29 YO With a big windfall. Invest or Pay off the mortgage?

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Topic Author
quicksand
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29 YO With a big windfall. Invest or Pay off the mortgage?

Post by quicksand » Wed Apr 11, 2018 8:01 pm

I recently received a 170K windfall and deciding what to do with it.

Mortgage is 3.6% and 520K principal on a current day value of ~800K property purchased at 700K a couple years ago. My non-taxed accounts are maxed out annually (401K, back-door Roth) and hold around 250K. I was going to put the windfall in equity given how far I am from retirement, and how far invested I am in the house already in comparison to the rest of my portfolio, but I want to hear some points on either shortening/ re-casting / re-financing the mortgage.

Any advice and thoughts appreciated!

~Q

Goal33
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Goal33 » Wed Apr 11, 2018 8:07 pm

Personally, I would:

Invest it all in equity in a taxable account. Move equity money out of equity to bonds in the 401k until you're comfortable with your stock/bond ratio.
This would help you achieve more liquidity which I personally value.

I would also support:
re-casting the mortgage or a lump some principal payment

I would not recommend:
Refinancing, I don't think you can get a better rate right now.

But, I'm just some guy on the internet :)
A man with one watch always knows what time it is; a man with two watches is never sure.

4803
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by 4803 » Wed Apr 11, 2018 8:09 pm

How about 50% 50% ?

If the cost of re-casting is low ($200?) I would go for that but would keep paying at the same rate if possible.

Plus - how about taking 10% to live a little ?
(so, 45% toward the mortgage, 45% for taxable equities, 10% to live a little) :happy

Best wishes,

:) 4803.

Dottie57
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Dottie57 » Wed Apr 11, 2018 8:38 pm

4803 wrote:
Wed Apr 11, 2018 8:09 pm
How about 50% 50% ?

If the cost of re-casting is low ($200?) I would go for that but would keep paying at the same rate if possible.

Plus - how about taking 10% to live a little ?
(so, 45% toward the mortgage, 45% for taxable equities, 10% to live a little) :happy

Best wishes,

:) 4803.
+1

il0kin
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by il0kin » Wed Apr 11, 2018 9:00 pm

Do you have any issues with monthly cash flow? (Probably not if you're maxing). Any plans for things like kids, etc? Does the mortgage take up an uncomfortable amount of your monthly income?

In my personal scenario, I would put the money into my mortgage and recast it, despite it not being the mathematically advantageous, because I don't like debt at all, I have young kids in daycare and would like to have a larger monthly cash flow. We are delaying things we would like to do (not a problem, just how it goes with kids in daycare) and it would be nice to cash flow things like home renovations instead of saving for years to do them.

Either way, what you are doing is a wise choice. This is why they call it personal finance!

ny_rn
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by ny_rn » Wed Apr 11, 2018 9:05 pm

I would probably act as if I did not receive this money and invest it according to my IPS. In my case I would put it all in Vanguard Total US Stock and go have a beer.

bradpevans
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by bradpevans » Wed Apr 11, 2018 9:15 pm

Paying down Your mortgage is essentially a fixed rate of return, probably 3-4% if you itemize

If you think you can do better than that — after tax, by investing then investing will preferred

Most long run analysis suggest stocks do better, especially as interest rates are so low.

This does NOT consider peace of mind, cash flow etc

Personally I’d invest (based in your amounts being saved I don’t think you are “House poor”)

BuckyBadger
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by BuckyBadger » Wed Apr 11, 2018 9:45 pm

I'd invest. It's not enough to eliminate the mortgage completely, so I'd rather get the gains on it.

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Darth Xanadu
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Darth Xanadu » Wed Apr 11, 2018 10:05 pm

BuckyBadger wrote:
Wed Apr 11, 2018 9:45 pm
I'd invest. It's not enough to eliminate the mortgage completely, so I'd rather get the gains on it.
I think it's a good idea. Not sure how long OP plans to stay in current residence but since it was recently purchased I would imagine at least a few more years. Maybe down the road, if the mortgage is bothering you, with other savings and this chunk having time to (hopefully) grow, you could always pay it off then.
"A courageous teacher, failure is."

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mlebuf
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by mlebuf » Thu Apr 12, 2018 1:59 am

I suspect that in a few years people will look at your 3.6% mortgage and say, "Those were the good old days." For years interest rates have been kept artificially low and those days are likely coming to an end. When I bought my first home in 1975, the best, fixed interest rate I could get was 8.5%. When I bought my second home in 1995, the best 15-year fixed rate I could get was 7.75%. You are young. Keep the mortgage and invest the windfall. With inflation and an interest rate tax deduction, it may be the equivalent of an interest-free loan.
Best wishes, | Michael | | Invest your time actively and your money passively.

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whodidntante
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by whodidntante » Thu Apr 12, 2018 2:14 am

ny_rn wrote:
Wed Apr 11, 2018 9:05 pm
I would probably act as if I did not receive this money and invest it according to my IPS. In my case I would put it all in Vanguard Total US Stock and go have a beer.
I would do exactly the same thing. Also, beer capital is very important.

Topic Author
quicksand
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by quicksand » Thu Apr 12, 2018 12:18 pm

Thanks all for the responses! I don't have kids, and have no cash flow issues even though wife is still in school. Wife will be finishing school and will start working soon so I will be much more cash flow positive after that. We do plan on trying to have kids in the next 5 years, but since we have no cash flow issues, the mortgage is not a huge concern for me.
In my case I would put it all in Vanguard Total US Stock and go have a beer.
I was about to pull the trigger on the above, but just wanted to make sure there's no other angle I'm missing.

:sharebeer

~Q

Retireby40
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Retireby40 » Thu Apr 12, 2018 12:49 pm

Emotionally, you should do what gives you the best piece of mind. Some people value the feeling of lower debt over other benefits.

However, financially the optimum strategy is very clear. You should not pay down the mortgage with a loan at 3.8% but rather invest the money in low cost diversified index funds. Without getting into the nitty-gritty, you could expect to double your money at least every 10 years if you stay invested as illustrated below:

29 years old - $170K
39 years old - $340K
49 years old - $680K
59 years old - $1,360M
69 years old - $2,720M

You are very fortunate. In 30 years, you could pay off your mortgage through regular payments and have a retirement nest egg of over $2.7M without doing anything but letting it ride and investing the dividends. You just have to avoid life events that would sabotage the portfolio and have the discipline to stay invested.

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C4NT
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by C4NT » Thu Apr 12, 2018 1:00 pm

Dottie57 wrote:
Wed Apr 11, 2018 8:38 pm
4803 wrote:
Wed Apr 11, 2018 8:09 pm
How about 50% 50% ?

If the cost of re-casting is low ($200?) I would go for that but would keep paying at the same rate if possible.

Plus - how about taking 10% to live a little ?
(so, 45% toward the mortgage, 45% for taxable equities, 10% to live a little) :happy

Best wishes,

:) 4803.
+1
My vote as well. That is probably what I would do personally.

aristotelian
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by aristotelian » Thu Apr 12, 2018 1:31 pm

Do you have any other liquid funds outside of your retirement accounts? If not, having a larger brokerage account can provide a nice secondary layer of liquidity, even if it is invested in stocks.

If your brokerage account is already large enough to cover any conceivable need, then it is pretty much a judgment call. It appears that you have been paying off the mortgage aggressively. That may not be optimal if you are young, but if that fits with your risk tolerance you could continue with that policy. Keep in mind that a mortgage is a negative bond, so one approach might be to pay down the mortgage at approximately the same rate as you invest in bonds. Another approach might be to pay off the mortgage and maintain a "true" allocation between stocks and bonds with zero debt. Either way, it is a nice opportunity to review your allocation and ask yourself how much risk do you really want to take.

CoAndy
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by CoAndy » Thu Apr 12, 2018 1:54 pm

4803 wrote:
Wed Apr 11, 2018 8:09 pm
How about 50% 50% ?

If the cost of re-casting is low ($200?) I would go for that but would keep paying at the same rate if possible.

Plus - how about taking 10% to live a little ?
(so, 45% toward the mortgage, 45% for taxable equities, 10% to live a little) :happy

Best wishes,

:) 4803.
I enjoy this advice. :dollar

Jack FFR1846
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Jack FFR1846 » Thu Apr 12, 2018 2:03 pm

You're seeing 3 answers here:

1) Put nothing into the mortgage, invest it all.
2) Put it all into the mortgage.
3) Put part into the mortgage and invest the rest.

That pretty much covers it unless there's a Lamborghini you've been eyeing.

I received a stock option windfall some years ago. I paid off my mortgage, bought my wife a car and bought an HDTV (at the time, they were new and weighed 275 pounds).

I never have regretted paying off the mortgage.
Bogle: Smart Beta is stupid

Dandy
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Re: 29 YO With a big windfall. Invest or Pay off the mortgage?

Post by Dandy » Thu Apr 12, 2018 2:20 pm

A lot depends. Not helpful I know. I would look into the cost and benefits of refinancing your existing mortgage to either shorten the term or the monthly payout. But, if you are already maxing out tax deferred investing and have money left over to invest or pay down the existing mortgage then it may be investing most if not all of the windfall would be better. But, in order to make the best decision you need to know what refinancing terms look like.

Most likely, given that interest rates are rising, you won't get a greatly beneficial refinancing terms. In that case invest. My opinion is not to go 100% equities - be aggressive at your age if your risk tolerance is there but your need to take a highly aggressive allocation should be somewhat diminished by the big windfall.

It is great that you are in such great financial shape at your age. Enjoy.

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