Pay down mortgage or invest

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Goosh
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Pay down mortgage or invest

Post by Goosh »

Hi All,

I posted other topic non financial section, topic rent or sell, and got several of advice what to do with my second house, which convinced me to sell.
I think here is the right section to ask my question about investing.

I decided to sell my second house, and will get profit around $400k which is just right amount to pay my primary home mortgage $390k, just refinanced 2.85% rate and 29 years left.

What would you advice? pay down the mortgage or invest instead?


Thank you,
Goosh

PS: I am new to investing , sounds promising also same time scary.
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willthrill81
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Re: Pay down mortgage or invest

Post by willthrill81 »

What would you do with the funds if you didn't pay down the mortgage? If you would buy bonds or other fixed income, then you're probably better off paying down/off the mortgage. If you would buy stocks or rental real estate, then you're probably better off doing that instead.

If you're leaning toward stocks, ask yourself this: if you had no mortgage, would you use your home as collateral for a 2.85% loan to buy stocks? If yes, then keep the mortgage and buy stocks. If no, then pay off the mortgage.
“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
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FiveK
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Re: Pay down mortgage or invest

Post by FiveK »

willthrill81 wrote: Thu Sep 03, 2020 9:26 pm If you're leaning toward stocks, ask yourself this: if you had no mortgage, would you use your home as collateral for a 2.85% loan to buy stocks? If yes, then keep the mortgage and buy stocks. If no, then pay off the mortgage.
That is one way to look at it.

Another way: few people, and very few among those starting out, have the wherewithal to buy a house without using a mortgage. For those wishing to buy a house, the mortgage is thus a necessary risk.

One may reasonably choose to invest in stocks rather than accelerate the payoff of a "necessary" mortgage, yet reasonably choose not to take an "unnecessary" mortgage on a paid-off house in order to buy more stocks.
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willthrill81
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Re: Pay down mortgage or invest

Post by willthrill81 »

FiveK wrote: Thu Sep 03, 2020 9:55 pm
willthrill81 wrote: Thu Sep 03, 2020 9:26 pm If you're leaning toward stocks, ask yourself this: if you had no mortgage, would you use your home as collateral for a 2.85% loan to buy stocks? If yes, then keep the mortgage and buy stocks. If no, then pay off the mortgage.
That is one way to look at it.

Another way: few people, and very few among those starting out, have the wherewithal to buy a house without using a mortgage. For those wishing to buy a house, the mortgage is thus a necessary risk.

One may reasonably choose to invest in stocks rather than accelerate the payoff of a "necessary" mortgage, yet reasonably choose not to take an "unnecessary" mortgage on a paid-off house in order to buy more stocks.
I agree that there isn't an objective right or wrong decision between buying stocks or paying down/off the mortgage. However, buying fixed income rather than paying down/off the mortgage in the OP's situation does not usually make sense unless one needs the liquidity and/or the ability to rebalance one's portfolio that fixed income can provide.
“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
dandinsac
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Re: Pay down mortgage or invest

Post by dandinsac »

One approach would be to pay off enough to only owe about 60% of the home value. Then, refinance to a 15-year mortgage. You should be able to get at or below 2.5%, with minimal out of pocket costs. Take advantage of the low rates available now.
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Goosh
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Re: Pay down mortgage or invest

Post by Goosh »

dandinsac wrote: Thu Sep 03, 2020 10:42 pm One approach would be to pay off enough to only owe about 60% of the home value. Then, refinance to a 15-year mortgage. You should be able to get at or below 2.5%, with minimal out of pocket costs. Take advantage of the low rates available now.
Hi dandinsac, thats very interesting idea, Thank you!
Thegame14
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Re: Pay down mortgage or invest

Post by Thegame14 »

pay off mortgage
DropAndDrag
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Re: Pay down mortgage or invest

Post by DropAndDrag »

Goosh wrote: Thu Sep 03, 2020 10:48 pm
dandinsac wrote: Thu Sep 03, 2020 10:42 pm One approach would be to pay off enough to only owe about 60% of the home value. Then, refinance to a 15-year mortgage. You should be able to get at or below 2.5%, with minimal out of pocket costs. Take advantage of the low rates available now.
Hi dandinsac, thats very interesting idea, Thank you!
it would be better
1. to refinance into 10-year mortgage because its rate is low than a 15-year mortgage
2. refinance maximum amount, like all 390 K$. in this case adjusted rate will be less
3. if 390 K$ is more than 80% of house price then to pay off to 80% to avoid monthly insurance payment
4. to check that maybe lender has better deal to refinance lower amount, like 300 K$
strongboy2005
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Re: Pay down mortgage or invest

Post by strongboy2005 »

dandinsac wrote: Thu Sep 03, 2020 10:42 pm One approach would be to pay off enough to only owe about 60% of the home value. Then, refinance to a 15-year mortgage. You should be able to get at or below 2.5%, with minimal out of pocket costs. Take advantage of the low rates available now.
Interesting. Is 60% loan to value (so, 40% equity) some kind of sweet spot for rates? I haven’t heard this before.
RobLyons
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Re: Pay down mortgage or invest

Post by RobLyons »

Hedge your bet and do both 50/50
"Great parenting sets the foundation for a better world"
Dandy
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Re: Pay down mortgage or invest

Post by Dandy »

If you have a decent amount of investments for your age then I would pay off the mortgage and use the freed up monthly income to invest.

If you don't have a decent amount of investments for your age then I would invest the amount that gives you a decent amount of assets for your age and use any left over to pay down the mortgage.
peterwantstosave
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Re: Pay down mortgage or invest

Post by peterwantstosave »

I would pay off the mortgage and celebrate the guaranteed return.

I did this about five years ago and even though I sometimes regret it, it's hard to regret not having a house payment.

Hope this helps, Peter
403b: 54% VTSAX, 36% BTMKX 10% QCBMRX | GSRA: 100% Money Market (100% QCBMRX on Dec 11, 2020) | Roth IRA: 100% FIPFX | Taxable: 100% FSKAX
MrJedi
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Re: Pay down mortgage or invest

Post by MrJedi »

strongboy2005 wrote: Fri Sep 04, 2020 2:18 am
dandinsac wrote: Thu Sep 03, 2020 10:42 pm One approach would be to pay off enough to only owe about 60% of the home value. Then, refinance to a 15-year mortgage. You should be able to get at or below 2.5%, with minimal out of pocket costs. Take advantage of the low rates available now.
Interesting. Is 60% loan to value (so, 40% equity) some kind of sweet spot for rates? I haven’t heard this before.
FNMA and FHMC charge loan level pricing adjustments (LLPA) for "risky" loans sold to them. 60% and below LTV is the threshold to avoid an LLPA as those are seen as less risky loans.

LLPA will affect your mortgage rates as lenders who intend on selling your loan will factor in the LLPA to determine the rate, points they charge, or credits they give you. The LLPA cut into their profit, so it will be passed onto the borrower.

Lenders who intend on holding onto your loan may have their own thresholds to assess appropriate risk and rate, but I would guess they follow pretty closely to FNMA and FHMC strategies in determining risk.
tedgeorge
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Re: Pay down mortgage or invest

Post by tedgeorge »

I'd split it up. Some to the mortgage, some to investing and some to just some fun and/or house projects that have been put on hold that would make things better. Gotta celebrate the wins!
Mindbender
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Re: Pay down mortgage or invest

Post by Mindbender »

It’s psychological for me but I’d pay off the mortgage first. This is assuming that you’re already funding your retirement according to your needs. :sharebeer
Jack FFR1846
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Re: Pay down mortgage or invest

Post by Jack FFR1846 »

So let me ask a question. If you pay off the mortgage, won't you then have free cash equal to the mortgage payment? Won't you be able to take that money going forward and invest? I have never heard of anyone who had a paid off mortgage regret doing that.

As usual, I'll post the 2 guys, one on each side:

Dave Ramsey: A mortgage is debt. You'd be an idiot not to pay off the mortgage.

Ric Edelman: Mortgage money is cheap and as time goes by becomes cheaper. You'd be an idiot to pay off your mortgage.
Bogle: Smart Beta is stupid
whereskyle
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Re: Pay down mortgage or invest

Post by whereskyle »

Goosh wrote: Thu Sep 03, 2020 9:21 pm Hi All,

I posted other topic non financial section, topic rent or sell, and got several of advice what to do with my second house, which convinced me to sell.
I think here is the right section to ask my question about investing.

I decided to sell my second house, and will get profit around $400k which is just right amount to pay my primary home mortgage $390k, just refinanced 2.85% rate and 29 years left.

What would you advice? pay down the mortgage or invest instead?


Thank you,
Goosh

PS: I am new to investing , sounds promising also same time scary.
I expect an 8% nominal return for my stock portfolio. Even if my interest rate were 5%, I'd probably buy stocks.

For the record, my interest rate is much lower than that, and I have no plans to prepay my mortgage.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Watty
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Re: Pay down mortgage or invest

Post by Watty »

What is best depends in part on the rest of your situation. You will get better responses if you post that using this suggested format as a guideline.

viewtopic.php?f=1&t=6212

There is also a wiki on this choice.

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

You could also call your lender and ask if they will "recast your mortgage"(Google this) if you make a large prepayment. They are not required to do this but they usually will for a few hundred dollar processing fee or even for free. The way this works is that if you pay your mortgage down by 50%(or whatever makes sense) then your required mortgage payment will be reduced by the same percentage. The interest rate and length of the loan stay the same. This could be important in case something happens like you are laid off or interest rates get real high.

All that said, there could be exceptions, but generally I would favor paying it off and then investing your mortgage payment each month.

The reason is that even though 2.85% is a low interest rate investing the money and earning a higher after tax return is harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
MrJedi
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Re: Pay down mortgage or invest

Post by MrJedi »

At that low of rate, I prefer to at least hold the debt and continue maxing tax advantaged accounts because those are limited each year.

If you are able to invest above and beyond and the question is taxable vs mortgage, I think good arguments can be made either way. If you are a young accumulator, I would err on the side of keeping the debt to build up more liquid investments before dumping money into home equity.
zlandar
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Re: Pay down mortgage or invest

Post by zlandar »

Pay down your mortgage and exchange the same amount of bonds for stocks.

I put an extra $5k in principal toward my mortgage. I exchanged $5k of Vanguard bonds for VG total stock index in my 401k.
hnd
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Re: Pay down mortgage or invest

Post by hnd »

Here are 2 scenarios. ( i also am pretending the value of the home does not go up because its not important to the math)

1. keep 400k invest it lump sum. assume a 6% return. out of that 400k investment though you withdraw the mortgage payment each month(I'm assuming around $1613 principal+interest) your balance at 15 years is 523k give or take. You have $171k in equity and 523k in your account. at 29 years its $789k. you own the home outright and also have 789k.

2. pay off your mortgage and begin investing that $1613 a month at a return of 6%. after 15 year you'll amass $517k. but you have all the equity in your home and 517k. even if we don't factor in home equity the difference is a measily 6k. after 29 years you'll have 1.5m.

you could do a mix of the 2. keep the 400 for a while and then pay off at a later date, etc.

i'm not taking into consideration taxes and deductions which may have considerable implications in all of this.
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Goosh
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Re: Pay down mortgage or invest

Post by Goosh »

Hi thank you all for your thoughts.

I should clarify more about me. I am 45 years old, unfortunately I just found out 401k 5 years ago ( I know I am dumb)
so far only 100k on that account, not much investment there. I am newbie making decision on this area seeking different possibilities from experts.

Thank you,
Last edited by Goosh on Fri Sep 04, 2020 1:09 pm, edited 1 time in total.
hnd
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Re: Pay down mortgage or invest

Post by hnd »

ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
Robdac
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Re: Pay down mortgage or invest

Post by Robdac »

Pay off the mortgage. If you don't like being debt free you can always get another one!
Money_Badger
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Re: Pay down mortgage or invest

Post by Money_Badger »

hnd wrote: Fri Sep 04, 2020 12:19 pm ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
hnd
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Re: Pay down mortgage or invest

Post by hnd »

Money_Badger wrote: Fri Sep 04, 2020 12:54 pm
hnd wrote: Fri Sep 04, 2020 12:19 pm ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
obviously but its all coming out of the same pot technically. if he doesn't take it out of the proceeds, he'll be -$1613 somewhere else every month.
Money_Badger
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Re: Pay down mortgage or invest

Post by Money_Badger »

hnd wrote: Fri Sep 04, 2020 1:18 pm
Money_Badger wrote: Fri Sep 04, 2020 12:54 pm
hnd wrote: Fri Sep 04, 2020 12:19 pm ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
obviously but its all coming out of the same pot technically. if he doesn't take it out of the proceeds, he'll be -$1613 somewhere else every month.
For simplicity sake, let's say that normally the OP would invest 2K / month aside from his mortgage. If he kept the 400K and kept investing his 2K, while paying off his mortgage, he would be better off than investing $3613 / month and by a fairly wide margin. You're assuming that the 400K is the only pot of money available, which clearly it is not.

I'm not a math wizard, but that seems to correct to me.
hnd
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Re: Pay down mortgage or invest

Post by hnd »

Money_Badger wrote: Fri Sep 04, 2020 1:45 pm
hnd wrote: Fri Sep 04, 2020 1:18 pm
Money_Badger wrote: Fri Sep 04, 2020 12:54 pm
hnd wrote: Fri Sep 04, 2020 12:19 pm ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
obviously but its all coming out of the same pot technically. if he doesn't take it out of the proceeds, he'll be -$1613 somewhere else every month.
For simplicity sake, let's say that normally the OP would invest 2K / month aside from his mortgage. If he kept the 400K and kept investing his 2K, while paying off his mortgage, he would be better off than investing $3613 / month and by a fairly wide margin. You're assuming that the 400K is the only pot of money available, which clearly it is not.

I'm not a math wizard, but that seems to correct to me.
The $1613 for payments has to come from somewhere. you can't just remove it from the equation. we are talking net worth here. "If he kept the 400K and kept investing his 2K, while paying off his mortgage (-$1613)"
BisterMean
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Re: Pay down mortgage or invest

Post by BisterMean »

Other than maxing 401k, every other dollar went to paying off the mortgage which I finished 2 years ago. Since then and every moment thereafter into the future, if I don't like my job I can say "I quit". I'm now 35.

Financial freedom is priceless.
Money_Badger
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Re: Pay down mortgage or invest

Post by Money_Badger »

hnd wrote: Fri Sep 04, 2020 1:54 pm
Money_Badger wrote: Fri Sep 04, 2020 1:45 pm
hnd wrote: Fri Sep 04, 2020 1:18 pm
Money_Badger wrote: Fri Sep 04, 2020 12:54 pm
hnd wrote: Fri Sep 04, 2020 12:19 pm ok so after 20 years you'll still have a mortgage and your 400k (minus monthly mortgage payments) will be 578k come retirement age. paying off mortgage and paying that 1613 into a retirement account over 20 years nets you a paid off house and 745k in that account. assuming 6% return.
If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
obviously but its all coming out of the same pot technically. if he doesn't take it out of the proceeds, he'll be -$1613 somewhere else every month.
For simplicity sake, let's say that normally the OP would invest 2K / month aside from his mortgage. If he kept the 400K and kept investing his 2K, while paying off his mortgage, he would be better off than investing $3613 / month and by a fairly wide margin. You're assuming that the 400K is the only pot of money available, which clearly it is not.

I'm not a math wizard, but that seems to correct to me.
The $1613 for payments has to come from somewhere. you can't just remove it from the equation. we are talking net worth here. "If he kept the 400K and kept investing his 2K, while paying off his mortgage (-$1613)"
Maybe I'm missing something here, but I didn't remove it, it got added back into the scenario where he pays off the mortgage. I am making an assumption, that he earns enough to invest 2K and pay his mortgage, but I don't think that's a crazy assumption.

Under both scenarios, he's allocating $3613 of his budget [mortgage (1613) + investment (2K) in one] and all investment [3613] in the other. By paying off his mortgage, he frees up an extra $1613, which gets added to his investments. So, I guess I don't see where I have removed the mortgage payment. If anything, the assumption that the mortgage payment automatically reduces the 6% profit from the 400K investment is not entirely accurate.
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AlabamaPaul
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Re: Pay down mortgage or invest

Post by AlabamaPaul »

At your age, I would vote for investing the proceeds from the sale of your second house. As you approach retirement is when you want to make sure you're debt free...
hnd
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Re: Pay down mortgage or invest

Post by hnd »

Money_Badger wrote: Fri Sep 04, 2020 3:02 pm
hnd wrote: Fri Sep 04, 2020 1:54 pm
Money_Badger wrote: Fri Sep 04, 2020 1:45 pm
hnd wrote: Fri Sep 04, 2020 1:18 pm
Money_Badger wrote: Fri Sep 04, 2020 12:54 pm

If you take the 400K and don't touch any of the proceeds, in 20 years you have 1.3 million. Of course you have to find $1613 / month to pay the mortgage, but the OP has been doing that all along.

It's a nice problem to have :)
obviously but its all coming out of the same pot technically. if he doesn't take it out of the proceeds, he'll be -$1613 somewhere else every month.
For simplicity sake, let's say that normally the OP would invest 2K / month aside from his mortgage. If he kept the 400K and kept investing his 2K, while paying off his mortgage, he would be better off than investing $3613 / month and by a fairly wide margin. You're assuming that the 400K is the only pot of money available, which clearly it is not.

I'm not a math wizard, but that seems to correct to me.
The $1613 for payments has to come from somewhere. you can't just remove it from the equation. we are talking net worth here. "If he kept the 400K and kept investing his 2K, while paying off his mortgage (-$1613)"
Maybe I'm missing something here, but I didn't remove it, it got added back into the scenario where he pays off the mortgage. I am making an assumption, that he earns enough to invest 2K and pay his mortgage, but I don't think that's a crazy assumption.

Under both scenarios, he's allocating $3613 of his budget [mortgage (1613) + investment (2K) in one] and all investment [3613] in the other. By paying off his mortgage, he frees up an extra $1613, which gets added to his investments. So, I guess I don't see where I have removed the mortgage payment. If anything, the assumption that the mortgage payment automatically reduces the 6% profit from the 400K investment is not entirely accurate.
you are right i believe. I've gone back and looked at it. If used proceeds from the 400k invested to pay your mortgage, you would have that 1613 to invest which equal themselves out technically. My calculator got the best of me there.
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