nepenthegu wrote:I have a question that probably has been asked zillion times. We are in our early 30s and have a 30-year fixed mortgage at 4%. We have maxed 401K contribution and do not quality for Roth IRA. Beyond retirement contribution, we have some additional savings which, if all used to pay down mortgage, we will own our house free and clear in 15 years. Effectively, however, the annual return from paying down mortgage is merely 4%. And if we buy and hold index fund in taxable account, the annual return could be much higher. Did I miss any advantage of paying down mortgage as opposed to invest?
Bubbagump wrote:Note, a percentage point one way or the other can completely tip the scales.
Did I miss any advantage of paying down mortgage as opposed to invest?
Clivus1 wrote:1 Mortgage rate are at generational lows. As others have mentioned your effective return on paying down the mortgage is well south of 4% If it ever makes sense to invest rather than pay down the mortgage the time is now.
Clivus1 wrote:2 Inflation will dramatically shrink your mortgage payment as a fraction of income over 30 years.
Clivus1 wrote:3 Early savings rate plays a large role in portfolio success. It will be mathematically very challenging to "catch up" later with a more aggressive savings rate.
Clivus1 wrote:4 Ask yourself which is a stronger position in 15 years: Mortgage paid off or funds in the bank able to pay off the mortgage + residual balance.
Harold wrote:Clivus1 wrote:3 Early savings rate plays a large role in portfolio success. It will be mathematically very challenging to "catch up" later with a more aggressive savings rate.
Paying down a mortgage is savings. One is deferring consumption and getting a return equal to the mortgage rate. The mathematics of compounding works precisely the same for paying down debt as it does for investing.
Clivus1 wrote:4 Ask yourself which is a stronger position in 15 years: Mortgage paid off or funds in the bank able to pay off the mortgage + residual balance.
Part of your equation is missing. Since more risk is being taken, there could be a "- residual losses", which could quite obviously lead to a weaker position than a paid off mortgage.
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