Invest or pay off mortgage?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
ACA
Posts: 9
Joined: Wed Nov 29, 2017 7:51 am

Invest or pay off mortgage?

Post by ACA » Wed Nov 29, 2017 7:58 am

Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?

Jack FFR1846
Posts: 5857
Joined: Tue Dec 31, 2013 7:05 am

Re: Invest or pay off mortgage?

Post by Jack FFR1846 » Wed Nov 29, 2017 8:51 am

You're going to find camps that say "never pay off the mortgage" that even includes radio show host Ric Edelman. The reason is that you can realize more gain by investing than the savings from putting the money towards the mortgage. They also say that if you put the money into the mortgage, you don't have it in case of an emergency.

The other camp says that the future is unknown. If we hit a downturn, your market investment is now wasted and you still have that big debt. Putting extra money towards the mortgage gives you a guaranteed, easily calculated return. And if you are worried that you won't have access to that money, take a HELOC before you pay down the mortgage.

Personally, I paid off my mortgage as the last of my debts as part of an avalanche strategy. I was extremely risk averse and wanted a guaranteed return on my investment. I had the HELOC in place and paid off the house. That was about 15 or so years ago and today, I'm sitting on a 2 comma portfolio not counting the house. I paid off my mortgage right about your age, actually.

Neither way is wrong. And because of the HELOC, neither way is irreversible. The fact that you're putting extra money towards investing puts you ahead of the average person by a mile.
Bogle: Smart Beta is stupid

ThePrince
Posts: 95
Joined: Sun Aug 20, 2017 9:15 pm

Re: Invest or pay off mortgage?

Post by ThePrince » Wed Nov 29, 2017 8:55 am

ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
Pay it off.

guitarguy
Posts: 1745
Joined: Mon Dec 20, 2010 4:10 pm

Re: Invest or pay off mortgage?

Post by guitarguy » Wed Nov 29, 2017 9:03 am

I'd pay it off if I were you.

I'd love to pay off my mortgage which is only $78k on a $150k house and 15-yr fixed at 2.875%. But we're not to the point where it makes sense yet. Our plan is

1. 401k (X2) to max employer match
2. Roth IRA (X2) to max
3. Add more to 401k (X2) until both are maxed out
4/5. Pay off mortgage
4/5. Invest in taxable account

We're in our early 30s and workin on #3 right now with annual increases. It'll likely be a long while yet before we get to choosing between 4 or 5.

Since you're already passed step 3...you can't go wrong!

Congrats! :beer

User avatar
knpstr
Posts: 1826
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Invest or pay off mortgage?

Post by knpstr » Wed Nov 29, 2017 9:28 am

ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
This is a very common question.
Unfortunately the best answer is: it depends on your own financial goals.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

neilpilot
Posts: 1084
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: Invest or pay off mortgage?

Post by neilpilot » Wed Nov 29, 2017 9:59 am

Does you investment allocation include equity & bonds? I'd do the mortgage payoff, consider it a form of bond investment, and increase your portfolio's equity-to-bond ratio to offset the payoff.

OP says "I...like the idea of accumulating more wealth". Obviously, a mortgage payoff is one way to increase your net worth.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Wed Nov 29, 2017 10:19 am

ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off. You can plug your numbers into a mortgage calculator to show the interest savings.

ACA
Posts: 9
Joined: Wed Nov 29, 2017 7:51 am

Re: Invest or pay off mortgage?

Post by ACA » Wed Nov 29, 2017 11:05 am

Admiral wrote:
Wed Nov 29, 2017 10:19 am
ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off. You can plug your numbers into a mortgage calculator to show the interest savings.

Great point. And you are spot on, coincidentally enough! We are 5 years in a 30 year mortgage.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Wed Nov 29, 2017 11:23 am

ACA wrote:
Wed Nov 29, 2017 11:05 am
Admiral wrote:
Wed Nov 29, 2017 10:19 am
ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off. You can plug your numbers into a mortgage calculator to show the interest savings.

Great point. And you are spot on, coincidentally enough! We are 5 years in a 30 year mortgage.
If that's the case, I would refi to a 15 year, not pay down the 30 year. You'll need to plug the numbers into a mortgage calculator to see the break even point. But if you have that much spare cash you should easily be able to make the larger payment on a 15 year note, and even pay it off more quickly, and still have money left to invest.

onthecusp
Posts: 298
Joined: Mon Aug 29, 2016 3:25 pm

Re: Invest or pay off mortgage?

Post by onthecusp » Wed Nov 29, 2017 12:01 pm

You are doing so well for your age that there is no wrong answer.

25 years more of mortgage payments puts you at 70 and that worries me because it is too similar to my own situation. My mortgage will be paid just a couple years before 70 and I would be so much more comfortable retiring now (at 60) or in the next year or two, if I didn't have that payment. That said you are way ahead of me (at that age) on the retirement savings.

I always liked 15year mortgages, just kept moving without significant house appreciation in the past, then had to buy in a higher cost area. If you can actually put 3k consistently into the principle then maybe a 5/1 ARM? I don't know if they are a good deal relative to the 15 yr rate, but you should be able to pay it off before the rate adjustments hit.

WhiteMaxima
Posts: 627
Joined: Thu May 19, 2016 5:04 pm

Re: Invest or pay off mortgage?

Post by WhiteMaxima » Wed Nov 29, 2017 12:11 pm

Split. 1/2 invest 1/2 pay debt. Open line of credit. If market crashes tomorrow, buy back stock.

User avatar
Watty
Posts: 11779
Joined: Wed Oct 10, 2007 3:55 pm

Re: Invest or pay off mortgage?

Post by Watty » Wed Nov 29, 2017 12:20 pm

There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up the money until you have $30K(20% of the loan) and then see if your lender will "recast your mortgage"(Google this). They are not required to but they usually will for a small processing fee.. This would reduce your required mortgage payment by 20% but your interest rate and length of the loan would stay the same. This could be important if you situation changes, like a layoff, or if interest rate go up a lot.

User avatar
DaftInvestor
Posts: 3200
Joined: Wed Feb 19, 2014 10:11 am

Re: Invest or pay off mortgage?

Post by DaftInvestor » Wed Nov 29, 2017 7:40 pm

Depends upon your emergency fund, whether you have a family and want to pay college expenses, job security. Other financial goals as well.
If it were me I'd pay it off provided emergency fund and family obligations were taken care of.

User avatar
Toons
Posts: 12096
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Invest or pay off mortgage?

Post by Toons » Wed Nov 29, 2017 7:41 pm

My favorite question
"Pay Off Mortgage"









:dollar :dollar
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

cutehumor
Posts: 60
Joined: Mon Oct 31, 2016 4:57 pm

Re: Invest or pay off mortgage?

Post by cutehumor » Wed Nov 29, 2017 8:13 pm

if you fear a crash or correction is coming, pay off the mortgage. when the correction or crash happens, stop paying the mortgage in advance and invest in the market. win win

Grt2bOutdoors
Posts: 17242
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Invest or pay off mortgage?

Post by Grt2bOutdoors » Wed Nov 29, 2017 8:28 pm

Do you have an emergency or reserve fund? How many months of expenses do you have?
Do you have an Investment Policy Statement? What level of risk are you willing to take with a 3 fund portfolio? How secure is your employment? All important questions to answer before we can offer practical advice on whether it is prudent for you to pay off your mortgage using the extra $3K in disposable income. While it's almost always beneficial to be debt and mortgage free, you don't want to put yourself in a position where you don't have access to readily available funds.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

noco-hawkeye
Posts: 237
Joined: Sat Aug 16, 2014 8:20 am

Re: Invest or pay off mortgage?

Post by noco-hawkeye » Wed Nov 29, 2017 8:37 pm

WhiteMaxima wrote:
Wed Nov 29, 2017 12:11 pm
Split. 1/2 invest 1/2 pay debt. Open line of credit. If market crashes tomorrow, buy back stock.
I think this is a good starting point for most people on this board. (outside of the credit line for stock buys - not a fan of this)

Most people not on this board should invest first.

Things to consider -
  • Make sure there is no other (higher rate) debt to service.
  • How many years of expenses do you have saved? More than 15x? Then the mortage makes more and more sense.
  • Are you saving around 15-20% of your income? I think thats a great number to hit, and additional savings can be used for stuff like the mortgage.

lakja
Posts: 35
Joined: Mon Nov 06, 2017 5:34 pm

Re: Invest or pay off mortgage?

Post by lakja » Wed Nov 29, 2017 9:00 pm

Admiral wrote:
Wed Nov 29, 2017 10:19 am
ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off. You can plug your numbers into a mortgage calculator to show the interest savings.
Interest paid is based on outstanding mortgage balance, doesn’t matter if he has a 10/15/20/25/30 year term.

By my math, the monthly interest is 150000*.0337/12=$421.25/month in interest.

Now if he has a 15/30 year mortgage, his PI payment will be larger for a 15 year, so he’d be paying more principal because the outstanding balance would be going down faster due to the larger payment.

Don’t refinance this mortgage. Just pay the bare minimum and throw all the extra funding toward a taxable account. You’ve already put a lot of cash in this house.

ThrustVectoring
Posts: 251
Joined: Wed Jul 12, 2017 2:51 pm

Re: Invest or pay off mortgage?

Post by ThrustVectoring » Wed Nov 29, 2017 9:10 pm

lakja wrote:
Wed Nov 29, 2017 9:00 pm

Interest paid is based on outstanding mortgage balance, doesn’t matter if he has a 10/15/20/25/30 year term.
Well, the option value of a fixed rate mortgage is significantly higher when there's more term remaining. There's a difference between 15 year and 30 year rates for a reason - if rates rise fifteen years in, you can keep making the lower rate payments on the 30 year mortgage but have to refinance at a higher rate if you had the 15 year.

Even if rates don't move at all, refinancing to extend your term can be a good idea. Or like, equivalently, you can get the lower interest rate of a 15 year mortgage by refinancing a 30-year halfway through.

lakja
Posts: 35
Joined: Mon Nov 06, 2017 5:34 pm

Re: Invest or pay off mortgage?

Post by lakja » Wed Nov 29, 2017 9:16 pm

ThrustVectoring wrote:
Wed Nov 29, 2017 9:10 pm
lakja wrote:
Wed Nov 29, 2017 9:00 pm

Interest paid is based on outstanding mortgage balance, doesn’t matter if he has a 10/15/20/25/30 year term.
Well, the option value of a fixed rate mortgage is significantly higher when there's more term remaining. There's a difference between 15 year and 30 year rates for a reason - if rates rise fifteen years in, you can keep making the lower rate payments on the 30 year mortgage but have to refinance at a higher rate if you had the 15 year.

Even if rates don't move at all, refinancing to extend your term can be a good idea. Or like, equivalently, you can get the lower interest rate of a 15 year mortgage by refinancing a 30-year halfway through.
I agree. I just ran some rough calcs assuming if he put the money in a risk-free investment earning 2.5% and the numbers showed a break even at 13.5 years. Now clearly, if he’s willing to take more risks, resulting in higher after-tax returns, it will never break even for paying the mortgage off.

Based on today’s rates, he’s not going to see much advantage of refinancing to a 15 year with a 3.37% 30 year fixed rate.

User avatar
randomizer
Posts: 706
Joined: Sun Jul 06, 2014 3:46 pm

Re: Invest or pay off mortgage?

Post by randomizer » Wed Nov 29, 2017 9:24 pm

ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free
That's good enough reason for me. You're doing well with your retirement accounts. The approach you take with $150k won't make much difference.

hightower
Posts: 359
Joined: Mon Dec 12, 2016 2:28 am

Re: Invest or pay off mortgage?

Post by hightower » Wed Nov 29, 2017 10:22 pm

ACA wrote:
Wed Nov 29, 2017 7:58 am
Long time lurker, first time poster. Hello!

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free, but also like the idea of accumulating more wealth.

So, do I pay off the mortgage as quickly as possible by paying extra $3k on principal monthly , invest the extra $3k monthly or throw $2k at mortgage and $1k in three fund portfolio monthly?
I don’t really think it matters. You’re mortgage is small and the interest rate is excellent so no reason other than psychological. Continuing to invest is never a bad idea either. Maybe do both? 1/2 to mortgage 1/2 to investments?

User avatar
grabiner
Advisory Board
Posts: 20975
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Invest or pay off mortgage?

Post by grabiner » Wed Nov 29, 2017 10:39 pm

Admiral wrote:
Wed Nov 29, 2017 10:19 am
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off.
I would argue the opposite. Every dollar you put to paying down the mortgage earns the mortgage rate until the mortgage is gone. If you pay an extra $1000 on a 3.375% mortgage, your balance will be $1034 less next year, regardless of the remaining term. But the shorter the term, the faster you get that money back, and the less you benefit from locking in the right to borrow at a low rate.

If you view a mortgage as a negative bond, then making extra mortgage payments is equivalent to buying a bond, with rate equal to the mortgage rate (taxable if you are deducting your mortgage interest) and duration equal to the time until the mortgage is paid off. A 3-year bond yielding 3.375% is a better investment than a 25-year bond yielding 3.375%.

If you pay off the mortgage, rather than just paying it down, then you are buying a bond portfolio covering the entire duration. Paying off a 25-year mortgage is equivalent to buying a bond portfolio with a duration of about 10 years (not 12.5 because the later payments are worth less in present value).
David Grabiner

knick17
Posts: 72
Joined: Sun Jul 02, 2017 9:39 am

Re: Invest or pay off mortgage?

Post by knick17 » Wed Nov 29, 2017 11:13 pm

I would go for the investment while paying the mortgage in instalments. If the investment goes well it shouldn't be a problem to pay the mortgage off in few yrs

User avatar
grabiner
Advisory Board
Posts: 20975
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Invest or pay off mortgage?

Post by grabiner » Thu Nov 30, 2017 12:42 am

knick17 wrote:
Wed Nov 29, 2017 11:13 pm
I would go for the investment while paying the mortgage in instalments. If the investment goes well it shouldn't be a problem to pay the mortgage off in few yrs
If municipal-bond rates are higher than your after-tax mortgage rate, one way to do this would be to invest the extra money into a municipal-bond fund which you designate as a mortgage payoff fund. When the fund is large enough to pay off the mortgage, you can pay it off then if appropriate. In the meantime, you aren't taking on much extra risk, because the money that you could have used to pay down the mortgage is still available to pay it down.
David Grabiner

MoonOrb
Posts: 889
Joined: Thu Jan 24, 2013 6:58 pm

Re: Invest or pay off mortgage?

Post by MoonOrb » Thu Nov 30, 2017 1:07 am

You have to decide whether you value being debt free more or value having greater wealth more.

If you value being debt free over greater wealth, pay it off. If you value accumulating greater wealth, invest.

ThrustVectoring
Posts: 251
Joined: Wed Jul 12, 2017 2:51 pm

Re: Invest or pay off mortgage?

Post by ThrustVectoring » Thu Nov 30, 2017 2:03 am

grabiner wrote:
Wed Nov 29, 2017 10:39 pm
A 3-year bond yielding 3.375% is a better investment than a 25-year bond yielding 3.375%.
Or to think of it in the original mortgage terms, the option to continue borrowing money at 3.375% is more valuable if it's 25 years from now rather than 3.

neilpilot
Posts: 1084
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: Invest or pay off mortgage?

Post by neilpilot » Thu Nov 30, 2017 9:47 am

One other thing to look at, if you itemize deductions, is the spread between the standard deduction and your itemized deduction. If the spread is less than what the mortgage interest would be next year, then your tax benefit from keeping the mortgage maybe less than you thought.

Here's one other possible benefit to a mortgage payoff. In our case, we were left with other itemized deductions that were only about $5k over the standard detection. Since we no longer had our bank's escrow paying our property taxes (about $9k/yr) we were able to pool 2 years worth of property tax payments into one year, pay property taxes every other year, and take the standard deduction on the alternate year. Allows us to save a significant amount in income tax.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Thu Nov 30, 2017 10:47 am

grabiner wrote:
Wed Nov 29, 2017 10:39 pm
Admiral wrote:
Wed Nov 29, 2017 10:19 am
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off.
I would argue the opposite. Every dollar you put to paying down the mortgage earns the mortgage rate until the mortgage is gone. If you pay an extra $1000 on a 3.375% mortgage, your balance will be $1034 less next year, regardless of the remaining term. But the shorter the term, the faster you get that money back, and the less you benefit from locking in the right to borrow at a low rate.

If you view a mortgage as a negative bond, then making extra mortgage payments is equivalent to buying a bond, with rate equal to the mortgage rate (taxable if you are deducting your mortgage interest) and duration equal to the time until the mortgage is paid off. A 3-year bond yielding 3.375% is a better investment than a 25-year bond yielding 3.375%.

If you pay off the mortgage, rather than just paying it down, then you are buying a bond portfolio covering the entire duration. Paying off a 25-year mortgage is equivalent to buying a bond portfolio with a duration of about 10 years (not 12.5 because the later payments are worth less in present value).
There are three primary issues when considering an early payoff:
1) Do I need the liquidity that having a mortgage provides (or, put another way, do I want my extra x dollars per month in my house, or in my hand?)
2) Can I beat my mortgage rate by investing (or, put another way, can I reasonably assume that I can earn more on each dollar than my mortgage rate is costing me)?
3) How much interest am I saving with an early payoff?

Mortgages are front loaded with interest, because the rate is charged on the remaining balance. One saves more interest by paying it off sooner than by paying it off later, because the remaining balance is higher. There's always a savings, the issue is the level/amount of the savings. Yes, a dollar in the future is worth less than a dollar now. But that's a complex, inflation-based calculation that is less relevant to this decision. My point was that if one has just a few years left on a note, 90% of the payment is principal, and therefore the savings on the interest is very small. For example, on my loan, when I am in year 13, I will owe 50k, but the remaining interest will be only about $2k. I therefore might not want to put the 50k into my house if I feel I can make more investing that 50k for two years.

However, if I paid it off tomorrow, the savings is much larger: about $50k, or 13 years of interest. Putting aside the liquidity factor, the monetary benefit is significantly higher if it's earlier in the loan.

The reason to refinance to a shorter term is two-fold: A lower interest rate (presumably) and a faster payoff.

chevca
Posts: 680
Joined: Wed Jul 26, 2017 11:22 am

Re: Invest or pay off mortgage?

Post by chevca » Thu Nov 30, 2017 10:50 am

Any of the $800k in investment accounts available to pay it off? You could pay it off now, and then throw the old mortgage payment plus the $3k a month into investment accounts.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Thu Nov 30, 2017 10:53 am

chevca wrote:
Thu Nov 30, 2017 10:50 am
Any of the $800k in investment accounts available to pay it off? You could pay it off now, and then throw the old mortgage payment plus the $3k a month into investment accounts.
OP said 800k in retirement accounts, so he'd be giving up Roth or other after tax money, presumably. I would not do that for a low-rate mortgage.

chevca
Posts: 680
Joined: Wed Jul 26, 2017 11:22 am

Re: Invest or pay off mortgage?

Post by chevca » Thu Nov 30, 2017 10:56 am

I should have been more clear, sorry. Any of the $800k in taxable?

I saw the retirement accounts part, but just wondered if it's all tax advantaged.

new2bogle
Posts: 1114
Joined: Fri Sep 11, 2009 2:05 pm

Re: Invest or pay off mortgage?

Post by new2bogle » Thu Nov 30, 2017 1:05 pm

Watty wrote:
Wed Nov 29, 2017 12:20 pm
There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up the money until you have $30K(20% of the loan) and then see if your lender will "recast your mortgage"(Google this). They are not required to but they usually will for a small processing fee.. This would reduce your required mortgage payment by 20% but your interest rate and length of the loan would stay the same. This could be important if you situation changes, like a layoff, or if interest rate go up a lot.
Saving up and then recasting is an interesting twist (in my limited view at least). If I am paying mortgage down early by $1k per month, could I ask for a recast after I reached some threshold of extra payments (let's say an extra 20%)? Or, are recasts only done if you put up one big extra payment (again let's say another 20%)? If the latter - then wouldn't it be better to save until you have a lump sum to pay down and then try a recast at the same time?

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Thu Nov 30, 2017 1:12 pm

new2bogle wrote:
Thu Nov 30, 2017 1:05 pm
Watty wrote:
Wed Nov 29, 2017 12:20 pm
There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up the money until you have $30K(20% of the loan) and then see if your lender will "recast your mortgage"(Google this). They are not required to but they usually will for a small processing fee.. This would reduce your required mortgage payment by 20% but your interest rate and length of the loan would stay the same. This could be important if you situation changes, like a layoff, or if interest rate go up a lot.
Saving up and then recasting is an interesting twist (in my limited view at least). If I am paying mortgage down early by $1k per month, could I ask for a recast after I reached some threshold of extra payments (let's say an extra 20%)? Or, are recasts only done if you put up one big extra payment (again let's say another 20%)? If the latter - then wouldn't it be better to save until you have a lump sum to pay down and then try a recast at the same time?
No. Requires a lump payment of principal. I'm not a fan of this strategy. If you plan to hold the mortgage, why not try to get a better rate? Recasting leaves you with the same interest rate.

new2bogle
Posts: 1114
Joined: Fri Sep 11, 2009 2:05 pm

Re: Invest or pay off mortgage?

Post by new2bogle » Thu Nov 30, 2017 3:34 pm

Admiral wrote:
Thu Nov 30, 2017 1:12 pm
new2bogle wrote:
Thu Nov 30, 2017 1:05 pm
Watty wrote:
Wed Nov 29, 2017 12:20 pm
There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up the money until you have $30K(20% of the loan) and then see if your lender will "recast your mortgage"(Google this). They are not required to but they usually will for a small processing fee.. This would reduce your required mortgage payment by 20% but your interest rate and length of the loan would stay the same. This could be important if you situation changes, like a layoff, or if interest rate go up a lot.
Saving up and then recasting is an interesting twist (in my limited view at least). If I am paying mortgage down early by $1k per month, could I ask for a recast after I reached some threshold of extra payments (let's say an extra 20%)? Or, are recasts only done if you put up one big extra payment (again let's say another 20%)? If the latter - then wouldn't it be better to save until you have a lump sum to pay down and then try a recast at the same time?
No. Requires a lump payment of principal. I'm not a fan of this strategy. If you plan to hold the mortgage, why not try to get a better rate? Recasting leaves you with the same interest rate.
Do you mean a better rate through converting a 30 year to 15 year (or even an ARM if you plan to pay off within the adjust timeframe)? Otherwise there's not necessarily a way to get a better 30 year rate (if moving from 30 to 30 year mortgage in a rising rate env).

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Thu Nov 30, 2017 3:40 pm

new2bogle wrote:
Thu Nov 30, 2017 3:34 pm
Admiral wrote:
Thu Nov 30, 2017 1:12 pm
new2bogle wrote:
Thu Nov 30, 2017 1:05 pm
Watty wrote:
Wed Nov 29, 2017 12:20 pm
There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up the money until you have $30K(20% of the loan) and then see if your lender will "recast your mortgage"(Google this). They are not required to but they usually will for a small processing fee.. This would reduce your required mortgage payment by 20% but your interest rate and length of the loan would stay the same. This could be important if you situation changes, like a layoff, or if interest rate go up a lot.
Saving up and then recasting is an interesting twist (in my limited view at least). If I am paying mortgage down early by $1k per month, could I ask for a recast after I reached some threshold of extra payments (let's say an extra 20%)? Or, are recasts only done if you put up one big extra payment (again let's say another 20%)? If the latter - then wouldn't it be better to save until you have a lump sum to pay down and then try a recast at the same time?
No. Requires a lump payment of principal. I'm not a fan of this strategy. If you plan to hold the mortgage, why not try to get a better rate? Recasting leaves you with the same interest rate.
Do you mean a better rate through converting a 30 year to 15 year (or even an ARM if you plan to pay off within the adjust timeframe)? Otherwise there's not necessarily a way to get a better 30 year rate (if moving from 30 to 30 year mortgage in a rising rate env).
Lower rate and shorter term (shorter terms almost always have lower rates). (Going from a 30 to a 30 simply adds more years of payments, even if the rate is lower.)

Anyone who can afford the larger payment should absolutely consider a refi to a shorter term. Less interest, more equity faster, payoff quicker. ARM is a fine choice if you don't plan to stay long term. I would not get an ARM in the current interest rate environment, but that's MHO.

10YearPlan
Posts: 191
Joined: Tue Dec 22, 2015 2:58 pm

Re: Invest or pay off mortgage?

Post by 10YearPlan » Thu Nov 30, 2017 7:18 pm

Assuming the $800k is all in tax-advantaged, I'd sock the $3k per month away in a taxable account for the first year or until you reach, say $50k. And then from there, I'd probably start putting $2k toward the mortgage and $1k toward taxable. This is sort of best of both worlds, IMO.

User avatar
grabiner
Advisory Board
Posts: 20975
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Invest or pay off mortgage?

Post by grabiner » Thu Nov 30, 2017 9:05 pm

Admiral wrote:
Thu Nov 30, 2017 10:47 am
There are three primary issues when considering an early payoff:
1) Do I need the liquidity that having a mortgage provides (or, put another way, do I want my extra x dollars per month in my house, or in my hand?)
This makes paying off a short-term loan more attractive, as the liquidity issue lasts a shorter time; you get the money back as you avoid payments.
2) Can I beat my mortgage rate by investing (or, put another way, can I reasonably assume that I can earn more on each dollar than my mortgage rate is costing me)?
If you do a fair comparison to match durations, this also makes paying off a short-term loan more attractive; short-term bonds yield less than long-term bonds.

My own mortgage rate is 2.625%, which is 1.89% after federal tax (fully deductible because my state taxes and charitable contributions are more than the standard deduction). This is about the rate on 5-year municipal bonds; Vanguard Intermediate-Term Tax-Exempt yields 1.97% on Admiral shares. Therefore, it would make sense for me to pay down my mortgage if it had less than five years to go. But I have 11 years left, so it is not worth paying down; 11-year bonds yield much more than 1.89%.
3) How much interest am I saving with an early payoff?
This is actually equivalent to #2. If you pay off a short-term mortgage, you save a small amount of interest, but you get back the principal quickly and can then invest it and earn interest. If you pay off a long-term mortgage, you save more interest, but you also give up the opportunity to earn money on the investment.

Ignoring taxes for simplicity, say that you have a 3% loan, and you can make a $10K payment against the loan or invest the money at 3%. If there are 15 years left on the loan, paying $10K against the loan will save you $5580 in interest, but you won't get that $5580 for 15 years, when you will reduce your final year's payment by $15,580. If you had instead invested the money at 3%, it would become $15,580, and you could use that money to eliminate the final payment and break even. If there is one year left on the loan, paying $10K against the loan will save you only $300 in interest, but you will get $10,300 back in just one year, the same as if you had invested the money. And either way, you can get $15,580 in 15 years, either by investing the $10,000 now, or the $10,300 in one year for another 14 years.
David Grabiner

aristotelian
Posts: 3151
Joined: Wed Jan 11, 2017 8:05 pm

Re: Invest or pay off mortgage?

Post by aristotelian » Thu Nov 30, 2017 9:18 pm

cutehumor wrote:
Wed Nov 29, 2017 8:13 pm
if you fear a crash or correction is coming, pay off the mortgage. when the correction or crash happens, stop paying the mortgage in advance and invest in the market. win win
That is what we did. Then the market went up another 15% and still hasn't corrected!

TomatoBoy
Posts: 42
Joined: Sun Jan 15, 2017 5:38 pm

Re: Invest or pay off mortgage?

Post by TomatoBoy » Thu Nov 30, 2017 9:25 pm

Jack FFR1846 wrote:
Wed Nov 29, 2017 8:51 am
You're going to find camps that say "never pay off the mortgage" that even includes radio show host Ric Edelman. The reason is that you can realize more gain by investing than the savings from putting the money towards the mortgage. They also say that if you put the money into the mortgage, you don't have it in case of an emergency.

The other camp says that the future is unknown. If we hit a downturn, your market investment is now wasted and you still have that big debt. Putting extra money towards the mortgage gives you a guaranteed, easily calculated return. And if you are worried that you won't have access to that money, take a HELOC before you pay down the mortgage.
The best of both worlds, as far as I can tell, is to put the 3k/month into an online savings account until there is enough to warrant either (a) re-amortizing or (b) paying off the whole thing. The problem that I have with making pre-payments is that there is no benefit realized until the whole thing is paid off. But with this method, the money is there in the event of an emergency and once there is enough to actually realize some immediate benefit (either via re-amortizing or paying the whole thing off at once), you can make the move.

MoonOrb
Posts: 889
Joined: Thu Jan 24, 2013 6:58 pm

Re: Invest or pay off mortgage?

Post by MoonOrb » Thu Nov 30, 2017 11:34 pm

This isn't really the best of both worlds because while the money's sitting in an online savings account, you're missing out on the gains you'd make while investing. There's no best of both worlds strategy: there's either pay off the mortgage, invest, or some of both. Some of both doesn't give you the best of both worlds, it gives you less than the best of each. And that might be an okay choice--there is no terrible answer here, but getting the best of both worlds requires you to accurately time the market.

chevca
Posts: 680
Joined: Wed Jul 26, 2017 11:22 am

Re: Invest or pay off mortgage?

Post by chevca » Fri Dec 01, 2017 7:35 am

TomatoBoy wrote:
Thu Nov 30, 2017 9:25 pm
Jack FFR1846 wrote:
Wed Nov 29, 2017 8:51 am
You're going to find camps that say "never pay off the mortgage" that even includes radio show host Ric Edelman. The reason is that you can realize more gain by investing than the savings from putting the money towards the mortgage. They also say that if you put the money into the mortgage, you don't have it in case of an emergency.

The other camp says that the future is unknown. If we hit a downturn, your market investment is now wasted and you still have that big debt. Putting extra money towards the mortgage gives you a guaranteed, easily calculated return. And if you are worried that you won't have access to that money, take a HELOC before you pay down the mortgage.
The best of both worlds, as far as I can tell, is to put the 3k/month into an online savings account until there is enough to warrant either (a) re-amortizing or (b) paying off the whole thing. The problem that I have with making pre-payments is that there is no benefit realized until the whole thing is paid off. But with this method, the money is there in the event of an emergency and once there is enough to actually realize some immediate benefit (either via re-amortizing or paying the whole thing off at once), you can make the move.
Not true. Each pre-payment one makes, they never pay interest on that amount again. So, if OP puts the extra $3000/month towards the principal, they're not paying interest on that anymore. The monthly mortgage payment stays the same amount, but one can change how much goes to principal and interest by prepaying. There's a benefit after each prepayment. One lowers their total interest paid by paying it down ASAP.

Plus, assuming one has an EF, piling money into a savings account earning 1% while paying a 3% mortgage (just examples)....

As said, pay it down or invest.

stan1
Posts: 5018
Joined: Mon Oct 08, 2007 4:35 pm

Re: Invest or pay off mortgage?

Post by stan1 » Fri Dec 01, 2017 8:14 am

If you have $800K in retirement account but don't have a taxable investing account you could find yourself wealthy on paper but not having the liquidity to spend money when you want or need to. I'd make two extra mortgage payments each year and invest the rest in a taxable investing account. Taxable accounts are almost as liquid as a savings/checking account and capital gains are taxed at a preferential rate. Retirement accounts have limits on accessibility by age and gains are taxed as ordinary income. The only way you can get liquidity from a house is to sell it or take out a home equity loan. Some people are OK with using a HELOC as a way to get cash, personally I'm not. If you work for 10-15 more years past your current age of 45 should retire with the house paid off, a seven figure retirement account, and a six figure taxable investing account. Good job!

oysterboy
Posts: 14
Joined: Sun Jun 06, 2010 5:37 pm

Re: Invest or pay off mortgage?

Post by oysterboy » Fri Dec 01, 2017 9:02 am

MoonOrb wrote:
Thu Nov 30, 2017 1:07 am
You have to decide whether you value being debt free more or value having greater wealth more.

If you value being debt free over greater wealth, pay it off. If you value accumulating greater wealth, invest.
And at OP's age, I would go for the latter. Also, it is unlikely (though certainly possible) that you will live in that house for 25 more years, nor that interest rates will be this low when you buy another house. You can decide then if you want to own a house debt-free.

Savio
Posts: 10
Joined: Sun Nov 05, 2017 7:35 pm

Re: Invest or pay off mortgage?

Post by Savio » Fri Dec 01, 2017 9:25 am

My personal plan is that if the market has been doing very well (which is has), then I will put my extra money into my mortgage.

If the market has been tanking, then I will put the extra into buying more stock every month. Eventually you will hit the bottom and enjoy the additional gains of the recovery.

No reason you can't change your strategy based on what is going on. Especially since both options are good.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Fri Dec 01, 2017 9:45 am

grabiner wrote:
Thu Nov 30, 2017 9:05 pm
Admiral wrote:
Thu Nov 30, 2017 10:47 am
There are three primary issues when considering an early payoff:
1) Do I need the liquidity that having a mortgage provides (or, put another way, do I want my extra x dollars per month in my house, or in my hand?)
This makes paying off a short-term loan more attractive, as the liquidity issue lasts a shorter time; you get the money back as you avoid payments.
2) Can I beat my mortgage rate by investing (or, put another way, can I reasonably assume that I can earn more on each dollar than my mortgage rate is costing me)?
If you do a fair comparison to match durations, this also makes paying off a short-term loan more attractive; short-term bonds yield less than long-term bonds.

My own mortgage rate is 2.625%, which is 1.89% after federal tax (fully deductible because my state taxes and charitable contributions are more than the standard deduction). This is about the rate on 5-year municipal bonds; Vanguard Intermediate-Term Tax-Exempt yields 1.97% on Admiral shares. Therefore, it would make sense for me to pay down my mortgage if it had less than five years to go. But I have 11 years left, so it is not worth paying down; 11-year bonds yield much more than 1.89%.
3) How much interest am I saving with an early payoff?
This is actually equivalent to #2. If you pay off a short-term mortgage, you save a small amount of interest, but you get back the principal quickly and can then invest it and earn interest. If you pay off a long-term mortgage, you save more interest, but you also give up the opportunity to earn money on the investment.

Ignoring taxes for simplicity, say that you have a 3% loan, and you can make a $10K payment against the loan or invest the money at 3%. If there are 15 years left on the loan, paying $10K against the loan will save you $5580 in interest, but you won't get that $5580 for 15 years, when you will reduce your final year's payment by $15,580. If you had instead invested the money at 3%, it would become $15,580, and you could use that money to eliminate the final payment and break even. If there is one year left on the loan, paying $10K against the loan will save you only $300 in interest, but you will get $10,300 back in just one year, the same as if you had invested the money. And either way, you can get $15,580 in 15 years, either by investing the $10,000 now, or the $10,300 in one year for another 14 years.
I suppose it depends on what one's goal is. I would argue that if your goal is to free up cash or to increase your cash flow earlier, then pre-paying does not make sense: You're tying up current dollars in the house with the goal of freeing up future dollars earlier, which have a lower value once you get them, due to inflation. Your analysis is correct as far as it goes, but these decisions are easy if one assumes fixed 3% interest rates for, say, the next 15 years, and there is no inflation taken into account. (I didn't want to go there, but let's, just for argument's sake.)

It's true that investing in low-yield bonds is the apples to apples comparison for a fixed rate loan, but the problem is you end up losing money due to inflation (even if it's very low). 1% inflation per year kills you in this scenario. In ten years, you've ended up losing money on your $10,000, not making money. [EDIT: in the sense that you're losing much of the gains to inflation, obviously you can make a small profit if the return rate is above inflation and there are no taxes.] (Unless you're in TIPS and the rate is favorable). My assumption (for myself) is that I can both beat my rate AND beat inflation by investing in a balanced portfolio of stocks and bonds.

I still say that a refinance to a shorter term with a lower rate (assuming a favorable spread between current loan rate and new loan rate) is a better option than continuing to pay a higher interest rate on the current loan, even if the balance is shrinking. Clearly there is a breakeven point when it doesn't matter: If you put enough down per month, you can pay off a 30 year loan in 7 year, or five, or whatever.
Last edited by Admiral on Fri Dec 01, 2017 9:51 am, edited 1 time in total.

Admiral
Posts: 903
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest or pay off mortgage?

Post by Admiral » Fri Dec 01, 2017 9:47 am

Savio wrote:
Fri Dec 01, 2017 9:25 am
My personal plan is that if the market has been doing very well (which is has), then I will put my extra money into my mortgage.

If the market has been tanking, then I will put the extra into buying more stock every month. Eventually you will hit the bottom and enjoy the additional gains of the recovery.

No reason you can't change your strategy based on what is going on. Especially since both options are good.
So your plan is to time the markets, and you'll know when the bottom is, and when the top occurs? That's rarely a good plan.

NorCalDad
Posts: 720
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: Invest or pay off mortgage?

Post by NorCalDad » Fri Dec 01, 2017 9:57 am

Savio wrote:
Fri Dec 01, 2017 9:25 am
My personal plan is that if the market has been doing very well (which is has), then I will put my extra money into my mortgage.

If the market has been tanking, then I will put the extra into buying more stock every month. Eventually you will hit the bottom and enjoy the additional gains of the recovery.

No reason you can't change your strategy based on what is going on. Especially since both options are good.
When did you start putting extra money into your mortgage in the current bull market? Under this strategy, you could have chosen to divert money toward paying down a 3% mortgage in 2011 or 2012 while missing out on huge gains thereafter. I remember thinking every year, it can't keep going up, right? And when there was a dip last year, I thought, OK, finally here comes that downturn we've all expected.

nolesrule
Posts: 326
Joined: Thu Feb 26, 2015 10:59 am

Re: Invest or pay off mortgage?

Post by nolesrule » Fri Dec 01, 2017 1:08 pm

I'm a bit curious about what bond funds I should be looking at in our situation for comparison. Assuming we make only the normal payment, we have 18 2/3 years left on a 20 year mortgage. Our rate is 3.125% and our marginal rate is an AMT rate of 32.5% putting the after tax rate at 2.11%. And we live in New Jersey (6.37% bracket, no deductions for mortgage interest).

Right now we're throwing a bit of extra money at the mortgage each month.

With the bond comparison, I think if we were unable to itemize any longer, then the bond funds would no longer make sense as a liquid payoff fund.

User avatar
grabiner
Advisory Board
Posts: 20975
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Invest or pay off mortgage?

Post by grabiner » Fri Dec 01, 2017 11:42 pm

nolesrule wrote:
Fri Dec 01, 2017 1:08 pm
I'm a bit curious about what bond funds I should be looking at in our situation for comparison. Assuming we make only the normal payment, we have 18 2/3 years left on a 20 year mortgage. Our rate is 3.125% and our marginal rate is an AMT rate of 32.5% putting the after tax rate at 2.11%. And we live in New Jersey (6.37% bracket, no deductions for mortgage interest).

Right now we're throwing a bit of extra money at the mortgage each month.
The natural comparison is Vanguard NJ Long-Term Tax-Exempt, with a 2.82% Admiral yield, and a shorter duration than the mortgage; your mortgage duration is 8 years if you can pay the whole thing off, or 18 if you make extra payments. However, that is not quite fair because there is a lot more risk in the NJ fund than in the national fund with its 2.47% yield; besides the lack of diversification, the NJ fund holds 37% in BBB bonds and 3% in junk and unrated bonds. But even the national fund comes out ahead, with a 2.31% yield after NJ tax (no federal tax deduction since you pay AMT).

If you choose to hold the muni funds themselves, you might want to split 50/50 between NJ and national funds to reduce the diversification risk.
David Grabiner

Post Reply