Invest or Pay Down Mortgage?

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Topic Author
83Tractors
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Joined: Tue May 12, 2020 12:28 pm

Invest or Pay Down Mortgage?

Post by 83Tractors » Tue May 12, 2020 12:33 pm

I'm 54 and we owe $115K on home worth $250K. Still working and planning to retire in a few years. We have savings, 401K and pension. The only debt we have is house.

We make double payments on mortgage with 3.3% APR and intend to pay off within 3 years. Planning to receive an inheritance soon of ~$50K.

Should I pay down mortgage debt further, invest or split between the two?

Thanks!

The Broz
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Re: Invest or Pay Down Mortgage?

Post by The Broz » Tue May 12, 2020 12:53 pm

Make sure you are investing 15% of your household income towards retirement. Everything extra goes at the house until it is paid off. There are others that will suggest that you keep the mortgage and invest. I think this is foolish, but reasonable people can differ.

GuyFromGeorgia
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Re: Invest or Pay Down Mortgage?

Post by GuyFromGeorgia » Tue May 12, 2020 12:59 pm

There's still a lot of uncertainty in the world right now. A larger emergency fund isn't a bad idea. If you invest, I would dollar cost average over the coming months. Maybe every 2 weeks put an extra $1k into the market. The only way I would put it toward the mortgage would be if I could pay it off in full, or similarly to the investing, dollar cost average. Maybe double the monthly payments or add an extra $1-2k per month. The last thing you want is to not have a large enough emergency fund, put the $50k toward the mortgage, and then loose your job. That $50k suddenly becomes very inaccessible in that scenario.

lakpr
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Re: Invest or Pay Down Mortgage?

Post by lakpr » Tue May 12, 2020 12:59 pm

As long as you are maxing out your 401k and Roth IRA, I would cast my vote to paying down the mortgage further. With your current schedule, you are on pace to extinguish the mortgage in 3 years. Additional payments into the mortgage is equivalent to buying a 3-year 3.3% CD.

You can choose to invest that money into the stock market, but it is not guaranteed, especially in the immediate 3-year horizon. It's a safer bet to invest that money into bond-like instruments, you might as well pay off the mortgage.

GoldenFinch
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Re: Invest or Pay Down Mortgage?

Post by GoldenFinch » Tue May 12, 2020 1:07 pm

There are many threads addressing this topic. If you search “pay off mortgage” in the Bogleheads search bar you will find a lot of advice. I would suggest paying it off as long as you are maxing out retirement accounts.

Topic Author
83Tractors
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Joined: Tue May 12, 2020 12:28 pm

Re: Invest or Pay Down Mortgage?

Post by 83Tractors » Tue May 12, 2020 2:28 pm

Thanks all for great responses. Paying off house would be great feeling of security. But, I'm sure I could gain more by investing. I'll search through the "Pay off Mortgage" posts.

miket29
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Re: Invest or Pay Down Mortgage?

Post by miket29 » Tue May 12, 2020 2:28 pm

if you pay off the mortgage in 3 years then $50K of debt will cost you roughly $5K at 3.3% interest before tax, somewhat less after-tax since it is deductible if you can itemize. This is offset by the return from whatever you do with the $50K (use it to invest, buy more bonds, etc).

Balance1969
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Re: Invest or Pay Down Mortgage?

Post by Balance1969 » Tue May 12, 2020 2:36 pm

lakpr wrote:
Tue May 12, 2020 12:59 pm
As long as you are maxing out your 401k and Roth IRA, I would cast my vote to paying down the mortgage further. With your current schedule, you are on pace to extinguish the mortgage in 3 years. Additional payments into the mortgage is equivalent to buying a 3-year 3.3% CD.
The equivalency to a 3.3% CD seems a little off if you itemize your tax return and write off the mortgage interest. Might be something more like a 2% CD because you would also likely have to pay taxes on the interest of the CD depending on your tax bracket.

I could be wrong.

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BrandonBogle
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Re: Invest or Pay Down Mortgage?

Post by BrandonBogle » Tue May 12, 2020 2:57 pm

Have you thought about doing a refi to get even a lower rate and make the decision even harder? I’m doing one right now with no closing costs (not financed closing costs, but no costs) for 2.625% for 15 years. Going from 3.3% to 2.875%-ish would be a nice extra little chunk of saving, even if you keep paying it down aggressively.

lakpr
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Re: Invest or Pay Down Mortgage?

Post by lakpr » Tue May 12, 2020 2:57 pm

Balance1969 wrote:
Tue May 12, 2020 2:36 pm
lakpr wrote:
Tue May 12, 2020 12:59 pm
As long as you are maxing out your 401k and Roth IRA, I would cast my vote to paying down the mortgage further. With your current schedule, you are on pace to extinguish the mortgage in 3 years. Additional payments into the mortgage is equivalent to buying a 3-year 3.3% CD.
The equivalency to a 3.3% CD seems a little off if you itemize your tax return and write off the mortgage interest. Might be something more like a 2% CD because you would also likely have to pay taxes on the interest of the CD depending on your tax bracket.

I could be wrong.
To itemize, the mortgage interest + charitable deductions must exceed $14,400 for a married couple, for 2020. Given the financial situation described in the first post, the mortgage interest on a $115k mortgage is peanuts, and I do not expect the couple to be making charitable donations exceeding $14k.

Edited to add: the 3.3% interest that this couple would earn by paying down the mortgage is tax-free. A before-tax equivalent of this CD, assuming a 22% tax bracket, is 4.25% CD

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willthrill81
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Re: Invest or Pay Down Mortgage?

Post by willthrill81 » Tue May 12, 2020 3:00 pm

lakpr wrote:
Tue May 12, 2020 12:59 pm
As long as you are maxing out your 401k and Roth IRA, I would cast my vote to paying down the mortgage further. With your current schedule, you are on pace to extinguish the mortgage in 3 years. Additional payments into the mortgage is equivalent to buying a 3-year 3.3% CD.

You can choose to invest that money into the stock market, but it is not guaranteed, especially in the immediate 3-year horizon. It's a safer bet to invest that money into bond-like instruments, you might as well pay off the mortgage.
100% agree. A 3.3% guaranteed after-tax return is almost unbeatable these days. Stocks may beat that, but there's a lot of uncertainty in stock returns over a three year period.

I really doubt that the OP would later regret paying off the mortgage early.
BrandonBogle wrote:
Tue May 12, 2020 2:57 pm
Have you thought about doing a refi to get even a lower rate and make the decision even harder? I’m doing one right now with no closing costs (not financed closing costs, but no costs) for 2.625% for 15 years. Going from 3.3% to 2.875%-ish would be a nice extra little chunk of saving, even if you keep paying it down aggressively.
Good idea. The key to this working is there being no closing costs associated with the refi.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Balance1969
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Re: Invest or Pay Down Mortgage?

Post by Balance1969 » Tue May 12, 2020 5:32 pm

lakpr wrote:
Tue May 12, 2020 2:57 pm
Balance1969 wrote:
Tue May 12, 2020 2:36 pm
lakpr wrote:
Tue May 12, 2020 12:59 pm
As long as you are maxing out your 401k and Roth IRA, I would cast my vote to paying down the mortgage further. With your current schedule, you are on pace to extinguish the mortgage in 3 years. Additional payments into the mortgage is equivalent to buying a 3-year 3.3% CD.
The equivalency to a 3.3% CD seems a little off if you itemize your tax return and write off the mortgage interest. Might be something more like a 2% CD because you would also likely have to pay taxes on the interest of the CD depending on your tax bracket.

I could be wrong.
To itemize, the mortgage interest + charitable deductions must exceed $14,400 for a married couple, for 2020. Given the financial situation described in the first post, the mortgage interest on a $115k mortgage is peanuts, and I do not expect the couple to be making charitable donations exceeding $14k.

Edited to add: the 3.3% interest that this couple would earn by paying down the mortgage is tax-free. A before-tax equivalent of this CD, assuming a 22% tax bracket, is 4.25% CD
Good point. The interest on the CD would have to be larger, not smaller, to make up for the difference.

mortfree
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Re: Invest or Pay Down Mortgage?

Post by mortfree » Tue May 12, 2020 5:49 pm

I would play with an amortization schedule.

Double payments have you paid off in 3 years.

How much of 50k would you need to:

Payoff mortgage in 3 years but without double payments? If more than 50k needed, maybe 1.5 times monthly payment

Or

Payoff mortgage in 2 years with accelerated payments.

Or another scenario

See what that works out to and then whatever is left of the 50k you can save/invest.

bogle707
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Re: Invest or Pay Down Mortgage?

Post by bogle707 » Tue May 12, 2020 6:02 pm

IMO, both. You should not retire with a mortgage because you need to be somewhat flexible. Having a mortgage payment is a huge burden that puts you at substantial risk when you no longer have income (I feel the same way about rent). If you slash your living expenses by not having rent or a mortgage, and something terrible happens to the economy (as it always does), you have the peace of mind knowing that you can just skip a vacation or eat out less. So what I do is split the difference and invest + pay down the mortgage with extra principle.

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Watty
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Re: Invest or Pay Down Mortgage?

Post by Watty » Tue May 12, 2020 6:18 pm

83Tractors wrote:
Tue May 12, 2020 12:33 pm
Planning to receive an inheritance soon of ~$50K.
When you receive that money one option would be to "recast your mortgage"(Google this). Lenders are not required to do this but usually will for a processing fee of a few hundred dollars or even for free. The way that this works is that if you pay the loan down by 50%(or whatever makes sense) then your required mortgage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same. This could be very useful if something happens like you are laid off or disabled or if interest rates go up a lot.

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