Pay off my mortgage or invest more each month?

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Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 3:08 pm

I'm 28 and owe about 207 k on my home, interest rate of 3.875%. Current payment is 1011 a month (not including escrow). I have been posting on here a little about investing in a taxable account, but I think my wife and I have decided to pay off our house quicker.

We have about $1000 extra each month that we are looking to either invest or add on to our principal each month for our home. We built this home in Nov. 2011, and plan on living here through retirement barring any unforeseen circumstances. We built the home really nice, and didn’t build it like a starter home or one that you would flip for a profit.

I have been doing some calculations and trying to figure out the best option: We currently pay a double payment every February which brings our pay off date to Mar 3038 (from Nov 2041) and saves about 20k in interest over the life of the loan.

Option 1: If we add the full 1000/month to our principal our pay off date will be Jun 2023, and will save an additional 72k in interest over 10 years.

Option 2: If we add 500/month to principal pay off will be Aug 2027, and we will save 53k in interest. In this option, we will invest the other 500/month in her 401k most likely (I currently max mine out, but she doesn’t have a lot of good funds to choose from and hasn’t been open to maxing her account as she makes much less than I do).
-----The $500/month invested over 10 years should bring about 21k in profit at 6% growth (30k at 8%).

Option 3: Invest the full 1000/month. This should bring about 42k in profit at 6% over 10 years (60k at 8%).

To me, options 1 and 2 make much more sense that option 3. I have to think that I’m most likely going to average about 6% over the next 10 years, so investing the full amount would cost be about 30k. Option 1 is good because I save a guaranteed amount, but option 2 has the ability to save me about 50k, plus I could grow an extra 20-30k, which would put me ahead over a 10 year time frame.

Sorry, for the long thought process, what do you think about this situation?
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Re: Pay off my mortgage or invest more each month?

Postby ourbrooks » Thu Jun 27, 2013 3:24 pm

1. Search for and read the other threads in this forum on the same topic.

2. This is really a decision about risk, not about absolute returns. At age 28, it's highly likely that you will move. The move may occur because of a corporate transfer or the need for a new job so you may not have much choice about when the move happens. Suppose it happens when the stock market is down. How will your mortage application look?

Although you won't be there any time soon, owning a house outright is a big negotiating advantage in a tight real estate market. As a seller, which offer is more attractive, one from someone who only has to sell their own house to buy yours or someone who has to sell their own house AND get a mortgage? If you're at all in a hurry to sell, you may be wise and willing to accept a lower price in exchange for being able to sell right now, while the market is at its hottest.
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Re: Pay off my mortgage or invest more each month?

Postby Toons » Thu Jun 27, 2013 3:38 pm

Option 2: 500 towards principal and invest 500 to get things going. :happy
Adjust accordingly as time goes by.
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Re: Pay off my mortgage or invest more each month?

Postby Watty » Thu Jun 27, 2013 4:02 pm

A few things to consider;

1) If you are not maxing out all your tax preferred accounts 401K, IRA, Roth, college savings, etc. than those are almost always a better choice than paying down the mortgage early.

2) Search the boards and Google "recast mortgage". That is basically where you save up a significant amount and then get your lender to recalculate your monthly mortgage payment for a small fee. For example of you save up 10% of your loan balance and get it recast then your mortgage payment would decrease by 10%, but more importantly the length of the mortgage will stay the same. This will be greatly to your advantage if interest rates get higher than your mortgage rate.

3) If your home equity is more than maybe 20 or 30% of your net worth then I would be concerned that building up your other investments might be a better choice for diversification.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 4:30 pm

Watty wrote:A few things to consider;

1) If you are not maxing out all your tax preferred accounts 401K, IRA, Roth, college savings, etc. than those are almost always a better choice than paying down the mortgage early.

2) Search the boards and Google "recast mortgage". That is basically where you save up a significant amount and then get your lender to recalculate your monthly mortgage payment for a small fee. For example of you save up 10% of your loan balance and get it recast then your mortgage payment would decrease by 10%, but more importantly the length of the mortgage will stay the same. This will be greatly to your advantage if interest rates get higher than your mortgage rate.

3) If your home equity is more than maybe 20 or 30% of your net worth then I would be concerned that building up your other investments might be a better choice for diversification.


The 500/500 option will easily allow me to max out mine and my wife's Roth, and I'm currently maxing my 401k as of this year. My wife refuses to max out her 401 as she said it just takes too much out of her check, and even though it all goes in the same pot she just isn't going for it right now. She puts in about 5k, but her company has no match which is awful.

The recast doesn't really make sense as I'm trying to pay off my remaining 28 years much quicker, unless I don't understand it.

Our equity in our home is about 30% of our net worth, so it's at the upper end of your limit.
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Re: Pay off my mortgage or invest more each month?

Postby Default User BR » Thu Jun 27, 2013 5:49 pm

I'm generally a believer in holding onto low-rate fixed debt.


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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 6:13 pm

Default User BR wrote:I'm generally a believer in holding onto low-rate fixed debt.


Brian


Just hard for me to hold on when I know I can save over 50k by increasing my principal payment.
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Re: Pay off my mortgage or invest more each month?

Postby stevewolfe » Thu Jun 27, 2013 6:18 pm

Personally I'd pay off the house. But a fall back would be $500 / $500 option.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 6:30 pm

stevewolfe wrote:Personally I'd pay off the house. But a fall back would be $500 / $500 option.


Steve what would be your reasoning? Would it just be to be clear of the debt?
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Re: Pay off my mortgage or invest more each month?

Postby lhl12 » Thu Jun 27, 2013 6:41 pm

ugaDAWGS09 wrote:
Default User BR wrote:I'm generally a believer in holding onto low-rate fixed debt.


Brian


Just hard for me to hold on when I know I can save over 50k by increasing my principal payment.


Even if you could make $100k in extra investment returns over the same period?
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 6:48 pm

lhl12 wrote:
ugaDAWGS09 wrote:
Default User BR wrote:I'm generally a believer in holding onto low-rate fixed debt.


Brian


Just hard for me to hold on when I know I can save over 50k by increasing my principal payment.


Even if you could make $100k in extra investment returns over the same period?


Don't see that being likely at all. Investing the 1000/month with an 8% return puts me about 60k in investment return. I know getting more than 8% is possible, but that is a good figure with high expectations. I was trying to base it on 6% returns.
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Re: Pay off my mortgage or invest more each month?

Postby stevewolfe » Thu Jun 27, 2013 6:50 pm

ugaDAWGS09 wrote:Steve what would be your reasoning? Would it just be to be clear of the debt?


Yes, that's the primary reason. It's a risk management / psychological thing for me. Also, inflation is quite low and 3.875% is a nice guaranteed rate of return right now for fixed income money. Not to mention, I never liked paying a dollar to the bank to save 25 cents (or so) on taxes. :beer
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Re: Pay off my mortgage or invest more each month?

Postby ourbrooks » Thu Jun 27, 2013 6:54 pm

lhl12 wrote:
ugaDAWGS09 wrote:
Default User BR wrote:I'm generally a believer in holding onto low-rate fixed debt.


Brian


Just hard for me to hold on when I know I can save over 50k by increasing my principal payment.


Even if you could make $100k in extra investment returns over the same period?


That's not by any means guarenteed, although the odds are high. There have, in fact, been some 10 year periods over which stocks have lost money.
It's that old "risk" thing again. A lot of people would feel more comfortable in higher risk investments if they knew that their house was relatively safe.
If the effect of having a mortgage is to make you take lower risks in your other investments, then holding the mortage isn't necessarily going to increase your total returns.

There are some other considerations as well. If you have a mortage, then you need to put more funding into your highly liquid, low return emergency fund, to cover mortage payments if you lose your job.

In my earlier post, I already mentioned the benefits of paid off mortgage when making offers on real estate.
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Re: Pay off my mortgage or invest more each month?

Postby Grt2bOutdoors » Thu Jun 27, 2013 7:31 pm

Default User BR wrote:I'm generally a believer in holding onto low-rate fixed debt.


Brian


Low rate fixed debt - is a 1.99% home equity loan taken out to pay down the original mortgage. Save on interest cost, invest or save to pay off home equity loan, interest is tax deductible.

3.875% pre-tax costs more than 30 T-bond yields or just about even with Tax Exempt Long Term Bond, for one who holds a 50/50 portfolio, why not swap out the 50% in traditional fixed income and pay down mortgage with that portion, remainder can be invested in Total Stk Market Index or if OP want's to really aim for shooting the lights out use Total Stk, Total Intl, SV index.
Last edited by Grt2bOutdoors on Thu Jun 27, 2013 7:34 pm, edited 1 time in total.
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Re: Pay off my mortgage or invest more each month?

Postby stan1 » Thu Jun 27, 2013 7:31 pm

My suggestion is 2, although that's not what we did. We started with 3 until salaries had grown to the point where we were maxing out all tax advantaged accounts and had accumulated six figure taxable accounts. Then we did 2 for about 10 years. Then finally we paid off the mortgage with some money from our taxable investments.
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Re: Pay off my mortgage or invest more each month?

Postby Rebecca_S » Thu Jun 27, 2013 9:31 pm

How likely is it that your wife will switch jobs in the next few years? Even the worst 401k is generally good to fund if you won't be in the same job for more than 10 years.
We paid off the mortgage, but only after maxing out both 401ks and the Roths (in years we were eligible). I would leave the taxable investing for last.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 10:09 pm

Stan1, I like how you approached the whole situation. You build up substantial retirement accounts before you decided to dump a bunch of extra money on your mortgage. However, I think I am so far agreeing with your opinion that number 2 (500/500) is probably the best route for me. Will save me 50k in interest, plus allow an extra 6k in investments per year.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Thu Jun 27, 2013 10:10 pm

Rebecca_S wrote:How likely is it that your wife will switch jobs in the next few years? Even the worst 401k is generally good to fund if you won't be in the same job for more than 10 years.
We paid off the mortgage, but only after maxing out both 401ks and the Roths (in years we were eligible). I would leave the taxable investing for last.


She shouldn't be switching her job anytime soon unless something happens to her company.
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Re: Pay off my mortgage or invest more each month?

Postby wander » Thu Jun 27, 2013 10:23 pm

It doesn't matter. Our mortgage interest rate was higher than yours a little bit but I decided to invest the extra money.
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Re: Pay off my mortgage or invest more each month?

Postby Watty » Thu Jun 27, 2013 10:47 pm

The recast doesn't really make sense as I'm trying to pay off my remaining 28 years much quicker, unless I don't understand it.



The big difference is in a few years from now if interest rates get significantly higher than your mortgage interest rate. For example if you can get 6% in a CD or Money market account five years from now then you would obviously want to pay off your mortgage slowly and invest as much as possible at the higher interest rate.

Doing a recast does not mean that you can't still pay off the mortgage earlier, it just makes it so that you do not have to.
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Re: Pay off my mortgage or invest more each month?

Postby Falco » Fri Jun 28, 2013 6:11 am

Great advice to chew on so far and here is another twist: tax deductible mortgage interest. Depending on your tax bracket the net interest is actually much lower.

Personally, I would max out all tax deferred before paying to the low rate tax deductible mortgage.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Fri Jun 28, 2013 9:47 am

Yeah I need to figure out exactly how much the mortgage interest saves on my taxes, I'm in the 28% federal tax bracket and live in GA.
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Re: Pay off my mortgage or invest more each month?

Postby Dandy » Fri Jun 28, 2013 10:21 am

Option 2 seems best to me. You will have your house paid off at an early age and will have a healthy retirement account since you are already maxing out your 401k and spouse is also contributing. As income increases you can always increase retirement savings or accelerate the mortgage payoff. Note any additional 401k contributions won't reduce your take home by that amount -- it will reduce your income and therefore taxes. So, a $500 extra 401k contribution should only reduce your take home by about $360 if you are in the 28% tax bracket ($500 - $140 = $360). So, you could actually pay down the mortgage by $640 a month and add $500 a month to your retirement investments.
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Re: Pay off my mortgage or invest more each month?

Postby ugaDAWGS09 » Fri Jun 28, 2013 10:29 am

Dandy wrote:Option 2 seems best to me. You will have your house paid off at an early age and will have a healthy retirement account since you are already maxing out your 401k and spouse is also contributing. As income increases you can always increase retirement savings or accelerate the mortgage payoff. Note any additional 401k contributions won't reduce your take home by that amount -- it will reduce your income and therefore taxes. So, a $500 extra 401k contribution should only reduce your take home by about $360 if you are in the 28% tax bracket ($500 - $140 = $360). So, you could actually pay down the mortgage by $640 a month and add $500 a month to your retirement investments.


That's a great idea, I have never really thought about it like that. That's why I like to come here for great ideas like this. Thanks so much.
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Re: Pay off my mortgage or invest more each month?

Postby Default User BR » Fri Jun 28, 2013 11:07 am

Grt2bOutdoors wrote:Low rate fixed debt - is a 1.99% home equity loan taken out to pay down the original mortgage. Save on interest cost, invest or save to pay off home equity loan, interest is tax deductible.
3.875% pre-tax costs more than 30 T-bond yields or just about even with Tax Exempt Long Term Bond, for one who holds a 50/50 portfolio, why not swap out the 50% in traditional fixed income and pay down mortgage with that portion, remainder can be invested in Total Stk Market Index or if OP want's to really aim for shooting the lights out use Total Stk, Total Intl, SV index.

There is no hedging value to that method. If rates go up next year, you can't get that money you paid down back out. A major reason that I like low-rate debt, and I do still consider that to be a good rate, is hedging against inflation and future rate increases. I also think it's cheap leverage for investing. Yes, you might buy some bonds that have rates worse than that right this moment.


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Re: Pay off my mortgage or invest more each month?

Postby NorCalDad » Fri Jun 28, 2013 11:20 am

ugaDAWGS09 wrote:
Watty wrote:A few things to consider;

1) If you are not maxing out all your tax preferred accounts 401K, IRA, Roth, college savings, etc. than those are almost always a better choice than paying down the mortgage early.

2) Search the boards and Google "recast mortgage". That is basically where you save up a significant amount and then get your lender to recalculate your monthly mortgage payment for a small fee. For example of you save up 10% of your loan balance and get it recast then your mortgage payment would decrease by 10%, but more importantly the length of the mortgage will stay the same. This will be greatly to your advantage if interest rates get higher than your mortgage rate.

3) If your home equity is more than maybe 20 or 30% of your net worth then I would be concerned that building up your other investments might be a better choice for diversification.


The 500/500 option will easily allow me to max out mine and my wife's Roth, and I'm currently maxing my 401k as of this year. My wife refuses to max out her 401 as she said it just takes too much out of her check, and even though it all goes in the same pot she just isn't going for it right now. She puts in about 5k, but her company has no match which is awful.

First, do not pay anything extra toward your mortgage before maxing out your Roth, so at the very least do the 500/500 option.

Second, it's hard for me to understand why your wife is afraid to have too much out of her paycheck via 401k deduction while you are contemplating what to do with an extra $1,000/month. Regardless of the match situation, I think you should try to convince her to max out her 401k before you devote the remaining $500/month to paying down your mortgage.

I agree with Watty and Brian here - max out tax advantaged investment space first. Then the only question should be whether to invest the rest in taxable or in paying down your mortgage.
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Re: Pay off my mortgage or invest more each month?

Postby Deacon Mike » Fri Jun 28, 2013 1:07 pm

ugaDAWGS09 wrote:Option 1: If we add the full 1000/month to our principal our pay off date will be Jun 2023, and will save an additional 72k in interest over 10 years.

Option 2: If we add 500/month to principal pay off will be Aug 2027, and we will save 53k in interest. In this option, we will invest the other 500/month in her 401k most likely (I currently max mine out, but she doesn’t have a lot of good funds to choose from and hasn’t been open to maxing her account as she makes much less than I do).
-----The $500/month invested over 10 years should bring about 21k in profit at 6% growth (30k at 8%).

Option 3: Invest the full 1000/month. This should bring about 42k in profit at 6% over 10 years (60k at 8%).

To me, options 1 and 2 make much more sense that option 3. I have to think that I’m most likely going to average about 6% over the next 10 years, so investing the full amount would cost be about 30k. Option 1 is good because I save a guaranteed amount, but option 2 has the ability to save me about 50k, plus I could grow an extra 20-30k, which would put me ahead over a 10 year time frame.

Sorry, for the long thought process, what do you think about this situation?


Not sure how you're figuring your numbers, but option 3 is the best option financially, assuming either a 6 of 8 percent return.
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Re: Pay off my mortgage or invest more each month?

Postby Watty » Fri Jun 28, 2013 6:13 pm

ugaDAWGS09 wrote:
Dandy wrote:Option 2 seems best to me. You will have your house paid off at an early age and will have a healthy retirement account since you are already maxing out your 401k and spouse is also contributing. As income increases you can always increase retirement savings or accelerate the mortgage payoff. Note any additional 401k contributions won't reduce your take home by that amount -- it will reduce your income and therefore taxes. So, a $500 extra 401k contribution should only reduce your take home by about $360 if you are in the 28% tax bracket ($500 - $140 = $360). So, you could actually pay down the mortgage by $640 a month and add $500 a month to your retirement investments.


That's a great idea, I have never really thought about it like that. That's why I like to come here for great ideas like this. Thanks so much.


It is even better when you look at the state taxes.

With state taxes you are in about the 33% marginal tax bracket so to pay down it down by $1000 a month that would take $1,500 in income to pay $500 in taxes and have $1000 left in take home pay.

To split it 50/50 you could contribute $750 to the 401K and then pay $250 in taxes to pay it down by $500.
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Re: Pay off my mortgage or invest more each month?

Postby KGOLDEN04 » Sat Jun 29, 2013 7:47 am

Do both, that is what I am doing. This is what I do. On my mortgage I pay bi weekly through deductions from my checking account. By paying bi weekly that alone takes off 7 years.(Verify this with online mortgage calculator) What you are actually doing is making one additional payment per year. I also add $330 each month. That will take off an additional 7 years. Plus in the beginning I applied some tax returns to my mortgage. I am paying off my mortgage in 13 years instead of 30. I have 4 years left. Standard rule I have heard, every year you can take off the back end is 10,000 less in total price you pay. Some people may say you need the mortgage interest deduction and maybe you do. After my house is paid for, the house payments start to go into my Vanguard account.

On finances. I max out my Roth IRA each year. In my 401k I max out company matching. My 401k is laden with loads and fees. 401k still have a lot of hidden fees that they do not have to report. Up to 15 I believe.I have 1 Vanguard fund in it and it is VINIX. So I put 100% in that. .04% Expense Ratio but a lot of other fees are added by carrier. I also have a Traditional IRA I no longer invest in. One day, I will convert it over to Roth.When it is advantageous. I also have a taxable that I use as an emergency fund and it is also a car fund. After I paid off my car, I made 6 years of car payments in my VG account. But I liked my car so much I decided not to go buy a new car. I will just let those funds compound.
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Re: Pay off my mortgage or invest more each month?

Postby vtanzi » Sun Jun 30, 2013 9:54 am

I would do both---I did that for the past 5 years. Paid off our mortgage in March and I don't care what anyone says having that new free cash and a paid off mortgage is very liberating. Remember when you invest there is no guarantee if it will go up or down but when you pay off a mortgage its certain you are paying off the mortgage.
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Re: Pay off my mortgage or invest more each month?

Postby dharrythomas » Sun Jun 30, 2013 9:26 pm

We paid off the mortgage early recently. Once we get the youngest kid off the payroll (DEC 13), she's taking 2/3 to improve our standard of living and I'm taking 1/3 to invest.

We've been maxing Roth IRAs and making significant contributions to my TSP (but not maxing). It's probably not the best financial move if you put it into a Monte Carlo simulation, but paying off debt lowers risk. It's hard to get into a situation where you go to zero or below if you don't owe money.

Good Luck

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Re: Pay off my mortgage or invest more each month?

Postby sambb » Sun Jun 30, 2013 9:55 pm

Investing the money cannot be well compared to paying off the mortgage.
Investing = risk of a variety of sorts
Paying off mortgage = completely risk free return (guaranteed return)

Putting the money into a money market fund is the only comparison to paying off the mortgage.


personally, I would consider investing half and payoff with the other half. = nice middle of the road philosophy that accepts the pros and cons of both sides.
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Re: Pay off my mortgage or invest more each month?

Postby grabiner » Sun Jun 30, 2013 11:20 pm

sambb wrote:Investing the money cannot be well compared to paying off the mortgage.
Investing = risk of a variety of sorts
Paying off mortgage = completely risk free return (guaranteed return)

Putting the money into a money market fund is the only comparison to paying off the mortgage.


The fair comparison is putting the money into Treasury bonds, because Treasury bonds have a guaranteed future value. You can buy a Treasury bond portfolio which will pay $12,000 per year for the next 25 years, and that portfolio would be guaranteed to cover the mortgage payments as they come due. (The value of the bonds will change over time, but so will the value of your mortgage if your lender wants to sell it; a low-rate mortgage is worth much less to the bank than the principal value.)

If you would be investing in a taxable account, you would use municipal bonds, which are an almost-fair comparison; they have a small credit risk.
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Re: Pay off my mortgage or invest more each month?

Postby inbox788 » Mon Jul 01, 2013 7:11 pm

1) Your and other's reasoning for choosing #2 is faulty. It's saying you don't know the answers and you're just betting on both horses. Why not 60/40 or 40/60? Which way and why? I'd argue that either 60/40 or 40/60 is a better choice than 50/50 if you could spell out the criteria.
2) Your math is wrong. You're comparing exponential interest rates, variable end terms from accelerated payments to a 10 year fixed investment. Saving 50k on less future costs in interests over 30 years vs 23 years on a mortgage isn't the same as saving 50k in 10 years by making monthly savings deposits and interest (ROI) at a 10 year point. NPV with assumptions on interests is the way to make apples to apples comparisons.
3) Once you have some apples to apples comparisons, then you need to question your assumptions. Is 8% too aggressive? 6% too conservative? Don't forget to make tax adjustments on both sides of the comparison. Then you can answer the question as to whether you're taking on too much risk or too little.
4) Just look at the first month $1000 extra payment on mortgage at just less than 4%, and likely 3% after taxes, so that $1000 extra mortgage principal saves you about $30 the first year. If you invest it and get a 6% return and it's 4% after taxes, you make $40. You could make $50, $60 or lose all plus more, but over the years, you are saying you expect 6%, so $40 average per year is reasonable. You'd make an extra $10/year average for that first payment. As time advances, if you don't change assumptions, only the time duration changes, so you really want to allocate it all to investment, unless you can't tolerate the risk. If that's the case, you should allocate it all towards earlier repayment. So, it's really a question of 4% (pretax) fixed return vs riskier 6% expected return.
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