February 15, 2019, 08:19:28 AM »
If you pay off the mortgage, you will then have the mortgage payment (plus the overpayment amount you regularly include) available for other things.  Savings bonds, 529, taxable account.  If you put money into the market instead of into the mortgage, will it yield better returns for you?  The clear and definite answer is......maybe.

The funny thing with paying off your mortgage is that you then have money to decide what to do with next.  It's not like you pay off your mortgage and are doomed to never have investable money again.

I have yet to find anyone who has paid off their mortgage to regret it.  (paid mine off in 2002, and yet, somehow, I've got $2.3M in liquid assets now).

Iím sure thereís a corollary between people who pay off their mortgage and saving as they have demonstrated discipline, focus and persistence.

GiantTaco

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Considering pumping money into my mortgage instead of investing
« Reply #32 on: February 15, 2019, 10:48:11 PM »
Thanks again, everyone. I didn't mean to abandon, just haven't had the time to check back in. Radagast, really appreciate the breakdown.

Lots of good inputs. The idea to just invest the money and see where I'm at is an interesting one. I would have paid out about $57k in interest in 4 years under normal payments, and if I'm understanding things correctly, it's still annualized to about 4% in interest (even though it feels like it should be more) when considering the full $376k I'm putting away.

I did a couple scenarios. 1) If I stick to my normal mortgage and invest 1k/mo + 20k/quarter @ 7.5% returns (plus equity minus interest). 2) paying off the mortgage with $23k/quarter (limitations of this amortization calculator), so plus paid-off principal minus interest. Former was about $402k (after 15% capital gains tax), latter ~$351k. Realistically the latter is a bit better since the interest is deductible, and the former is also probably better as I won't immediately pull the money out. I know over the long term, investing _will_ come out ahead.

If that sounds like reasonable calculations, then then I think the opportunity cost of paying off the mortgage is small enough to not warrant paying it off. I'm starting to lean towards YoungGranny's advice of investing for a few years and maybe making the decision to sell and pay off.

Though I do agree with "Bird In Hand" as it pertains to my situation, because between large fallback funds, job security, and plenty of opportunity, even if the market tanks and my house is gone, I have a high likelihood of surviving.

If I was doing it again, I'd put the additional principle into closed end municipal bond funds purchased at a discount to NAV.

I don't know what this means, but I'm interested.

If you could edit the thread title to say 'instead of after-tax investing' that would make this topic somewhat less controversial.

Good call! I've done just that.

coldsteel333

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: Considering pumping money into my mortgage instead of after-tax investing
« Reply #33 on: February 17, 2019, 01:33:51 PM »
I would Pay down the home if it was me. I think those saying the market is not over extended aren't dialed in with the fed and market indicators. So sure we could get a great china deal, market could run up another 10-15 percent  but i think it will eventually find a retest of today highs or lower ,imo lower before the next bull market. This is the longest bull market in history and the debt crisis is looming. The home pay down is a sure 4% percent right? But on a optimistic look i think many people would love to have the decisions your trying to make. So kudos to you for realizing that goal of great income. Really its hard to go wrong with that kinda salary. invest in some great insurance and a nice umbrella policy should be a top priority as well.

CoffeeR

  • Stubble
  • **
  • Posts: 215
  • Location: Southwest
Re: Considering pumping money into my mortgage instead of after-tax investing
« Reply #34 on: February 17, 2019, 03:21:15 PM »
How silly is this? Thanks in advance.
If historical stock market returns are similar in the future as they have been in the past then at current mortgage rates, not paying off your mortgage and investing the money in the stock market instead will result in an overall higher net worth.

Personally, after maxing out the tax advantaged accounts I have access to, I would get rid of all debt and pay of the mortgage as fast a possible. One less variable to be concerned with. One less concern. I am in the minority here. At MMM cfiresim trumps this opinion. [I now duck].