Author Topic: Pay off mortgage before investing in stocks?  (Read 2251 times)

Swamp Chomp

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Pay off mortgage before investing in stocks?
« on: June 09, 2016, 07:33:37 AM »
We like MMM's principle about investing in stocks and have appreciated his advice about low-fee index funds because we have no interest in attempting to time the market.  I am 31, the primary breadwinner, and our goal is to retire by 55.  My wife and I have a little extra savings built up in addition to our safety/emergency fund (about $17K) that we are thinking about dollar-cost-averaging into some funds but we are unsure about one thing:  Is it wiser to invest that money into the market or put it on the mortgage?  We've owned our house for about 5 years, have a 30-year fixed with a 4.25% rate.  If we invest that money in the market sooner than later and average around the 7% returns over the longterm, then won't that get us further ahead?  The same question goes for when we have a few extra bucks, do we just put it on the mortgage or invest it?

Appreciate your advice.

nereo

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Re: Pay off mortgage before investing in stocks?
« Reply #1 on: June 09, 2016, 07:55:13 AM »
Well, the whole "pay off your mortgage early vs investing more"  is one of hte most vibrant topics on this forum.  Below are some lengthy threads where people argue passionately for and against.  There are literally dozens more if you use the search function.

Personally, I'm in the invest first club, particularly when your mortgage is under 5% like yours.
I will strongly urge you to first max out your IRA accounts ($11,000 between you and your spouse) plus contribute to any available HSA and 401k/403b/TSP plans before putting extra money towards your mortgage.  The tax-advantages of contributing to those make it almost a no brainer.

After that, it's a personal choice.  If you think past market returns will be similar to the future, then the math shows investing will come out ahead.  If you think that we are in for decades of poor market returns or if you have a psycological aversion to debt (e.g. it keeps you from sleeping at night or causes you undue stress) then pay down your mortgage faster.
A mortgage is a great inflation hedge should inflation rise in the future (we've been at ≤2% for the last decade, but historically it's been closer to 3% with forays into 5%+ territory).  Mortgage interest can be deducted in the US (but sometimes is less than the standard deduction), and I particularly get antsy whenever someone has most of their net worth tied up into their home (e.g. a lack of diversity).


http://forum.mrmoneymustache.com/share-your-badassity/real-cost-of-paying-off-mortgage/
http://forum.mrmoneymustache.com/welcome-to-the-forum/do-you-regret-paying-off-your-mortgage-early/
forum.mrmoneymustache.com/investor-alley/pay-of-mortgage-or-invest


Also good reading: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
edit:  fixed links
« Last Edit: June 09, 2016, 08:00:07 AM by nereo »

Drifterrider

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Re: Pay off mortgage before investing in stocks?
« Reply #2 on: June 09, 2016, 12:33:10 PM »
We've owned our house for about 5 years, have a 30-year fixed with a 4.25% rate. 

Have you looked into a streamlined interest rate reduction loan (IRRL)?

I'm looking into a second investment property and I can get 4.5% with no buydown (4.125% with a buydown).

I think it is a good time for you to look into a refinance.

Swamp Chomp

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Re: Pay off mortgage before investing in stocks?
« Reply #3 on: June 09, 2016, 07:12:35 PM »
Well, the whole "pay off your mortgage early vs investing more"  is one of hte most vibrant topics on this forum.  Below are some lengthy threads where people argue passionately for and against.  There are literally dozens more if you use the search function.

Personally, I'm in the invest first club, particularly when your mortgage is under 5% like yours.
I will strongly urge you to first max out your IRA accounts ($11,000 between you and your spouse) plus contribute to any available HSA and 401k/403b/TSP plans before putting extra money towards your mortgage.  The tax-advantages of contributing to those make it almost a no brainer.

After that, it's a personal choice.  If you think past market returns will be similar to the future, then the math shows investing will come out ahead.  If you think that we are in for decades of poor market returns or if you have a psycological aversion to debt (e.g. it keeps you from sleeping at night or causes you undue stress) then pay down your mortgage faster.
A mortgage is a great inflation hedge should inflation rise in the future (we've been at ≤2% for the last decade, but historically it's been closer to 3% with forays into 5%+ territory).  Mortgage interest can be deducted in the US (but sometimes is less than the standard deduction), and I particularly get antsy whenever someone has most of their net worth tied up into their home (e.g. a lack of diversity).


http://forum.mrmoneymustache.com/share-your-badassity/real-cost-of-paying-off-mortgage/
http://forum.mrmoneymustache.com/welcome-to-the-forum/do-you-regret-paying-off-your-mortgage-early/
forum.mrmoneymustache.com/investor-alley/pay-of-mortgage-or-invest


Also good reading: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
edit:  fixed links

I had a feeling it was a hot topic and searched for some threads but obviously didn't search well enough.  These threads were great helping shed some light on the topic.  It's clearly a very personalized answer depending on a number of factors.  Do you know if MMM take a general position on this topic in any of his posts?

So, regarding the IRAs, does it make more sense to always max those out each year before putting anything in the stock market?  Because cant you just have your IRA funds invested in an index fund like MMM's favorite Vanguard one but gain tax advantages on the money by doing it through the IRA instead of through straight stocks?  That said, then you're limited on when you can withdraw the IRA funds and keep the tax benefit until age 59.5, right?

Gosh, I'm loving learning about all this stuff.

Mattzlaff

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Re: Pay off mortgage before investing in stocks?
« Reply #4 on: June 10, 2016, 04:27:13 AM »
I've been pondering this very same question myself,

My mortgage is my only "debt" at around ~350k.

I've got approx. 66k in retirement funds at 25. Which is light years ahead of my friends in similar positions as myself.

I have planned to invest 5k or more it depends a quarter into index funds and the rest of my savings(vice emergency) into the mortgage until the mortgage is paid off. It might not be what everyone would say to do but I like the idea. It's not aggressive either way but it suits me. I've no idea what my "date" is either and I'm some one who needs to be doing something who loves his job so I could potentially work forever yeehaw

But I like input from like minded people about this subject.

matchewed

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Re: Pay off mortgage before investing in stocks?
« Reply #5 on: June 10, 2016, 05:18:48 AM »
Mathematically if you expect a higher return on investment than your interest rate on your mortgage, go with investing.

If you choose to factor in other value judgements then it's up to you.

nereo

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Re: Pay off mortgage before investing in stocks?
« Reply #6 on: June 10, 2016, 05:48:29 AM »

I had a feeling it was a hot topic and searched for some threads but obviously didn't search well enough.  These threads were great helping shed some light on the topic.  It's clearly a very personalized answer depending on a number of factors.  Do you know if MMM take a general position on this topic in any of his posts?

MMM paid off his mortgages early, but only after maxing out his IRAs and 401(k) when he was working.  If I remember correctly they were saving ~70% of their income pre-retirement. 
he even wrote a blog post about the 'dilemma' you face: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Quote
So, regarding the IRAs, does it make more sense to always max those out each year before putting anything in the stock market?  Because cant you just have your IRA funds invested in an index fund like MMM's favorite Vanguard one but gain tax advantages on the money by doing it through the IRA instead of through straight stocks?  That said, then you're limited on when you can withdraw the IRA funds and keep the tax benefit until age 59.5, right?

OK... several things to clear up here.  An IRA is just one "bucket" where you can put your money.  You can invest in almost anything you like, from index funds, bonds, individual stocks, even FDIC insured savings accounts.  Personally I'd invest it into an index fund.  You should really create your own Investor Policy Statement (ISP) that will guide such decisions.
So by putting money into an IRA invested in a low cost index fund like the VTSAX (Total Market Fund) you are investing in the market, but with tax-advantaged money.
Second, you CAN access that money before age 59.5, penalty fee by a number of different ways.  Forum member forummm wrote a great sticky on the topic here.  The favorable tax treatment lasts as long as the money is kept in that account (though eventually the rules will force you to start taking distributions after age 70.5 for a tIRA; there is no limit currently on a ROTH).


I have planned to invest 5k or more it depends a quarter into index funds and the rest of my savings(vice emergency) into the mortgage until the mortgage is paid off. It might not be what everyone would say to do but I like the idea. It's not aggressive either way but it suits me.


This is certainly one strategy.  I always urge people to make sure they FIRST have an emergency fund and contribute to their tax-advantaged accounts.  After that it's personal preference.  If you want to split the difference that's fine.  However, I'd do some reading about how a mortgage is an inflation hedge (and therefor can be very useful in a period of high interest rates).

Spitfire

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Re: Pay off mortgage before investing in stocks?
« Reply #7 on: June 10, 2016, 10:31:03 AM »
I was on the "make extra payments" side until I read a post here that reminded me that paying down the mortgage doesn't change the payment due until you are done. If there is an emergency or you lose your job, you still have to write the same check.

I think a better option is to invest that money until you have enough for a full payoff. I also think that you should max out tax advantaged accounts first.

nereo

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Re: Pay off mortgage before investing in stocks?
« Reply #8 on: June 10, 2016, 11:30:51 AM »
I was on the "make extra payments" side until I read a post here that reminded me that paying down the mortgage doesn't change the payment due until you are done. If there is an emergency or you lose your job, you still have to write the same check.
Yup.  Also, even having a paid off house doesn't prevent eviction; if you fail to pay your property taxes for several months you can still get booted from your home. After 30 years (the length of many mortgages) the property taxes are often more than the original mortgage payment due to inflation and appreciation.

It's always a good idea to have accessible money (i.e. 'liquid assets') that can pay necessary expenses should you loose your job or otherwise have the SHTF. If you throw every dime you have at your mortgage you will be very vulnerable to any financial hiccup.  At the very least carry a reasonable E-fund and/or enough investments/savings to cover a prolonged job loss or illness.