Pay off mortgage, or invest?

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Pay off mortgage, or invest?

Postby DChen » Mon Dec 03, 2012 3:35 am

Hi guys! It's been a long time since I posted.

My dad is trying to figure out if he should pay $41,000 on his mortgage to remove the monthly mortgage insurance of $132.70 per month. This equates to about $1,592.4 per year.

The cost of the mortgage insurance is about 3.89% of $41,000. Additionally, the rate of his mortgage is 3.5%.

If my math is correct, by investing the $41,000 in low cost mutual funds, my dad should be making at least 7.89% per year on his investments just to break even.

Should he invest the $41,000, or pay off the mortgage instead?

My parents are not in any financial distress. Both are in their late 40's, employed and have really good, stable, jobs.
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Re: Pay off mortgage, or invest?

Postby DChen » Mon Dec 03, 2012 7:13 am

/bump
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Re: Pay off mortgage, or invest?

Postby Outer Marker » Mon Dec 03, 2012 7:31 am

You don't provide a lot of information to go on here, but generally paying the mortgage down to get rid of PMI is a very good idea. You get not only the guaranteed return of the mortgage rate, but also the guaranteed return of eliminating pmi, which make the combined rate of return on the pmi overage amount very high. I would certainly do this over additional taxable investing. If the mtge payoff would require you to forgo employer match in the 401K, I might think twice about it. Otherwise, pay it down.
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Re: Pay off mortgage, or invest?

Postby Beantown85 » Mon Dec 03, 2012 8:12 am

Based on the numbers given, your father would be getting a guaranteed 3.9% return on his 41k in PMI savings, in addition to the 3-4% interest rate he is paying on his mortgage. That kind of guaranteed return is unheard of in today's environment, no-brainer if he has the cash.
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Re: Pay off mortgage, or invest?

Postby Grt2bOutdoors » Mon Dec 03, 2012 8:17 am

Get rid of the PMI - the cost of the insurance is not deductible. It sounds like they have enough cash to pay it off, a sufficient e-fund and as you say, good stable employment. Pay it off.
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Re: Pay off mortgage, or invest?

Postby swyck » Mon Dec 03, 2012 8:45 am

You'd be paying off not just the PMI but also the interest on the mortgage at 3.9%. There are no risk free investments out there that will give you that kind of return at this time. It's also hard to quantify just plain being out of debt.

As long as they have their emergency fund well funded I say do it.
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Re: Pay off mortgage, or invest?

Postby dhodson » Mon Dec 03, 2012 9:00 am

definitely id pay off the loan enough to at least get rid of PMI as others have stated. In addition, he may be able to even refinance again to an even lower rate with little to no costs.
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Re: Pay off mortgage, or invest?

Postby stemikger » Mon Dec 03, 2012 3:17 pm

This is what I wrote in a thread almost identical to this one.

Not that I agree with everything Dave Ramsey says, but he is asked this question a lot and his standard answer is:

If you had a paid off house would you borrow money to put it in savings or invest. 100% people answer that question with a no and his response to them that it is the same thing.

I will be paying off my mortgage next month and I love the feeling of having no debt. I'd go that route if I was you.
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Re: Pay off mortgage, or invest?

Postby greg24 » Mon Dec 03, 2012 3:23 pm

Pay off the mortgage.
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Re: Pay off mortgage, or invest?

Postby Clearly_Irrational » Mon Dec 03, 2012 3:26 pm

I'm usually in favor of paying off the mortgage on your primary residence anyways, but especially since he's paying PMI he should pay it off.
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Re: Pay off mortgage, or invest?

Postby grabiner » Mon Dec 03, 2012 9:08 pm

DChen wrote:My dad is trying to figure out if he should pay $41,000 on his mortgage to remove the monthly mortgage insurance of $132.70 per month. This equates to about $1,592.4 per year.

The cost of the mortgage insurance is about 3.89% of $41,000. Additionally, the rate of his mortgage is 3.5%.

If my math is correct, by investing the $41,000 in low cost mutual funds, my dad should be making at least 7.89% per year on his investments just to break even.


Not quite, because the mortgage interest may be deductible. If he is in a 25% tax bracket and can deduct both the PMI (which depends on when he took out the loan) and the interest, then the 7.38% return from paying down the mortgage is 5.54% after tax. That's still a good deal because 5.54% risk-free is much better than anything you can get in a 401(k).
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Re: Pay off mortgage, or invest?

Postby greg24 » Tue Dec 04, 2012 10:10 am

grabiner wrote:
DChen wrote:My dad is trying to figure out if he should pay $41,000 on his mortgage to remove the monthly mortgage insurance of $132.70 per month. This equates to about $1,592.4 per year.

The cost of the mortgage insurance is about 3.89% of $41,000. Additionally, the rate of his mortgage is 3.5%.

If my math is correct, by investing the $41,000 in low cost mutual funds, my dad should be making at least 7.89% per year on his investments just to break even.


Not quite, because the mortgage interest may be deductible. If he is in a 25% tax bracket and can deduct both the PMI (which depends on when he took out the loan) and the interest, then the 7.38% return from paying down the mortgage is 5.54% after tax. That's still a good deal because 5.54% risk-free is much better than anything you can get in a 401(k).


That is true if he has already filled his deductions with other items, and the mortgage interest and PMI are above the standard deduction. Most likely, his effective rate is somewhere between 5.54 and 7.38.
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Re: Pay off mortgage, or invest?

Postby kenner » Tue Dec 04, 2012 10:17 am

greg24 wrote:Pay off the mortgage.


Most often, it is helpful to supply someone seeking help with a rational financial analysis of why it is better to "pay off the mortgage", especially when that is the precise question they are seeking to have answered.
Last edited by kenner on Tue Dec 04, 2012 10:21 am, edited 1 time in total.
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Re: Pay off mortgage, or invest?

Postby greg24 » Tue Dec 04, 2012 10:19 am

DChen wrote:Should he invest the $41,000, or pay off the mortgage instead?
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Re: Pay off mortgage, or invest?

Postby kenner » Tue Dec 04, 2012 10:24 am

greg24 wrote:
DChen wrote:Should he invest the $41,000, or pay off the mortgage instead?


Greg,

I'm not quibbling with your conclusion, just pointing out that some of us appreciate a rational explanation, not just a conclusion that we should accept as gospel.
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Re: Pay off mortgage, or invest?

Postby JupiterJones » Tue Dec 04, 2012 12:15 pm

Another vote for paying off the mortgage, and for the same reasons already mentioned--the amount they'd save on interest and PMI is higher than they are likely to get by investing it at a similar risk level.

But... other questions get raised here. Where is this $41,000 coming from? Do your parents have any other debt (car loans, etc.)? What about an emergency fund?


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Re: Pay off mortgage, or invest?

Postby Toons » Tue Dec 04, 2012 12:47 pm

Pay it off ,be done with it :happy
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Re: Pay off mortgage, or invest?

Postby kenner » Tue Dec 04, 2012 12:56 pm

Give someone a fish, they'll eat for one day. Teach someone to fish, they'll eat for a lifetime.
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Re: Pay off mortgage, or invest?

Postby Jerilynn » Tue Dec 04, 2012 6:08 pm

grabiner wrote:Not quite, because the mortgage interest may be deductible.


At least for now.

I'm thinking that maybe we should update the wiki to include a sentence saying that planning for a mortgage deduction for years into the future is not a for sure thing.
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Re: Pay off mortgage, or invest?

Postby Default User BR » Tue Dec 04, 2012 6:36 pm

Jerilynn wrote:I'm thinking that maybe we should update the wiki to include a sentence saying that planning for a mortgage deduction for years into the future is not a for sure thing.

Or one that says that planning for anything is not a sure thing.


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