Invest or Payoff Home

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sprocketnose
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Invest or Payoff Home

Post by sprocketnose » Wed May 15, 2019 5:26 pm

Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?

bradpevans
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Re: Invest or Payoff Home

Post by bradpevans » Wed May 15, 2019 7:09 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
My $0.02 -- that's way too much cash earning too little, so invest it.
a) in the mortgage
b) in the market

either way, that money is now "long term money", so I would favor putting in the market.

You could pay off the house and that opens up cash flow...

Or you could do some off each (but that doesn't help cash flow until the mortgage is gone).

I'm in the invest first, pay down mortgage second group. The sooner my money is in the market,
the sooner it can double. The third, fourth, fifth doubling things really pay off....(so invest sooner than later)

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Carlos Danger
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Re: Invest or Payoff Home

Post by Carlos Danger » Wed May 15, 2019 7:18 pm

For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.

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willthrill81
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Re: Invest or Payoff Home

Post by willthrill81 » Wed May 15, 2019 7:23 pm

Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
Yes, the 'sleep well at night' factor is not to be underestimated, especially if stocks do a nosedive.

It seems unlikely to earn a guaranteed return higher than 4.12% any time in the near future. As long as the OP will have sufficient liquidity after paying off the house, it seems like a good move to me as well. I really doubt that if his home were paid off, he would take out a 4.12% mortgage on it in order to invest the proceeds in a 2.2% savings account.
“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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Nate79
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Re: Invest or Payoff Home

Post by Nate79 » Wed May 15, 2019 7:31 pm

A guaranteed 4.12% aftertax return is very good right now. The return of the market over the next 5-10 years is far from guaranteed to beat that. I would pay off the mortgage and then start investing like crazy with your new found cash flow of not needing to pay for a mortgage.

tampaite
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Re: Invest or Payoff Home

Post by tampaite » Wed May 15, 2019 8:02 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
No brainier. Pay off home tomorrow.

Bud
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Re: Invest or Payoff Home

Post by Bud » Wed May 15, 2019 8:12 pm

yep, pay off the mortgage or at least pay half of it. I just had a 5% mortgage I paid off and now I wonder why I waited so long. I pulled my money from my Intermediate Bond Index Fund which was yielding 2.89%.

Bacchus01
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Re: Invest or Payoff Home

Post by Bacchus01 » Wed May 15, 2019 8:21 pm

willthrill81 wrote:
Wed May 15, 2019 7:23 pm
Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
Yes, the 'sleep well at night' factor is not to be underestimated, especially if stocks do a nosedive.

It seems unlikely to earn a guaranteed return higher than 4.12% any time in the near future. As long as the OP will have sufficient liquidity after paying off the house, it seems like a good move to me as well. I really doubt that if his home were paid off, he would take out a 4.12% mortgage on it in order to invest the proceeds in a 2.2% savings account.
OP doesn’t have to return that over the near future, just over the lifetime over the loan. You don’t think over 20 years OP can do better than that?

I would refi to a lower rate and invest.

Bacchus01
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Re: Invest or Payoff Home

Post by Bacchus01 » Wed May 15, 2019 8:22 pm

Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
And if OP doesn’t have ability to pay taxes, will still be homeless. Having liquidity is very important.

Herekittykitty
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Re: Invest or Payoff Home

Post by Herekittykitty » Wed May 15, 2019 8:38 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
I would add a third option to the question
Option #1: Pay off the mortgage
Option #2: Do a combo - pay off a big part of the mortgage, maybe 1/3 or 1/2, refinance to a lower interest rate possibly shorter (certainly not longer) term mortgage, set aside part of the remainder as an emergency fund, and invest the rest (either by investing directly or by supplementing your income if needed in order to increase contributions to 401k and perhaps IRA).
Option #3: Invest the cash

I am not offering an opinion as to what you should do, just an opinion that there are more than two options.

Best wishes.
I don't know anything.

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willthrill81
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Re: Invest or Payoff Home

Post by willthrill81 » Wed May 15, 2019 8:46 pm

Bacchus01 wrote:
Wed May 15, 2019 8:21 pm
willthrill81 wrote:
Wed May 15, 2019 7:23 pm
Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
Yes, the 'sleep well at night' factor is not to be underestimated, especially if stocks do a nosedive.

It seems unlikely to earn a guaranteed return higher than 4.12% any time in the near future. As long as the OP will have sufficient liquidity after paying off the house, it seems like a good move to me as well. I really doubt that if his home were paid off, he would take out a 4.12% mortgage on it in order to invest the proceeds in a 2.2% savings account.
OP doesn’t have to return that over the near future, just over the lifetime over the loan. You don’t think over 20 years OP can do better than that?

I would refi to a lower rate and invest.
First of all, the money isn't invested in assets that are likely to outperform his 4.12% mortgage rate. It's currently yielding 2.2%.

But more importantly, contrary to what many believe, this issue is not merely one of arbitrage. Even if the OP's mortgage rate were 0%, it would still increase his sequence of returns risk because he must make that mortgage payment every month, regardless of how his portfolio performs. By definition, that increases his sequence of returns risk. For instance, if his portfolio drops by 30% over the next five years, he must still make that mortgage payment every month, and he would probably wish that he had paid it off instead. Now if his mortgage payment is only a small portion of his overall expenses, it might not increase this risk much, and he might benefit from leveraging that rate. But that certainly is the riskier option. Even if 20 year average stock returns were higher than 4.12%, he could easily be worse off by keeping the mortgage due to the way sequence of returns risk works. Remember that the 30 year SWR has historically been about 4%, despite stocks' average real return being closer to 7%. Karsten at Early Retirement Now has an excellent post demonstrating this.

Again, I don't know many retirees with paid-for homes who would choose to do a cash-out refinance in order to invest the proceeds in stocks.
“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

DesertDiva
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Re: Invest or Payoff Home

Post by DesertDiva » Wed May 15, 2019 8:52 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
I’m generally in the pay-off-your-mortgage camp. But there’s a lot of detail missing in your post. How old are you? The closer you are to retirement, the more it makes sense to have a paid off mortgage. Are you making out retirement accounts? What is your mortgage balance, and would the payoff drain all your cash?
♫ Stocks go up ♫ Stocks go down ♫ Stocks go up ♫ Stocks go down ♫

Bacchus01
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Re: Invest or Payoff Home

Post by Bacchus01 » Wed May 15, 2019 8:57 pm

willthrill81 wrote:
Wed May 15, 2019 8:46 pm
Bacchus01 wrote:
Wed May 15, 2019 8:21 pm
willthrill81 wrote:
Wed May 15, 2019 7:23 pm
Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
Yes, the 'sleep well at night' factor is not to be underestimated, especially if stocks do a nosedive.

It seems unlikely to earn a guaranteed return higher than 4.12% any time in the near future. As long as the OP will have sufficient liquidity after paying off the house, it seems like a good move to me as well. I really doubt that if his home were paid off, he would take out a 4.12% mortgage on it in order to invest the proceeds in a 2.2% savings account.
OP doesn’t have to return that over the near future, just over the lifetime over the loan. You don’t think over 20 years OP can do better than that?

I would refi to a lower rate and invest.
First of all, the money isn't invested in assets that are likely to outperform his 4.12% mortgage rate. It's currently yielding 2.2%.

But more importantly, contrary to what many believe, this issue is not merely one of arbitrage. Even if the OP's mortgage rate were 0%, it would still increase his sequence of returns risk because he must make that mortgage payment every month, regardless of how his portfolio performs. By definition, that increases his sequence of returns risk. For instance, if his portfolio drops by 30% over the next five years, he must still make that mortgage payment every month, and he would probably wish that he had paid it off instead. Now if his mortgage payment is only a small portion of his overall expenses, it might not increase this risk much, and he might benefit from leveraging that rate. But that certainly is the riskier option. Even if 20 year average stock returns were higher than 4.12%, he could easily be worse off by keeping the mortgage due to the way sequence of returns risk works. Remember that the 30 year SWR has historically been about 4%, despite stocks' average real return being closer to 7%. Karsten at Early Retirement Now has an excellent post demonstrating this.

Again, I don't know many retirees with paid-for homes who would choose to do a cash-out refinance in order to invest the proceeds in stocks.
It it doesn’t have to be returning 2% or so.

I understand the sequence of returns risk. That is a viable concern.

I woild cash-our refi my house in retirement and plan to do just that.

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willthrill81
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Re: Invest or Payoff Home

Post by willthrill81 » Wed May 15, 2019 9:00 pm

Bacchus01 wrote:
Wed May 15, 2019 8:57 pm
willthrill81 wrote:
Wed May 15, 2019 8:46 pm
Bacchus01 wrote:
Wed May 15, 2019 8:21 pm
willthrill81 wrote:
Wed May 15, 2019 7:23 pm
Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.

I'd pay off the mortgage 1st and sleep like a baby.
Yes, the 'sleep well at night' factor is not to be underestimated, especially if stocks do a nosedive.

It seems unlikely to earn a guaranteed return higher than 4.12% any time in the near future. As long as the OP will have sufficient liquidity after paying off the house, it seems like a good move to me as well. I really doubt that if his home were paid off, he would take out a 4.12% mortgage on it in order to invest the proceeds in a 2.2% savings account.
OP doesn’t have to return that over the near future, just over the lifetime over the loan. You don’t think over 20 years OP can do better than that?

I would refi to a lower rate and invest.
First of all, the money isn't invested in assets that are likely to outperform his 4.12% mortgage rate. It's currently yielding 2.2%.

But more importantly, contrary to what many believe, this issue is not merely one of arbitrage. Even if the OP's mortgage rate were 0%, it would still increase his sequence of returns risk because he must make that mortgage payment every month, regardless of how his portfolio performs. By definition, that increases his sequence of returns risk. For instance, if his portfolio drops by 30% over the next five years, he must still make that mortgage payment every month, and he would probably wish that he had paid it off instead. Now if his mortgage payment is only a small portion of his overall expenses, it might not increase this risk much, and he might benefit from leveraging that rate. But that certainly is the riskier option. Even if 20 year average stock returns were higher than 4.12%, he could easily be worse off by keeping the mortgage due to the way sequence of returns risk works. Remember that the 30 year SWR has historically been about 4%, despite stocks' average real return being closer to 7%. Karsten at Early Retirement Now has an excellent post demonstrating this.

Again, I don't know many retirees with paid-for homes who would choose to do a cash-out refinance in order to invest the proceeds in stocks.
It it doesn’t have to be returning 2% or so.

I understand the sequence of returns risk. That is a viable concern.

I woild cash-our refi my house in retirement and plan to do just that.
That might turn out to be a good move, but those employing it should be fully aware that it is the riskier option, and it could be a lot riskier.
“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

tdmp
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Re: Invest or Payoff Home

Post by tdmp » Wed May 15, 2019 9:05 pm

If you had the cash all this time and didn’t invest that cash in equity with it, then what changed ? Ie. If it is bc you didn’t know much about investing and now you found the Boglehead way, then certainly you might want to take a chance and use it to invest it with the appropriate asset allocation. However, if you had some basic knowledge of investing and just didn’t do so, then I suppose you might be a little risk-averse . In this case, I would pay off the mortgage.
Also, your decision depends upon where your other investments are sitting in. Investors very often OVERESTIMATE their risk tolerance. When there is a downturn and increase volatility, many investors have trouble staying the course. Outflows of from equity funds increase when there is a downturn. Personally, I would pay off the mortgage. I think it would help investors stay the course in market downturns.

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Nate79
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Re: Invest or Payoff Home

Post by Nate79 » Wed May 15, 2019 9:15 pm

There is an active thread going on right now showing that bonds outperformed stocks over a 20 year period. There have been periods where stocks have had zero return over decade long periods. Risk and reward are complementary and investors today really do not understand that stocks can certainly far underperform the guaranteed return of the mortgage.

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willthrill81
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Re: Invest or Payoff Home

Post by willthrill81 » Wed May 15, 2019 9:26 pm

Nate79 wrote:
Wed May 15, 2019 9:15 pm
There is an active thread going on right now showing that bonds outperformed stocks over a 20 year period. There have been periods where stocks have had zero return over decade long periods. Risk and reward are complementary and investors today really do not understand that stocks can certainly far underperform the guaranteed return of the mortgage.
If you compare 30 year mortgage rates in early 2000 to the subsequent returns of U.S stocks, paying off the mortgage was clearly the superior move, although virtually nobody thought it likely to be that way since the S&P 500 had compounded at over 18% for the last several years. Now you could certainly have refinanced that mortgage rate as time went on due to falling interest rates, but there is no guarantee that you will have that option if/when you need it in the future.
“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

Topic Author
sprocketnose
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Re: Invest or Payoff Home

Post by sprocketnose » Wed May 15, 2019 11:44 pm

To provide more details to my original post. I’m 41 years old and max out my employer 401k and Roth IRA I have $165k in my taxable FIRE fund and will have about 40k left in savings if I payoff the mortgage.

Thanks for all the input it’s very valuable in my decision making. I want to make the best decision since this is a lot of money and could set my wife and I up for FIRE

fleetwdl
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Re: Invest or Payoff Home

Post by fleetwdl » Thu May 16, 2019 3:37 pm

Stealing this from Dave Ramsey. Ask yourself "Would I borrow money (at 4.12% or any %) to invest in the market? If your answer is yes, then I cannot help. If the answer is no, then pay off the mortgage.

As others here have mentioned, the feeling that you get from owning your home debt free, is sweet indeed. It just gives you an inner peace not related to money or investments or percentages.

veindoc
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Re: Invest or Payoff Home

Post by veindoc » Thu May 16, 2019 3:55 pm

sprocketnose wrote:
Wed May 15, 2019 11:44 pm
To provide more details to my original post. I’m 41 years old and max out my employer 401k and Roth IRA I have $165k in my taxable FIRE fund and will have about 40k left in savings if I payoff the mortgage.

Thanks for all the input it’s very valuable in my decision making. I want to make the best decision since this is a lot of money and could set my wife and I up for FIRE
When do you want to FIRE? If I were you I would pay enough principal off so that if you make your regular payments you will be done in 10 years (assuming that is your FIRE age). Then invest the rest.

If you wanted to FIRE tomorrow or if your taxable was well in excess of your mortgage, I would say pay it off, but seems to me you still have a ways to go.

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bengal22
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Re: Invest or Payoff Home

Post by bengal22 » Thu May 16, 2019 4:55 pm

If your personality is prone to worry and you stress about sequence of return and the possibility of homelessness then by all means pay off mortgage.

If your personality is one of Hope and Faith in our economy then don't pay off mortgage and have more flexibility in your investment plan.

I see it more like it really doesn't matter. It just gives things around in your ledger sheet. Just a matter of how you roll.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

Quaestner
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Re: Invest or Payoff Home

Post by Quaestner » Thu May 16, 2019 5:20 pm

This doesn't have to be an either/or decision. Why not accelerate your mortgage payments and simultaneously invest with a sensible (for you) asset allocation?

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Blimpalot
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Re: Invest or Payoff Home

Post by Blimpalot » Thu May 16, 2019 5:30 pm

OP: Another option to consider.

You could sell the house and invest the equity AND the money you have in savings, and find a place to rent for less than your mortgage payment. I made that move a few years ago and it was one of the best things I ever did, financially speaking. Now, of course, it depends a lot on your own situation. Could you rent for less than your mortgage payment in your area? Do you have substantial equity in the house? Is it a seller's market in your area? Do you like owning? Do you hate renting? Do you have kids and are pretty much tied to a certain school district? Stuff like that.

Personally, I never lost any sleep when I had a mortgage; nor do I lose any sleep now that I am "homeless." I'm confident in my ability to pay rent now (as I was confident in my ability to make a mortgage payment when I owned). I like the lower costs associated with renting as well as not having all the headaches that come with home ownership. I'm not saying it's for everyone; the choice to rent or own is a personal one, and there are many factors (not just economic ones) that go into the decision. Just floating it as an idea. I like my lifestyle more now than when I owned. I walk to work. Don't have to do/hire out yard work. Don't have to worry about maintenance and repairs. And I am saving about $2,000 a month by renting instead of owning, which is helping me amp up my savings rate bigly. The smaller place helps me keep my consumerist tendencies under control--nowhere to store a lot of useless junk. Might not have been the right move for me ten years ago (when I was your age), but it was right for me at the moment. When I retire, I imagine we might go back to owning, but for now, renting is working out great.
"Nothing I see can be taken from me."--Tom Marshall

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slow n steady
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Re: Invest or Payoff Home

Post by slow n steady » Fri May 17, 2019 8:23 am

sprocketnose wrote:
Wed May 15, 2019 11:44 pm
To provide more details to my original post. I’m 41 years old and max out my employer 401k and Roth IRA I have $165k in my taxable FIRE fund and will have about 40k left in savings if I payoff the mortgage.

Thanks for all the input it’s very valuable in my decision making. I want to make the best decision since this is a lot of money and could set my wife and I up for FIRE
The taxable account provides you with a good backstop if things go sideways. I would pay off the mortgage right away.

pdavi21
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Re: Invest or Payoff Home

Post by pdavi21 » Fri May 17, 2019 10:07 am

Easy. Pay off the mortgage.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

MrBobcat
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Re: Invest or Payoff Home

Post by MrBobcat » Fri May 17, 2019 10:17 am

It's definitely a personal decision. I have a huge aversion to debt even when rational me knows in all likelihood it's probably better to invest it for potentially greater returns.

When I faced the decision I went with the known and paid off the mortgage as quickly as possible. I sleep better knowing I'm not beholden to any lenders. As soon as it was paid off every penny that I used to pay debt went straight into savings.

flyphotoguy
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Re: Invest or Payoff Home

Post by flyphotoguy » Fri May 17, 2019 10:58 am

If it was my wife deciding, the mortgage will be paid off... if it was me I'd invest and consider paying it off in the future instead. You have a lot of options but for peace of mind maybe just pay it off and forget about it. Good luck!

Day9
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Re: Invest or Payoff Home

Post by Day9 » Fri May 17, 2019 11:46 am

Ignoring OP's specifics, the general question of investing or paying off the mortgage has a lot of nuances especially for such a basic question that many investors face.

Financial Advisers who are paid a percentage of Assets Under Management (AUM) have an interest that their clients keep their mortgage and invest in financial assets so they can extract more money from their clients. Not saying this means it is a bad idea, just pointing that out.
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Toons
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Re: Invest or Payoff Home

Post by Toons » Fri May 17, 2019 11:50 am

Personally
I would pay it off today.
Been there done that.
You still have money left over to invest.
The best of both worlds
:mrgreen:
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JoeRetire
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Re: Invest or Payoff Home

Post by JoeRetire » Fri May 17, 2019 4:07 pm

Carlos Danger wrote:
Wed May 15, 2019 7:18 pm
For me personally, the fear of being homeless would be a greater motivator than the hope of good market returns.
Are you actually in fear of being homeless? If you had 245K in cash and a 207K mortgage, would you still be in fear of being homeless?

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Meg77
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Re: Invest or Payoff Home

Post by Meg77 » Fri May 17, 2019 4:16 pm

slow n steady wrote:
Fri May 17, 2019 8:23 am
sprocketnose wrote:
Wed May 15, 2019 11:44 pm
To provide more details to my original post. I’m 41 years old and max out my employer 401k and Roth IRA I have $165k in my taxable FIRE fund and will have about 40k left in savings if I payoff the mortgage.

Thanks for all the input it’s very valuable in my decision making. I want to make the best decision since this is a lot of money and could set my wife and I up for FIRE
The taxable account provides you with a good backstop if things go sideways. I would pay off the mortgage right away.
Agreed.
"An investment in knowledge pays the best interest." - Benjamin Franklin

siriusblack
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Re: Invest or Payoff Home

Post by siriusblack » Fri May 17, 2019 6:02 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
Some projections of forward expected returns on the stock market are in the ~5% range right now. (With risk of course.) If I were in your shoes, I would do the mortgage in a heartbeat.

Another way to look at it: If you had the opportunity to invest 200K in a margin account that charges you 4% interest, would you do it? Basically the same question.

mortfree
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Re: Invest or Payoff Home

Post by mortfree » Fri May 17, 2019 6:21 pm

Another way to look at it. If you were buying this house today would you unload all of your cash into the house and tie up your money in an illiquid asset.

Is everything with this house “in order” such as the roof, appliances, HVAC, flooring, exterior, etc? Hate to see you have to borrow money if something needs fixed.

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Re: Invest or Payoff Home

Post by corn18 » Fri May 17, 2019 6:23 pm

siriusblack wrote:
Fri May 17, 2019 6:02 pm
sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
Some projections of forward expected returns on the stock market are in the ~5% range right now. (With risk of course.) If I were in your shoes, I would do the mortgage in a heartbeat.

Another way to look at it: If you had the opportunity to invest 200K in a margin account that charges you 4% interest, would you do it? Basically the same question.
A mortgage is not callable.

OP, I'm in the same boat but my mortgage is 3.75% and I am in the 37% marginal tax bracket, so I am leaving the cash in FZDXX earning 2.31%. The arbitrage isn't enough yet to make me move. And the liquidity might come in handy this year if I lose my job.

Sure is nice having the option, though.
Don't do something, just stand there!

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Re: Invest or Payoff Home

Post by JediMisty » Fri May 17, 2019 7:47 pm

fleetwdl wrote:
Thu May 16, 2019 3:37 pm
Stealing this from Dave Ramsey. Ask yourself "Would I borrow money (at 4.12% or any %) to invest in the market? If your answer is yes, then I cannot help. If the answer is no, then pay off the mortgage.

As others here have mentioned, the feeling that you get from owning your home debt free, is sweet indeed. It just gives you an inner peace not related to money or investments or percentages.
+1

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grabiner
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Re: Invest or Payoff Home

Post by grabiner » Fri May 17, 2019 9:16 pm

sprocketnose wrote:
Wed May 15, 2019 5:26 pm
Here is my current situation and I'm not sure where to put my 244K cash. Payoff the mortgage or invest or keep some cash for a pullback and other opportunities or pay down the mortgage?

Currently, I have 245K in an online bank earning 2.20%. I keep it here to get a decent return until I decide how to invest my cash. I have a mortgage balance of 207K (no other debt) that I pay interest of 4.12% on. Do I pay off my house or invest the cash in the market?
We have a discussion on the wiki: Paying down loans versus investing

Unless you donate a lot to charity, you probably are not itemizing deductions, or just barely itemizing. Your interest payment is $8530, and if you are paying the maximum $10,000 in state and local taxes, you need to have $5870 in other deductions to itemize at all.

Therefore, paying off the loan gives you a risk-free and tax-free 4.12% return, which is a great deal; Vanguard Long-Term Tax-Exempt, a low-risk long-term bond investment, yields only 2.47%. (This is a fair comparison for a 15-year mortgage, since the fund has the same duration as the mortgage; if you have a 30-year mortgage, the comparison moves slightly towards keeping the mortgage, but not enough to make keeping the mortgage better.)

If you are donating enough to charity that you deduct all the interest at 24%, the return on paying off the mortgage is 3.13%. Even at that rate, I would still pay off the mortgage, since you don't need the liquidity and that is better than any low-risk return you can get.
Wiki David Grabiner

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grabiner
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Re: Invest or Payoff Home

Post by grabiner » Fri May 17, 2019 9:21 pm

corn18 wrote:
Fri May 17, 2019 6:23 pm
OP, I'm in the same boat but my mortgage is 3.75% and I am in the 37% marginal tax bracket, so I am leaving the cash in FZDXX earning 2.31%. The arbitrage isn't enough yet to make me move. And the liquidity might come in handy this year if I lose my job.
FZDXX (Fidelity Premium Money Market) is not the right fund to use for arbitrage comparison, because paying down the mortgage is a long-term return. A fair comparison would be Admiral shares of Vanguard Long-Term Tax-Exempt at 2.47% tax-free. If you are deducting all of your mortgage interest at 37%, the after-tax rate is 2.38%, so you come out ahead by holding long-term bonds and keeping the long-term mortgage.

This is my situation as well. My mortgage is 2.625% with ten years left, and I pay 24% federal and 8.2% MD tax. I can deduct all my interest, so my after-tax rate is 1.79%. If I had enough cash to pay off the mortgage, with a five-year duration, I could instead invest in Admiral shares of Vanguard Intermediate-Term Tax Exempt at 2.06%, which is 1.91% after MD tax. Therefore, even if I had the cash (I can't raise it all now without selling stocks for a large capital gain), I still wouldn't pay off the mortgage.
Wiki David Grabiner

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corn18
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Re: Invest or Payoff Home

Post by corn18 » Sat May 18, 2019 7:27 am

grabiner wrote:
Fri May 17, 2019 9:21 pm
corn18 wrote:
Fri May 17, 2019 6:23 pm
OP, I'm in the same boat but my mortgage is 3.75% and I am in the 37% marginal tax bracket, so I am leaving the cash in FZDXX earning 2.31%. The arbitrage isn't enough yet to make me move. And the liquidity might come in handy this year if I lose my job.
FZDXX (Fidelity Premium Money Market) is not the right fund to use for arbitrage comparison, because paying down the mortgage is a long-term return. A fair comparison would be Admiral shares of Vanguard Long-Term Tax-Exempt at 2.47% tax-free. If you are deducting all of your mortgage interest at 37%, the after-tax rate is 2.38%, so you come out ahead by holding long-term bonds and keeping the long-term mortgage.

This is my situation as well. My mortgage is 2.625% with ten years left, and I pay 24% federal and 8.2% MD tax. I can deduct all my interest, so my after-tax rate is 1.79%. If I had enough cash to pay off the mortgage, with a five-year duration, I could instead invest in Admiral shares of Vanguard Intermediate-Term Tax Exempt at 2.06%, which is 1.91% after MD tax. Therefore, even if I had the cash (I can't raise it all now without selling stocks for a large capital gain), I still wouldn't pay off the mortgage.
Thanks for the analysis. I hadn't thought about it that way. Once I find out if I still have a job later this year, we will decide what to do and will follow this advice. Thank you!
Don't do something, just stand there!

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Re: Invest or Payoff Home

Post by Ben Mathew » Sat May 18, 2019 9:26 am

sprocketnose wrote:
Wed May 15, 2019 11:44 pm
To provide more details to my original post. I’m 41 years old and max out my employer 401k and Roth IRA I have $165k in my taxable FIRE fund and will have about 40k left in savings if I payoff the mortgage.

Thanks for all the input it’s very valuable in my decision making. I want to make the best decision since this is a lot of money and could set my wife and I up for FIRE
From the lifecycle investing perspective, people tend to be underinvested in stocks when young and overinvested closer to retirement age. So generally speaking, young people (in their 20s and 30s) are better served by keeping their mortgage and investing 100% in stocks. In the 40s and 50s, it's less clear. Depends a lot on how much you've saved up and when you expect to retire and what your risk preference is.

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