Pay off mortgage, or invest?
Pay off mortgage, or invest?
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.
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?
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?
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?
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.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Pay off mortgage, or invest?
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.
As long as they have their emergency fund well funded I say do it.
Re: Pay off mortgage, or invest?
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.
Re: Pay off mortgage, or invest?
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.
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.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Re: Pay off mortgage, or invest?
Pay off the mortgage.
- Clearly_Irrational
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Re: Pay off mortgage, or invest?
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.
Re: Pay off mortgage, or invest?
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).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.
Re: Pay off mortgage, or invest?
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.grabiner wrote: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).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.
Re: Pay off mortgage, or invest?
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.greg24 wrote:Pay off the mortgage.
Last edited by kenner on Tue Dec 04, 2012 9:21 am, edited 1 time in total.
Re: Pay off mortgage, or invest?
DChen wrote:Should he invest the $41,000, or pay off the mortgage instead?
Re: Pay off mortgage, or invest?
Greg,greg24 wrote:DChen wrote:Should he invest the $41,000, or pay off the mortgage instead?
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?
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?
JJ
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?
JJ
"Stay on target! Stay on target!"
Re: Pay off mortgage, or invest?
Pay it off ,be done with it
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Pay off mortgage, or invest?
Give someone a fish, they'll eat for one day. Teach someone to fish, they'll eat for a lifetime.
Re: Pay off mortgage, or invest?
At least for now.grabiner wrote: Not quite, because the mortgage interest may be deductible.
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.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Pay off mortgage, or invest?
Or one that says that planning for anything is not a sure thing.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.
Brian