Author Topic: Payoff mortgage or buy funds?  (Read 1290 times)

Ottoford

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Payoff mortgage or buy funds?
« on: April 28, 2020, 03:38:12 AM »
We are in the process of receiving a pretty hefty inheritance. I know hefty is a relative term. Definitely hefty to me.  About $400k so far. Another $600k to come after probate.

We have a 5 year ARM at 3.55% for $280k on a house we just bought late last year. We always intended to pay it off in five years.

Other stats...four rental houses with no mortgages, all currently rented. And $1m in other stocks/funds most of which ($800k) is IRA. I work from home, itís good money for working in my sweats.

I hate debt. Knowing we can pay it off in 5 years without issue, the debate is do we invest now and pay it off later. Or pay it off now? Investing would mean a mix of vanguard funds.

Opinions are appreciated. Thanks

Goatee Joe

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Re: Payoff mortgage or buy funds?
« Reply #1 on: April 28, 2020, 04:18:07 AM »
With that kind of $$ coming in, might as well just pay it off.  You'll still have plenty left over to buy funds.

Ottoford

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Re: Payoff mortgage or buy funds?
« Reply #2 on: April 28, 2020, 04:41:01 AM »
Good point.  May we will invest what we already have and pay off house with second round.
Strange times.

MustacheAndaHalf

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Re: Payoff mortgage or buy funds?
« Reply #3 on: April 28, 2020, 10:32:38 AM »
I wouldn't be in a rush to pay off the mortgage this month - consider taking it month by month for awhile.  Although I don't trust Suze Orman's investment advice, she has mentioned that it can be a good idea to do nothing with an inheritance for a year, if it was someone very close to you.

Has your ARM interest rate dropped yet?  It should, given rates have dropped since last year.  Online I see fixed-rate 15 year loans at 2.8%, which is the lowest I've seen.  I think you have time to wait and see if your ARM payments drop, and if you want, maybe even refinance at rates so low they look silly.

I can understand hating debt, but I'd encourage you not to act too hastily.  Check out how mortgage rates are falling, and take your time to decide.

Financial.Velociraptor

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Re: Payoff mortgage or buy funds?
« Reply #4 on: April 28, 2020, 12:17:57 PM »
The mathematically optimal thing is probably to invest and not pay off the mortgage.  I'm of the opinion though that there are things in life more important than maximizing your stash.  Except for 401k contributions up to my employer match I did not invest one penny in the market until I extinguished my mortgage.  Doing so brought me great peace of mind.  It also put me in a mental state that allowed more aggressive investing.  So long as I knew I wasn't risking the mortgage payment, I was more or less immune to fear of losing my investments and thus invested in more aggressive mix and learned to sell options for income.  I'd have been too afraid with the mortgage hanging over my head.

I'd probably have retired earlier if I kept the note but I'd be nervous about money.  I haven't regretted making that monetarily inefficient decision once.

Ottoford

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Re: Payoff mortgage or buy funds?
« Reply #5 on: April 28, 2020, 03:58:46 PM »
I wouldn't be in a rush to pay off the mortgage this month - consider taking it month by month for awhile.  Although I don't trust Suze Orman's investment advice, she has mentioned that it can be a good idea to do nothing with an inheritance for a year, if it was someone very close to you.

Has your ARM interest rate dropped yet?  It should, given rates have dropped since last year.  Online I see fixed-rate 15 year loans at 2.8%, which is the lowest I've seen.  I think you have time to wait and see if your ARM payments drop, and if you want, maybe even refinance at rates so low they look silly.

I can understand hating debt, but I'd encourage you not to act too hastily.  Check out how mortgage rates are falling, and take your time to decide.

Since we just bought the house the first 5 years are fixed at 3.55%.

I agree with not doing anything dramatic for a year. Which we were doing by looking at real estate many states away. But we stopped that. I think investing more into funds isnít too dramatic.

I much appreciate your insight.

talltexan

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Re: Payoff mortgage or buy funds?
« Reply #6 on: April 30, 2020, 07:57:02 AM »
I personally think that we hesitate to put large chunks in the market because 100% stocks is too risky for most of us, even some people who really think they can handle it.

I would put 40% of the pile into $VTI today. That's a nice, conservative allocation. You can buy bonds with the rest, or save another 20% to buy stocks in a month or two. Start with a low-volatility allocation, and perhaps you can increase to the mix you think you can handle.

dresden

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Re: Payoff mortgage or buy funds?
« Reply #7 on: May 05, 2020, 11:12:16 PM »
I wouldn't hesitate to pay off the house unless you are planning to purchase a new home in which case I might keep the pool of cash to simply the buying end.   3.55% guaranteed return with no risk really beats anything else you can do with the money right now unless you don't think the impact of the coronavirus increases risk.

I think our high-yield savings is down to 1.3% now with synchrony.  It's still not bad to park your money for 1.3% until you come up with a plan, but 3.55% is much better.

ColoAndy

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Re: Payoff mortgage or buy funds?
« Reply #8 on: May 08, 2020, 07:59:23 AM »
I would pay the house off asap.  Then invest the remainder as well as the second batch of inherited money.

talltexan

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Re: Payoff mortgage or buy funds?
« Reply #9 on: May 08, 2020, 08:16:50 AM »
any update here on what OP decided to do?

Markets are jumping today while an employment report is out showing twenty million jobs lost during April. The sport of investing was not meant to be easy.

nereo

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Re: Payoff mortgage or buy funds?
« Reply #10 on: May 08, 2020, 08:31:45 AM »
I would thank my lucky stars to have a 3.55% mortgage and ample savings; I would not toss that gift into the trash bin by paying off the mortgage.

My first quesiton is always "what additional tax-advantaged head-space do you have available to you"?  If you are not maxing out your IRA/HSA/401(k)/403(b) that should become a priority.  Invest what you can and use this to increase contributions through work.  It might also be worthwhile to consider a Mega Backdoor Roth strategy. 2021 might seem distant but you could hold enough cash to max accounts for both years.

After that I would invest along your normal AA. 

MrThatsDifferent

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Re: Payoff mortgage or buy funds?
« Reply #11 on: May 08, 2020, 01:59:01 PM »
This is not my area, so feel free to ignore me: have you accounted for taxes on the inheritance? Otherwise, I know the pay mortgage or not debate and would generally agree, however here, Iíd probably pay off the mortgage, then invest the remainder, while leaving some in an HISA. I think youíre set up well and any path you take will be good, this is bonus money.

talltexan

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Re: Payoff mortgage or buy funds?
« Reply #12 on: May 08, 2020, 02:23:16 PM »
I didn't think six-digit inheritances got hit by estate tax.

MrThatsDifferent

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Re: Payoff mortgage or buy funds?
« Reply #13 on: May 08, 2020, 04:47:02 PM »
I didn't think six-digit inheritances got hit by estate tax.

Seems like youíre right.

nereo

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Re: Payoff mortgage or buy funds?
« Reply #14 on: May 08, 2020, 06:27:28 PM »
I didn't think six-digit inheritances got hit by estate tax.
The federal estate tax exemption is $11.58MM.  Each state has their own limit, but a quick glance shows the majority are at or above $5MM.  In any case, these amounts are far above what the OP is talking about.

Adding:  Remember money is fungible.  Just because you donít pay taxes on the inheretence doesnít mean you shouldnít consider your overall tax situation.  Using those funds to boost tax-advantaged accounts (if applicable) can further reduce your taxable burden.  In other words: follow the Investment Order.