Author Topic: Paying home down vs. investing.  (Read 2141 times)

moosejaw

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Paying home down vs. investing.
« on: August 29, 2016, 05:46:13 PM »
Hi All...

I've been a MMM subscriber for a while, and my wife and I follow the principles decently.

We recently moved to a home that was in a superior school district for our children, and we have a slightly larger owed amount on the house, but pay an equal or lesser amount each month due to the 2.875% interest rate we received.

The owed amount on the house is $645,000 with a value of about 1.2 million.  I would prefer to pay the principle down to simply have it more secured, and allow our current payment to pay down even more principle each month.

I understand the concept of investing wisely, and that our money might be able to earn 8-16% historically in the market, but does anyone see a smart and/or bright side to paying the principle down faster?


NoNonsenseLandlord

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Re: Paying home down vs. investing.
« Reply #1 on: August 29, 2016, 06:00:35 PM »
I do both.  I pay ~$4K extra on my mortgage, and invest ~$8K each month.  My interest rate is 5.375%

You never know what the market will do.  In a bad or flat year, you will be glad you paid on your mortgage.

moosejaw

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Re: Paying home down vs. investing.
« Reply #2 on: August 29, 2016, 06:06:54 PM »
Thanks for the reply.   I like your style and will likely mimic the same percentages as you.  However, in your example, the idea of paying 12k/mo extra on your house and having no house payment in a few years sounds pretty awesome.

NoNonsenseLandlord

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Re: Paying home down vs. investing.
« Reply #3 on: August 29, 2016, 06:11:15 PM »
Thanks for the reply.   I like your style and will likely mimic the same percentages as you.  However, in your example, the idea of paying 12k/mo extra on your house and having no house payment in a few years sounds pretty awesome.

Thank you for the complements.  It is actually a rental mortgage.  I am trying to get rid of one more.  I will only have two mortgages left, the mortgage payments will total less than 10% of my rents.

moosejaw

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Re: Paying home down vs. investing.
« Reply #4 on: August 29, 2016, 07:08:49 PM »
Great job!  This is our main and only residence, so our income has to make up the difference. However moving to this area increased my wife's pay 50% which gives us a small windfall each month.

Prior to this we had a MIL rental in our main home which allowed us to build some significant equity over 10 years of ownership.  Due to the potential issues with owning an older home I decided to not carry on the risk with it as a full time rental.

bpleshek

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Re: Paying home down vs. investing.
« Reply #5 on: August 30, 2016, 06:57:34 AM »
This seems to be a question about risk.  If you pay down the mortgage, you're actually investing at a rate equal to the interest rate on the property.  Do you have one income or two?  Could you pay the mortgage if you lost one of the incomes?  If the answer is no, then you may have too much risk leaving the mortgage around just to try to get a few more percentage points.  Keep in mind that even though the market around 10-12%, adjusted for inflation isn't that around 8%?  But even assuming that the rates over time are high, that's picking a start and an end point and doing simple work math on it.  If you have 100k invested and the value drops by 25% in one year, the next year it has to raise 33% just to get back to even.  The two year aver might appear to be +8%, but your portfolio might not reflect a +8% return over the two years. 

But putting that aside, let's say you get an 8% return.  Depending on your tax bracket, that 8% might be 6% after taxes.  It is true that 6% beats 2.875%, but that's probably variable and might go up at some point.  In any case, you're looking at a 3.125% increase in your rate of return at a higher risk(someone loses their job) in this example.  You have to determine for yourself your risk tolerance and whether you can withstand a job loss for a few months(or longer) and still make the minimum mortgage payments.  If not, I'd suggest just killing off the mortgage.

Just a question.  If you had a payed off house, would you take out a mortgage to do some investing in the market?  It's kind of the same question, but in reverse.  If your answer is no, then you are answering your question.

Brian

moosejaw

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Re: Paying home down vs. investing.
« Reply #6 on: August 30, 2016, 02:55:00 PM »
The 2.875 is fixed. 

I think there is a comfort level in my mind, somewhere around 400k in mortgage that I want to be at before I speed up investing.  We have two incomes, and more than likely either one could pay the mortgage currently but our expenditures would have to decrease.


JumpInTheFIRE

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Re: Paying home down vs. investing.
« Reply #7 on: August 30, 2016, 03:42:48 PM »
Even at a fairly conservative asset allocation (i.e. 50%/50% stocks/bonds) you should easily be able to get better returns than the paltry interest rate on your mortgage and if a financial catastrophe happened you still have that money available.  Mathematically, it makes more sense to invest the money rather than paying down the mortgage.  Of course there are exceptions, like paying extra to get rid of PMI, but for most people in this interest rate environment investment will net them more.  Since on a loan interest works in your favor (payments you make in 10 years will be in 2026 dollars which are worth less) it makes sense to defer payment as long as possible to take advantage of that.  Psychologically, it can be a tossup so obviously it depends on each person's perspective on which way is "best" but with the amount of equity you already have (which can provide a good emergency fund) I would certainly invest rather than paying extra principal.

MDM

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Re: Paying home down vs. investing.
« Reply #8 on: August 30, 2016, 05:41:37 PM »
Keep in mind that even though the market around 10-12%, adjusted for inflation isn't that around 8%?
...let's say you get an 8% return.  Depending on your tax bracket, that 8% might be 6% after taxes. 

It is true that 6% beats 2.875%, but that's probably variable and might go up at some point.  In any case, you're looking at a 3.125% increase in your rate of return at a higher risk(someone loses their job) in this example.

Good things to consider, but one needs to consider the same effects on the mortgage as on the market.

If adjusting for inflation takes a 10-12% return down to 8%, that's ~3% inflation.  Despite being lower in recent years, 3% is a not unreasonable assumption.

Assuming 3% inflation, your 2.875% loan is already "saving" you 0.125%.  A fixed rate mortgage loan is a good hedge against high inflation - the higher the inflation, the happier you would be to retain the 2.875% loan rate.

There is also a good chance that you are deducting at least some part of your mortgage interest payments for federal tax purposes, making the effective cost even lower than 2.875%.

The "would you take out a mortgage if you didn't have one?" question is reasonable.  On the flip side, if you suspect the market will drop and 2.875% is better than a loss, are you willing to go short on the market?  If the answer is no....

You'll only know the "correct" decision in hindsight, so it's a guess either way.  If history is any guide, you will do better with that low a rate to pay only the minimum on the mortgage.

clarkfan1979

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Re: Paying home down vs. investing.
« Reply #9 on: September 05, 2016, 09:59:36 PM »
I don't see a lot of value in paying down a mortgage at 2.875%, but that is just my opinion. If was 5% or 6%, it would be a different story. The house seems pretty secure at the current equity rate. Either option is a good choice.