Pay off mortgage OR invest in index fund?

[Andy]

Hello,

I have a dilemma on whatever I should pay off my mortgage or invest that money into stock market. Sitting on money in the bank account doesn’t feel right at all.

My situation:

• Outstanding mortgage $50 000 (15 years left, 3.5% interest rate, monthly payment $360)

• No other debts. Income $120k a year, spending around $30k of that.

• House value approx. $200k

•  $90k in the bank account

• Family of 4 (kids are 6 and 9)

I just feel that next collapse is around the corner and maybe paying off the house is a good move now?

Many thanks for any suggestions! :)


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[nereo]

We really need a sticky on this...

See Investment order


For extra credit, read some/all of the following for various arguments for/against.
https://forum.mrmoneymustache.com/investor-alley/pay-off-mortgage-principal-or-invest-in-the-market/
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/350/?topicseen
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/mortgage-payoff-club!!/
https://forum.mrmoneymustache.com/continue-the-blog-conversation/pay-down-the-mortgage-or-invest-more-a-winwin-question/
https://www.bogleheads.org/forum/viewtopic.php?t=233295

and some additional commentary from other bloggers:
https://www.financialsamurai.com/why-i-wont-pay-off-my-mortgage-until-i-retire/
https://www.bankrate.com/mortgages/why-i-wont-pay-off-my-mortgage-early/
https://www.daveramsey.com/askdave/home-buying-and-selling/why-should-i-pay-off-the-mortgage

On your particular situation:
Much will depend on your interest rate, your tax rate, whether you have any available space in tax-advantaged accounts (e.g. IRA, 401(k), HSA), and how much money you have in other savings.  If you have little additional savings there's no way I'd put almost my entire NW into my home.  If you've got several hundred $k in various accounts already invested... meh - I'd still hold onto a low rate mortgage but paying it off would certainly be better than letting that money languish in a checking account somewhere earning 1.x% .

[CheapScholar]

You didn’t tell us your savings.

But, anyway, if you think there’s a collapse around the corner I don’t see a problem with taking 50k from your 90k bank account and paying off the mortgage next week.  Heck, I’d probably do so.  Unless you have no retirement savings, which I highly doubt.

[wageslave23]

It would be hard not to get 3.5% over the next 10 yrs in the stock market, that would be one of the worst periods in history.  Considering inflation is about 2-2.5% that's about 1% real return.

[Car Jack]

What *I* would do.....and what I actually did do:

1) Get a HELOC.  This shores up any emergency fund money with a way to pull that mortgage payment right back out again.

2) Pay off your mortgage.

Now you don't have the $x,xxx monthly payment anymore.  What's that mean?  Well, you can shore up your emergency fund, you can max your 401k, Roth and other investments.  In short, you get to decide what you want to do.  Still squeamish about the market?  Buy some savings bonds.  A point that many here forget when they argue to pay/not pay the mortgage off is that it is really unusual to have the money to just pay it off.  You're way ahead of the majority of home owners.  Heck.....I see people over on Bogleheads talking about being FI and ready to retire with "only" a $500k mortgage.  I want to respond....."uh, excuse me....that's a freaking crap ton of debt right there.  Would you say "only" if you had a paid mortgage and $500k sitting on credit cards?". 

By the way, I had about the same amount on my mortgage when my stock options vested and I had an instant $70k plus another $30k I sent in for taxes.  Yah, that mortgage disappeared, my wife got a new car and I bought myself an HDTV (this was like 2001).  Any extra after that went to buy savings bonds.  I was a low risk investor, only doing 401k for anything related to the market.  I'm sure people will say "hey Jack....if only you had invested in yadda yadda instead of the mortgage, you'd have a million dollars today".  Ok, great.  As of this morning, I'm a few hundred away from $2.5M, so there's that.

[BlueHouse]

paying it off would certainly be better than letting that money languish in a checking account somewhere earning 1.x% .

if those are the choices then I'd pay it off. 

But I'd make darn sure to max out my tax-advantaged accounts first (even if you're just putting the money into the money market fund inside of a retirement account).

[HPstache]

$50K remaining, $120K income and only spending $30k/yr?  90K just sitting in a checking account?!  Pay that mortgage off in less than a year and be done with it!  /my opinion

[ice1717]

There are a few reasons I would pay off a mortgage, but this doesn't hit any of them.  Your payment is $360 and your interest rate is 3.5%.

1) Flexibility - Your payment is $360/month you don't gain much flexibility here.
2) Cost costs to reduce taxes and/or hit certain income thresholds for ACA when FIRE'd- your monthly payment is $360/month, which is $4320 annually.  At your current spending rate WITH the mortgage this isn't going to move the tax needle.  In fact you might need to pull the income to not be put on Medicaid.   
3) Dollar cost average into the market - if you really think the market is too high, the best play would be to dollar cost average monthly into the market over the next 2-3 years.  This covers you from being wrong (market goes up) and protects you in case you are right.  Again, your payment is $360/month, which is no where near DCAing $50k into the market over the next 2-3 years. 

I would just invest the $50k and be done with it, but if you are nervous about the market a more cautious play is to invest $1300-2000 of that money into the market every month for the next few years until it is all invested.

[surpasspro]

I'm in a similar situation actually, but my rate is 2.4%, so I'm holding tight as I can put it in a money market and earn just about that.  I think its more of a emotional thing paying it off than a financial one as the feeling of freedom will outweigh a percentage point here or there.  No one can predict the market, but it is late cycle so keep that in mind.  At 3.5 with the facts that you outlined, I'd just pay it off. 

[surpasspro]

Here's a video that may help: https://www.youtube.com/watch?v=AJSCT51Rfws

[Andy]

Thank you all for the insights/suggestions.

As for my other savings: I don't have anything... yep! I found the MMM just few years ago and basically for last couple of years was dealing with clearing stupid debt, getting rid of clown cars etc.

The $360 monthly payment - with my $10k monthly income - I don't feel that at all, BUT I'm a freelancer so my income is not as predictable as for people who have secure jobs.

The whole "pay off mortgage" thing is more of a physiological thing for me - this is last debt I have and I would like to pay it off for peace of mind. At the same time it feels stupid to do it while I could get better ROI in the markets, or even by simply buying some RE (I could buy an apartment for same $50k that would yield in rent $300 a month, after all the expenses).

I know that only I can make that decision, but it's great to hear from others - especially ones who have been in a similar situation.

[WSUCoug1994]

Since you are new here - at least to posting - you will see this is a topic that gets discussed a lot.  You have the people in the psychological/emotional camp and those in math/logic camp.  There is no right answer.  I am a math guy and the math is hard to argue as to what the right decision is but that is not the only factor.  There are also some unique tax situations that might impact that decision as well.

I am always amazed for a group of people who are so good at generally delaying gratification - I don't understand why paying off the mortgage seems to create this immediate emotional relief.  I digress.....

I am personally more worried that you have $90K in your bank account and your lack of tax advantaged investment accounts. 

[CheapScholar]

Thank you all for the insights/suggestions.

As for my other savings: I don't have anything... yep! I found the MMM just few years ago and basically for last couple of years was dealing with clearing stupid debt, getting rid of clown cars etc.

The $360 monthly payment - with my $10k monthly income - I don't feel that at all, BUT I'm a freelancer so my income is not as predictable as for people who have secure jobs.

The whole "pay off mortgage" thing is more of a physiological thing for me - this is last debt I have and I would like to pay it off for peace of mind. At the same time it feels stupid to do it while I could get better ROI in the markets, or even by simply buying some RE (I could buy an apartment for same $50k that would yield in rent $300 a month, after all the expenses).

I know that only I can make that decision, but it's great to hear from others - especially ones who have been in a similar situation.

I take back what I said about paying off the mortgage.  Unlike most on this forum I’m often ok with paying down mortgage debt, and I do so myself.  But in your case I think you should immediately start an IRA and make that your first priority.  I’m assuming you’re American and that because you freelance you don’t have access to a 401(k).

Of course, an IRA has a limit of $6,000.  So your spouse should also max out an IRA if they have earned income.  Not to say you can’t apply some money to the mortgage principal (you make good money) but you really need some investments. 

[surpasspro]

If you're going to do an IRA do a SEP-IRA since you're a freelancer and technically a sole proprietor of your own business.  You can contribute 25% of compensation or $56,000 for 2019.  That will reduce you're tax burden and allow you to contribute much more than a standard IRA.  Something to look into to see if you meet the qualifications.

[Chris @ Saturday Financial]

. . . But in your case I think you should immediately start an IRA and make that your first priority.  I’m assuming you’re American and that because you freelance you don’t have access to a 401(k).

Of course, an IRA has a limit of $6,000.  So your spouse should also max out an IRA if they have earned income.  Not to say you can’t apply some money to the mortgage principal (you make good money) but you really need some investments. 

Yes, definitely max all tax advantaged accounts before you consider paying down a mortgage balance. A married couple can max out two IRAs even if only one spouse has earned income.  That's $12,000 of tax-advantaged space per year.  https://www.nerdwallet.com/blog/investing/spousal-ira-what-it-is-and-why-you-should-open-one/

Also, a freelancer can open a solo 401k to get even more tax advantaged space.  (ETA: I missed that surpasspro mentioned a SEP-IRA.  Both a SEP-IRA and a solo 401k are good options for freelancers who want more tax advantage space.  I recommend researching the difference between the two and opening whichever fits your situation best.)

[nereo]

• Outstanding mortgage $50 000 (15 years left, 3.5% interest rate, monthly payment $360)
• No other debts. Income $120k a year, spending around $30k of that.
•  $90k in the bank account

Take $90K from the bank and pay off mortgage($50k) immediately tomorrow. Come back and thank me :) for sleeping better at night!

I sleep better at night knowing I've got a large sum of liquid investments.  Having a mortgage doesn't bother me.  I wouldn't encourage others to have an emotional reaction to what should be a financial decision.

[Chris @ Saturday Financial]

• Outstanding mortgage $50 000 (15 years left, 3.5% interest rate, monthly payment $360)
• No other debts. Income $120k a year, spending around $30k of that.
•  $90k in the bank account

Take $90K from the bank and pay off mortgage($50k) immediately tomorrow. Come back and thank me :) for sleeping better at night!

I sleep better at night knowing I've got a large sum of liquid investments.  Having a mortgage doesn't bother me.  I wouldn't encourage others to have an emotional reaction to what should be a financial decision.

Here's an "middle-view" plan that's optimized to minimize your taxes while still allowing you to pay off the mortgage in one lump sum in approximately one year.  This plan assumes a self-employed income of $120,000 per year, a family of 4, and only one spouse earning income:

-Open a solo 401k. You can contribute $19,000 pre-tax for your individual contribution, plus $24,000 for profit-sharing (20% of your net $120,000 self-employed income).
-Open IRAs for you and your spouse.  You can contribute $6,000, plus your spouse can contribute $6,000.
-Based on the above, your total available tax-advantaged space is $55,000.  By using this space, you reduce your federal income tax to $0.  (You'll still pay self-employment tax, but aside from that your federal tax liability would be $0.)
-Putting $55,000 of your $90,000 savings into tax advantaged accounts leaves you $35,000 to put into an earmarked savings account for mortgage payoff.
-Assuming you spend $30,000 per year, then after maxing out your tax-advantaged accounts you'll have just over $1,200 per month to add to your earmarked mortgage-payoff savings account.
-So in about 12 months, your earmarked savings will have increased to $50,000.  Then you can pay off your mortgage in one lump sum, without sacrificing any tax savings.

ETA: In reality you could pay off your mortgage faster than 12 months, assuming a steady income stream.  If you immediately earmark $55,000 into tax advantaged accounts, then all future 2019 monthly surplus can go straight into your earmarked mortgage payoff savings account.  You might even be ready to pay off the mortgage in one lump sum by the end of the year while still optimizing your taxes for 2019.

[ReadySetMillionaire]

Thank you all for the insights/suggestions.

As for my other savings: I don't have anything... yep! I found the MMM just few years ago and basically for last couple of years was dealing with clearing stupid debt, getting rid of clown cars etc.

The $360 monthly payment - with my $10k monthly income - I don't feel that at all, BUT I'm a freelancer so my income is not as predictable as for people who have secure jobs.

The whole "pay off mortgage" thing is more of a physiological thing for me - this is last debt I have and I would like to pay it off for peace of mind. At the same time it feels stupid to do it while I could get better ROI in the markets, or even by simply buying some RE (I could buy an apartment for same $50k that would yield in rent $300 a month, after all the expenses).

I know that only I can make that decision, but it's great to hear from others - especially ones who have been in a similar situation.

I am in the debt payoff crowd around here, but with no retirement savings, add me to the list of the other folks here stating that you need to take advantage of all tax-advantaged accounts first.

If you are a sole proprietor, look into starting a solo 401k. You can contribute a ton to that.

You should also look to invest the max in a Health Savings Account (amount you can contribute differs based on whether you're married).

Then and only then should you pay down your mortgage.

[BlueHouse]

(I could buy an apartment for same $50k that would yield in rent $300 a month, after all the expenses).

Really?  I don't think you have an apartment identified that would bring in this ROI off the bat.  If you do, let me know and I'll buy it.