Author Topic: Should i invest more aggressively in my mortgage or Index fund??  (Read 3681 times)

JJ saves

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Hello all!

I've been following the money-mustache way over year now, and I'm hooked! This is my first post hoping you can help me out with some advice please.

I'm a 29 year old homeowner that owes 181,000. It's a 30 yr fixed @ 4 percent. I make at least 200$ Additional payments on principal each month. I will be paying PMI for another 3 years since I didn't have 20 percent when I bought.

I have 21,000$ invested in Vanguard total stock market index fund. I have no other debt besides the mortgage.

If I start making 800$ principal payments on my mortgage I could possibly pay it off completely before I'm forty years old. Or would it be wiser to invest the 800$ in my vanguard fund?

Thanks!

iamlindoro

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #1 on: April 28, 2014, 08:20:40 AM »
I'd probably pay everything into the mortgage until you could get the PMI removed, then switch to everything/most into your index fund.   Your average return on the index fund is likely to outpace the 4% on your mortgage by a fair margin-- but the PMI is killer.

JJ saves

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #2 on: April 28, 2014, 08:35:50 AM »
Thanks for the advice.

 The PMI will stay 3yrs regardless of how much extra I give. Would putting all the cash in the mortgage before PMI is off make a difference ? Or should I invest aggressively in vanguard fund then switch aggressively to mortgage once the PMI is off?

Thanks

iamlindoro

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #3 on: April 28, 2014, 08:46:34 AM »
Thanks for the advice.

 The PMI will stay 3yrs regardless of how much extra I give. Would putting all the cash in the mortgage before PMI is off make a difference ? Or should I invest aggressively in vanguard fund then switch aggressively to mortgage once the PMI is off?

Thanks

Are you sure you can't get the PMI removed if you hit the 80/20 ratio by paying down your mortgage?  The only reason I would pay extra on the mortgage in your case would be to accelerate the removal of PMI, since your interest rate is low.

kyleaaa

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #4 on: April 28, 2014, 11:12:09 AM »
I probably wouldn't pay down the mortgage any faster than necessary at that rate.

Drew

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #5 on: April 28, 2014, 11:28:20 AM »
Thanks for the advice.

 The PMI will stay 3yrs regardless of how much extra I give. Would putting all the cash in the mortgage before PMI is off make a difference ? Or should I invest aggressively in vanguard fund then switch aggressively to mortgage once the PMI is off?

Thanks

Are you sure you can't get the PMI removed if you hit the 80/20 ratio by paying down your mortgage?  The only reason I would pay extra on the mortgage in your case would be to accelerate the removal of PMI, since your interest rate is low.

If it's an FHA loan there is a minimum time frame you must pay PMI regardless of how much additional principle you have paid. I am not sure of the exact time frame.

waltworks

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #6 on: April 28, 2014, 11:49:53 AM »
If you're unsure at all about the PMI, call your servicer and ask about a recast of the loan. In some cases you can put a big chunk (how big will depend on the servicer and your loan) of money and reamortize the mortgage over a new 30 year period. You may be able to get rid of the PMI this way.

A refi is a possibility too if you can match your current rate or come close without paying a ton in closing costs but that's a long shot IMO.

If the PMI stays for 3 years no matter what then:
-Make *sure* it will go away in 3 years (ie you'll be at 80/20 and satisfy whatever other requirements are in place).
-Put all your extra $ in index funds (pay NO extra mortgage payments at all). Expected return there is going to be >4%. This is assuming you don't think you'll need the money in the short term, of course. If you do, stay away from stocks.

There is an emotional aspect too, here - paying off the mortgage is a 100% "safe" investment, so you could choose that as well and not be wrong to do so, depending on how you feel about risk and investment optimization.

-W

JJ saves

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Re: Should i invest more aggressively in my mortgage or Index fund??
« Reply #7 on: April 28, 2014, 12:04:13 PM »
If you're unsure at all about the PMI, call your servicer and ask about a recast of the loan. In some cases you can put a big chunk (how big will depend on the servicer and your loan) of money and reamortize the mortgage over a new 30 year period. You may be able to get rid of the PMI this way.

A refi is a possibility too if you can match your current rate or come close without paying a ton in closing costs but that's a long shot IMO.

If the PMI stays for 3 years no matter what then:
-Make *sure* it will go away in 3 years (ie you'll be at 80/20 and satisfy whatever other requirements are in place).
-Put all your extra $ in index funds (pay NO extra mortgage payments at all). Expected return there is going to be >4%. This is assuming you don't think you'll need the money in the short term, of course. If you do, stay away from stocks.

There is an emotional aspect too, here - paying off the mortgage is a 100% "safe" investment, so you could choose that as well and not be wrong to do so, depending on how you feel about risk and investment optimization.

-W

My PMI is on my loan for five years. I tired everything to take it off, but my FHA loan will not remove it until the time is complete. The 80/20 is already in place by appreciation in increased home value. I looked into refinance however interest rates aren't lower then 5% so that's out.

I do understand the emotional aspect of owning your own home and not owing anything to the man. Think I'll invest more of my cash in my vanguard index funds
Thank you!

Thanks