Investing vs Mortgage Priority

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Investing vs Mortgage?

Ramsey Method: 15 yr mortgage, 15% investing, remaining funds applied to mortgage balance
3
4%
Leveraging method: 30 yr mortgage, Maximize all possible Tax Advantaged Investments, remaining income applied to taxable investing
16
22%
Hybrid 1: 15 yr Mortgage, Maximize all possible Tax Advantaged Investments, remaining income applied against Mortgage
9
12%
Hybrid 2: 15 yr Mortgage, Maximize all possible Tax Advantaged Investments, remaining income applied to taxable investing
22
30%
Hybrid 3: 30 yr Mortgage, Maximize all possible Tax Advantaged Investments, remaining income applied against Mortgage
5
7%
Hybrid 4: 30 yr Mortgage, Maximize all possible Tax Advantaged Investments, SPLIT remaining income applied to taxable investing and Mortgage
16
22%
Other: Please describe in a post with your reasoning/philosophy and how you feel about your choice after time
2
3%
 
Total votes: 73

Nukeboilermaker
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Investing vs Mortgage Priority

Post by Nukeboilermaker » Sat Jan 11, 2014 8:17 pm

All,

I called into the Dave Ramsey show a few weeks ago and was curious if he thought I could afford to trade up in a home. The result I got was actually a little different than I expected; he said I could easily afford a 350k home with a 15 year mortgage. However, I was saving WAY too much! I made about 140k last year and will likely make about that same the next two years before bumping up to 180-200k. I am maxing out a 401k (17.5k), my rIRA (5k), her tIRA (5k), and 10% in company stock (~10k). His advice is to only save 15% and then dump the rest at the 15 yr mortgage. My plan was to continue maxing out my tax advantage funds and then save extra into taxable accounts and pay on a 30 year mortgage (assume @ 4.6%). What are all of your thoughts, which way did you decide to go and how do you feel about the path option you took?

EDIT: For my situation would you consider if unable to afford a 15 year mortgage and maxing out of all tax advantaged funds that you can not actually afford the home?
EDIT2: I am 27 years old and currently have a 15 year mortgage, however I could not afford to trade up in home and stay with a 15 year (and maintain maxing out tax advantaged funds and ESPP). So this is a situation that has 30 years to play out (i.e. not retiring in <10 years)

Cheers,
Nuke
Last edited by Nukeboilermaker on Sat Jan 11, 2014 11:17 pm, edited 1 time in total.

Histotech
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Re: Investing vs Mortgage Priority

Post by Histotech » Sat Jan 11, 2014 8:53 pm

I tend to agree in general with most of what he teaches. He was a big influence early on for me as growing up I was not taught a lot of the basics. That said, I have come to think the main time he misses the mark is with investing. Some other threads around here get into detail on that, but basically he still has not come over to the passive side of the force with mutual funds and he places all too much importance on historical performance.

As for your question, I personally would fall somewhere between the Ramsey method and Hybrid #1 (which is what I voted for). I think it's really preference though. If you feel like having a paid for home would make your quality of life--and peace of mind--much better, then go for it. If it doesn't bother you or keep you up at night, 15 years is not all that long, assuming you have at least that long until you wish to retire.

Cheers!

cjg
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Re: Investing vs Mortgage Priority

Post by cjg » Sat Jan 11, 2014 9:20 pm

I voted for Hybrid 1 and would consider the leveraging method depending on the interest rate. Government subsidies for mortgages make them a much better deal than they would be otherwise. Fixed rate 30-year mortgages are protected for the consumer if interest rates go either direction - if interest rates go up, you keep the fixed rate - if they go down, you can refinance.

I might change my opinion in the future if government subsidies for mortgages went away but tax-advantaged accounts are extremely valuable and I would prioritize them over the mortgage if you think you'll continue making the maximum contribution every year.

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LadyGeek
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Re: Investing vs Mortgage Priority

Post by LadyGeek » Sat Jan 11, 2014 9:36 pm

Nukeboilermaker wrote:EDIT: For my situation would you consider if unable to afford a 15 year mortgage and maxing out of all tax advantaged funds that you can not actually afford the home?
Caution on using the poll results to decide what to do. Remember that polls are anonymous and you don't know the responder's background or intentions.

I recommend only using advice in this thread. Or, delete the poll (which you can do when editing the post) and just ask for help directly.
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Nukeboilermaker
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Re: Investing vs Mortgage Priority

Post by Nukeboilermaker » Sat Jan 11, 2014 9:50 pm

LadyGeek wrote:
Nukeboilermaker wrote:EDIT: For my situation would you consider if unable to afford a 15 year mortgage and maxing out of all tax advantaged funds that you can not actually afford the home?
Caution on using the poll results to decide what to do. Remember that polls are anonymous and you don't know the responder's background or intentions.

I recommend only using advice in this thread. Or, delete the poll (which you can do when editing the post) and just ask for help directly.
I am using the poll simply to see what trends might be present with people who tend to follow Boglehead princepals. It will not be used to determine what I do, just simply insterested in some data points. Some people (like DR) believe if you need a 30 year mortgage that can't afford the home, was curious if most bogleheads would say that is not true if you can afford the home on a 30 year and max out tax advantaged accounts.

Grt2bOutdoors
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Re: Investing vs Mortgage Priority

Post by Grt2bOutdoors » Sat Jan 11, 2014 10:41 pm

Nukeboilermaker wrote:All,



EDIT: For my situation would you consider if unable to afford a 15 year mortgage and maxing out of all tax advantaged funds that you can not actually afford the home?

Cheers,
Nuke
Maybe, maybe not. Let's say you are 25 years old, you plan on working for 40 years or even 30 years. Over the course of your working career, you will receive either an annual raise or in lieu of that, promotions, each of which will increase your income over time whilst your mortgage payment stays fixed. You could have purchased the home with a 15 year mortgage but opted not to so that you could maximize your 401K plan contributions and by doing so, maximize the amount of time the account values could compound. You also chose to make some improvements to the home (new paint, re-tiled the bathrooms, upgraded the electrical system, etc.) - you paid for it in cold hard cash - had you taken out the 15 year mortgage - all of your monthly cash flow would have gone to making the payments leaving you miserable in your fixer-upper starter home. Dave ought to move up to the Northeast where quite a bit of the housing stock is older than Methuselah. Using his rationale, most of NYC shouldn't own homes, yet many do and quite valuable homes at that.

A 30 year offers flexibility at a slightly higher cost - you decide when to pay it off, just because the term is 30 years does not mean the holder of the mortgage can not pay it down sooner - you could choose to start pre-paying it from day 1 or you could choose to pay it off entirely at year 10 or year 30 - as long as you make the payments on time, no one will come knocking on your door.

BTW, Dave may have said you are over-saving, but I never hear Dave offer a guarantee to the callers who take his advice, that he'd make them whole or bail them out of a jam if his advice failed to pan out. I'd keep saving if I were you, when you reach your number and only you know what that number is, then you can throttle back. Until then, stay the course.

I voted for Hybrid 4. If I were to have some windfall land in my lap, I might reconsider that choice and pay off the mortgage, until then hybrid 4 offers the best of both worlds.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

tj
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Re: Investing vs Mortgage Priority

Post by tj » Sat Jan 11, 2014 11:00 pm

I voted hybrid 2, because that's what I am doing. I don't know enough about your situation to give you relevant advice...

abracadabra11
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Re: Investing vs Mortgage Priority

Post by abracadabra11 » Sun Jan 12, 2014 1:04 am

I voted for the leveraging method.

This board often tilts towards paying down a mortgage as fast as possible. Although this helps one become debt free in a shorter time horizon, it fails to recognize that debt isn't inherently bad. Investing as much money as you can will allow you to achieve the greatest portfolio and should put you on a path to greater financial freedom and flexibility. The value of the liquidity provided by the leveraging method is also often understated here.

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jimb_fromATL
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Re: Investing vs Mortgage Priority

Post by jimb_fromATL » Sun Jan 12, 2014 12:21 pm

I can eliminate #1.

Dave gives the same one-size-fits-all advice to everybody, regardless of their income, debt, age, discretionary income after expenses, or the cost of housing in their area. His advice is for spendaholics and debtaholics who have no understanding of money and no patience or ability to plan for the future. The fact that you're even asking about it here means that his advice does not apply to you.
  • Dave advocates NOTHING but 20% down and a 15 year mortgage for no more than 25% of your income for everybody regardless of whether it's a $5000 house in a blighted neighborhood in Detroit or a $700,000 bungalow in San Francisco, and whether you make $15K or $500K.

    He advocates contributing exactly 15% of your income toward retirement as though it were a magic number, regardless of your income and regardless of whether you're 20 years old or are 60 but haven't contributed anything to retirement.

    He advocates investing only in equities both before and after retirement, with no hedging your bets with balanced funds. He also promises his followers that they can count on earning 12% "in any good growth mutual fund" as though it were a constant both before and after retirement.

    He tells his followers that they can start withdrawing 8% of their retirement funds every year (twice the conventional thought of others) and says that their guaranteed 12% earnings will allow for 4% increases for inflation/COLA. Last I heard he had not changed that even after several years of little to no return in the market after the crash off 2001/2002. (He says the S&P 500 has averaged 12%). In fact he has ranted on his radio show and twitter against financial folks who suggested that 12% earnings and 8% withdrawals were unrealistic.

    TWITTER ARTICLE
    Dave's Dangerous Advice article
IMO Dave's single worst piece of one-size-fits-all advice is to stop investing for retirement including contributions to 401(k)s and IRAs in order to pay down those evil debts as fast as possible. He insists on this regardless of the amount of debt, or your income and tax brackets, or even if you get employer matching payments. He says it's about the behavior, not about the money.

He contradicts himself on this point because in his books and presentations he shows the huge loss for not starting retirement contributions early. Yet At normal market earnings expectations the loss of future retirement income for delaying contributions for even a year or two can easily run it tens to hundreds of thousands of dollars in exchange for saving only a tiny fraction as much interest on the debts. At Dave's pie-in-the-sky 12% both before and after retirement, I've shown real-life examples where the loss can run into tens of millions.

So... I say don't stop your retirement contributions at 15% if you can afford more, and don't think you cannot afford a house if you can't afford a 15 year mortgage. ... or if it's more than 25% of your income.

IMO what really matters is how much discretionary income you have after investing the max allowed to tax-deferred retirement plans, after building an adequate emergency fund of 6 months+ of living expenses; after eliminating most consumer debts (other than student loans).

Then you can pay as much extra as you wish on a 30 year mortgage to pay it down faster if it will make you feel good or if it is financially appropriate for your circumstances.

The main reason for a taking 30 year mortgage is that although you can pay it off in 15 years if you want to, if you fall on hard times financially -- such as a job loss or cut in pay or any family emergency-- you can drop back to the lower payment. Especially for lower income folks, that extra cost of a 15 year loan could make the difference between keeping the home or losing it. In fact I've seen posts on Dave Ramsey's forum by people who were exactly in that situation.

If your budget doesn't allow maxing retirement contributions AND a 15 year loan, and if you're paying any significant income taxes, then you definitely should go with 30 years so you can max your retirement and defer taxes too.

Here's an example to illustrate how wrong Dave's insistence on a 15 year mortgage can be:
  • For a mortgage balance of $250,000 at 4.% for 360 months the payment for P&I is $1193.54. The total interest would be $179,674.

    Adding $656 per month will pay off the loan in 180. months with $82,860 in interest. So you save $96,814 in interest and 180. months time in debt.

    If you were to suffer a financial setback, an extra $656 per month could be mighty handy -- and might even help avoid losing the home.

    It would be far worse if you had to reduce contributions to your 401(k)s or other retirement plans to afford it.

    For example, if your top tax brackets are 25% federal and 6% state for a total of 31% you’d have to stop contributing $11,403 per year ($950.26 per month) to the retirement plans. You’d pay an extra $294.58 per month in taxes and have $655.68 per month left to pay extra on the mortgage. That $294 is money that won't pay bills, buy necessities, earn compound interest for the rest of your life, or pay down your mortgage debt either.

    Notice that during that 180. months you've paid an extra $53,025 in taxes and lost the Time Value of that money for the rest of your life in order to save that $96,814 in interest and 15 years on the mortgage.
Next let's see how much you might lose for NOT maxing the 401(k)s.
  • Bear in mind that you'd be increasing your contributions as inflation and your salary goes up, so these are essentially in terms of today's dollars.

    If you did not reduce your 401(k) contributions, the total of $950.26 per month earning a conservative estimated average of 8.% would grow to $1,416,234 in 360. months.

    If you delay the $950 contribution for 180. months while paying down the debt and then resume it, your total will grow to only $328,827 in the remaining 180. months. Your 401(k) and its tax advantage will be short by $1,087,406 for saving $96,814 in interest on the debt.

    Even if you have the sticktoitivity to reinvest the freed up mortgage payments you'll run into yearly contributions limits for the tax-deferred plans -- assuming you resumed the max when the mortgage was paid off.

    If you were to re-invest the 180. freed-up payments of $1194 with no delay starting after month 180 in an after-tax account then at the same conservative 8.% it would grow to $413,010 by the end of the original 360 months. Added to the $328,827 you would have from resuming the $950 401(k) contributions, your total would be $741,837. That is still a loss of $674,396 for exactly the same money out of pocket.


But those losses are only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.
  • If you were to earn a conservative 5% after retirement, that $1,087,406 that you probably won’t have could have paid you an extra $4530.86 per month without even touching the principal. ( At 4% inflation for 30 years, that would be equivalent to an extra $1397/mo. in income today.)

    So if you lived another 30 years, you would lose the $1,087,406 that you won't have at retirement, plus the $1,631,109 of interest it won't earn after retirement, for a total loss of $2,718,516 in the long term in exchange for saving $96,814 in interest on the mortgage.

Even if you had reinvested all the freed up mortgage payments, you’re still losing a lot more.
  • At the same 5% after retirement, the extra $674,396 could have paid you an extra $2,810 in interest every month without touching the principal.

    If you lived another 30 years that would be another $1,011,595 for a total lifetime loss of $1,685,991 in exchange for saving $96,814 on the short-term debt.

If you could avoid higher taxes, or if you have longer until retirement, or if you could earn more nearly the historical long-term averages in the stock market, your losses could run into some real money.

If you want to believe Dave that 'anybody can earn 12% in any good mutual fund' … as a constant both before and after retirement…then it can be mind boggling.
  • At 12% you could have $3,321,136 at retirement time in 30 years, but would only have $474,733 if you delay contributions for 180 months.
    Your loss at retirement time would be $2,846,403 that you won't in the account have plus the $28,464 per month interest that it won't earn from then on.

    If you lived another 30 years, that's a loss of a potential $13,093,454 in retirement income in exchange for saving $96,814 and 180 months on the debt..

    Even if you reinvested the freed-up payments you'd only have $1,071,001, which is still short by $2,250,135 at retirement time. Then you'd lose the $22,501 per month in interest that it won’t earn. If you lived another 30 years, the best case would be a total loss of $10,350,621 in exchange for saving $96814 on the debt.
Thanks, Dave.

Inquisitive minds might ask this: If "it’s not about the money, it’s about the behavior", then at what point does it become bad behavior to throw away anywhere from over $600K to over TEN MILLION DOLLARS just to have a 15 year mortgage?

jimb

JoeTaxpayer
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Re: Investing vs Mortgage Priority

Post by JoeTaxpayer » Sun Jan 12, 2014 12:45 pm

What I find most curious about Dave's advice is that he sticks with a long term 12% return, but suggests you knock off a 4% mortgage as fast as you can.
I'll agree with him that's it's emotional, in the 2000's a 4% guarantee was preferable to the lost decade. But, he sticks with 12%, saying that the lost decade will be made up in the next decade and his 12% will be proven true over the long term. Hmm.
Long term, I'd rather have $250K in the investments, and a $250K mortgage, than to be at net zero. The risk is lower. If you lose your job, you still have bills to pay, along with property tax. The $250K saved up will let me sleep far better than the paid off house.

What Dave continues to miss is the combination of matched funds and pretax benefit. You can pay $7500 to the mortgage, or deposit $10K pretax to the 401(k) and see it matched to $20K. In other words, instead of paying off my $250K mortgage, I was able to deposit $333K to my 401(k) and see it matched to $666K. That can survive even a pretty bad decade.

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grabiner
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Re: Investing vs Mortgage Priority

Post by grabiner » Sun Jan 12, 2014 6:59 pm

Any of options 1, 2, and Leveraged are reasonable. It's clear that you want to max out your retirement accounts if you can, as this allows your savings to continue to grow tax-deferred well beyond the mortgage.

I selected option 2, which is what I did myself. Given your reported salary, you are going to be in a 28% tax bracket for most of the duration of your mortgage. A 15-year loan has a rate of about 3.5%, which is 2.52% after federal tax. Admiral shares of Long-Term Tax-Exempt, which have about the same duration as your mortgage but a bit of risk, earn 3.58%; this may not be your chosen alternative investment (it wasn't mine, as I hold all my bonds in a retirement account) but it is the most fair comparison. You may earn more on stocks than on the mortgage, but you can get this benefit without a mortgage by selling bonds to buy stocks, so you have presumably decided that it isn't worth the risk.

If you can't afford option 2, then I would recommend the leveraged option (30-year mortgage and don't make extra payments); you pay a higher rate on the mortgage, but you lock in that high rate for a long time. You might well find that the 30-year mortgage is a great deal when you still have a 4.5% mortgage which is 3.24% after tax, and after a few years, you are earning 5% on your municipal bonds or 7% on the bonds in your IRA. (And if rates fall, you can always refinance the 30-year mortgage, so it is only the bank taking on the interest-rate risk.)

I don't like option 3, taking out a 30-year mortgage and planning to pay it off early. If you pay off your 30-year mortgage in 15 years, you paid a lot more interest than necessary for no benefit.
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Histotech
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Re: Investing vs Mortgage Priority

Post by Histotech » Sun Jan 12, 2014 9:38 pm

jimb_fromATL wrote: IMO Dave's single worst piece of one-size-fits-all advice is to stop investing for retirement including contributions to 401(k)s and IRAs in order to pay down those evil debts as fast as possible. He insists on this regardless of the amount of debt, or your income and tax brackets, or even if you get employer matching payments. He says it's about the behavior, not about the money.
Not trying to nit-pick (okay maybe a little), because I agree that his investing advice is geared toward those with zero interest in spending time to learn, but I will say he does not always advocate stopping investments to pay down debt, regardless of the amount. If one's payoff horizon is longer than 2 years he advises them to continue retirement contributions. I'm not advocating this is the correct advice, just clarifying his position.

His main target audience are those who are financial wrecks (see: general population), so I doubt many people here would be included. I think he does more good than harm personally, but I do get why some feel frustrated with him. At a certain point though everyone needs to evaluate things for themselves and not just blindly follow one man's advice.

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jimb_fromATL
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Re: Investing vs Mortgage Priority

Post by jimb_fromATL » Sun Jan 12, 2014 11:39 pm

Histotech wrote: Not trying to nit-pick (okay maybe a little), because I agree that his investing advice is geared toward those with zero interest in spending time to learn, but I will say he does not always advocate stopping investments to pay down debt, regardless of the amount. If one's payoff horizon is longer than 2 years he advises them to continue retirement contributions. I'm not advocating this is the correct advice, just clarifying his position.

My original post in this thread was mainly illustrating why it would be better to take a longer mortgage rather than reduce retirement contributions to get a 15 year mortgage, so the 2 year limit wasn't a factor.

Dave at least does advocate contributing his magic 15% to retirement after paying off all other debt, but before paying down a mortgage. But for debts other than the mortgage he advises stopping retirement contributions unless it's going to take more than two years to pay off the debt. And Dave does not make an exception just to get employer matching payments. Again, he says it's not about the money, it's about the behavior. ( I personally don't think taking a voluntary cut in pay is good behavior ... or a good way to build wealth or pay off debt faster.)

Below are some excerpts from one of my posts for a real-life example HERE on the Dave Ramsey forum several years ago. (Dave charges for access to the forums nowadays, but you can still see some of the text without paying. Search for "jimb" to find my post.)

This one is for relatively low income, low taxes, low contributions to retirement, a low rate on a small debt; and only delaying contributions with matching payments for 22 months:
  • "...
    If you were contributing 5% of your $48,000 salary ( $200 per month) to your pre-tax plan, but redirect it to debt reduction instead, and if your combined marginal tax bracket is 21%, then the first $42 per month will have to go to pay income taxes that are no longer deferred. So you are losing the exponential growth in compound interest--the Future Value--for that $42 per month, and it is not paying down your debt either.

    If you were paying $428.87 per month on a debt of $12,035 at 5.237% it would be paid off in 30 months. The total interest paid would be $831. Paying the after-tax $158.00 extra per month will pay it off in about 22 months, saving $182 in interest and cutting 8 payments.
    ...
    We'll use the 12% average that Dave often says "anyone can earn in any good mutual fund."
    ...
    12.% Earnings With Employer Matching:

    You forfeit $4,400 in free matching payments...
    ...
    Assuming you start investing immediately after postponing retirement contributions for 22 months, you get the matching of $200/mo. for the remaining 398 months ... If you do not re-invest the 8 'freed-up' former payments, your loss at retirement is $518,741.

    If you do re-invest the 'freed-up' payments... at 12.%, earnings until retirement, the BEST CASE for delaying retirement contributions for 22 months to pay off the loan, including re-investing the 8 'freed-up' loan payments, is the difference between the normal $2,598,108 and $2,253,273 which is a loss at retirement time of $344,834.

    At retirement time, the interest alone on the $344,834 at a more conservative 6% would have been $1,724 per month. If you live 30 more years, the loss of monthly interest after retirement would be 1724 x 360 = $620,702.

    So you would lose the initial $344,834 that you won't have at retirement plus the $620,702 in interest that it won't earn after retirement, for a total lifetime loss of $965,536..."
And even that is with ony half as much earnings after retirement as Dave promises his followers that they can count on.

jimb

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Re: Investing vs Mortgage Priority

Post by bhsince87 » Mon Jan 13, 2014 12:15 am

I’m an option 2 guy.

A 30 year, tax subsidized, fixed rate, mortgage is some of the best inflation insurance you can buy. And if deflation hits, pay it off or give the house to the bank (if your conscience allows that). Its heads I win, tails the bank and I both lose, but the bank loses more.

And don’t forget, most of the tax savings come in the early years, when you’re paying mostly interest. I’ve seen some estimates where it’s optimal to pay for 7-8 years, and then re-evaluate. If rates are lower or similar, refinance for another 30 years. If rates are higher, let it ride. Or pay it off then if you have excess cash and liquidity, or if cash flow is an issue.

So many people ignore inflation when they run their mortgage numbers. But I’ll always remember my father smiling when he explained to me the benefit of his 5% mortgage rate when inflation was 8%.
BH87

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Re: Investing vs Mortgage Priority

Post by jnet2000 » Mon Jan 13, 2014 9:55 pm

Well, I am a huge Dave Ramsey fan and I believe in his plan, except he investing advice, I follow Boglehead philosophy. This forum is very unique in that it has some extremely brilliant people, but for most of us are emotion people. Even if the numbers work out in favor of investing vs paying the mortgage, there is an intangible. I for one, get much more peace seeing my mortgage balance diminish instead of seeing my taxable account increase. I have a 15 year mortgage that I am on track to payoff in 5 years. I can't wait :!:
"You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing" Warren Buffet

JoeTaxpayer
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Re: Investing vs Mortgage Priority

Post by JoeTaxpayer » Fri Jan 24, 2014 8:15 am

jnet2000 wrote:Even if the numbers work out in favor of investing vs paying the mortgage, there is an intangible. I for one, get much more peace seeing my mortgage balance diminish instead of seeing my taxable account increase. I have a 15 year mortgage that I am on track to payoff in 5 years.
Peace is fine. And even the numbers people will agree that a guaranteed 4% has its place when compared to a higher risk 10% return with 14% standard deviation.
It's when people skip their company match that the numbers go very bad. Then it's a guaranteed 4% vs 100%.
Or when they miss the math and pay their mortgage early vs paying their 18% credit card off.

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Re: Investing vs Mortgage Priority

Post by Colorado13 » Fri Jan 24, 2014 9:08 am

Grt2bOutdoors wrote: Let's say you are 25 years old, you plan on working for 40 years or even 30 years. Over the course of your working career, you will receive either an annual raise or in lieu of that, promotions...
I think this is very industry specific and/or location specific. In some industries, annual raises are a thing of the past....the good old days and all of that. I know quite a few people who have not had raises since 2008. So I would not necessarily advise a 25-year old to plan for annual raises because I don't think that's the reality for many people. But, it certainly may be the case for the OP depending on his/her career choice.

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Re: Investing vs Mortgage Priority

Post by kaudrey » Fri Jan 24, 2014 10:07 am

I think when you are young and starting out, a 30 year is fine and gives you the most flexibility. As others have said, hopefully in your 20s and 30s you are working toward promotions or occasional raises (not guaranteed, of course), in which case over time the mortgage becomes a smaller and smaller percent of your income. Then, at some point, it might make sense to refinance into a 15 year if interest rates are favorable - presumably you can afford a higher monthly payment and your interest paid over the life of the loan can go down significantly. That's what I did - refinanced to a 15 year about 8 years into a 30 year mortgage.

So I picked hybrid #2. Definitely want to max out retirement accounts, and then I invest the rest in taxable. That is also specific to our situation, as we want to retire early, so will need funds to live on before we can tap the retirement accounts.

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Re: Investing vs Mortgage Priority

Post by sunnyday » Fri Jan 24, 2014 10:20 am

Nukeboilermaker wrote:
LadyGeek wrote:
Nukeboilermaker wrote:EDIT: For my situation would you consider if unable to afford a 15 year mortgage and maxing out of all tax advantaged funds that you can not actually afford the home?
Caution on using the poll results to decide what to do. Remember that polls are anonymous and you don't know the responder's background or intentions.

I recommend only using advice in this thread. Or, delete the poll (which you can do when editing the post) and just ask for help directly.
I am using the poll simply to see what trends might be present with people who tend to follow Boglehead princepals. It will not be used to determine what I do, just simply insterested in some data points. Some people (like DR) believe if you need a 30 year mortgage that can't afford the home, was curious if most bogleheads would say that is not true if you can afford the home on a 30 year and max out tax advantaged accounts.
I agree with LadyGeek, especially considering that the poll does not factor in interest rates. That's a major factor. If someone has a 2% after-tax mortgage rate and decides to use it as leverage, that's completely different than deciding to prepay a 7% mortgage.

If you post your specific scenario and do a poll on what Bogleheads would do if they were in your situation, that would likely be more beneficial. That's what I did: http://www.bogleheads.org/forum/viewtop ... st=1935010 Although I decided against the majority, I got some tremendous feedback

Iorek
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Re: Investing vs Mortgage Priority

Post by Iorek » Fri Jan 24, 2014 11:15 am

I agree a lot depends on the mortgage interest rates and other factors. I actually voted for 4, but in my life I am pretty much doing 2 (a lot but not all of the difference is because I am more than 15 years closer to retirement and because I don't need a smaller mortgage to make the payments on a home I love).
Last edited by Iorek on Fri Jan 24, 2014 1:35 pm, edited 1 time in total.

Dulocracy
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Re: Investing vs Mortgage Priority

Post by Dulocracy » Fri Jan 24, 2014 1:06 pm

Somehow the internet ate my first post. Second attempt.

I chose "Other".

First: You should always do everything you can to maximize what you have in tax-advantaged space. My biggest regret is not putting more aside for this, as you can never get that space back. If you make a lot of money in the future, you can always dump money on the mortgage, but you can never go back and put money in tax-advantaged space once it is lost. If you do not wind up making a lot of money, maximizing tax-advantaged space will help you more at the end of life. If you only put 15% into this space, what happens when you lose a job or have a break in access to a 401k or have an emergency and have to scale back. Putting more money forward early on can increase the time your money has to grow, and make up for bumps in the investment road. My wife and I have in our investment plan that we will put the GREATER of 20% or maxing out tax-advantaged space. No matter what, we will put 20% aside, but if laws allow us more access to tax advantaged investments, we will keep stuffing money in the appropriate accounts.

Second: The reason I put "Other" is that you only included 15 and 30 year mortgages. People often recommend splitting money between mortgage and investing. What about splitting it between 15 and 30 year mortgages? I was not quite able to make the payments for a 15 year mortgage, but I was able to make the 20 year. I shortened the mortgage, lowered interest, and kept it manageable. Look into the 20 year mortgage. It does not save you as much as the 15, but it does allow you to pay off the mortgage faster and save more than you would with the 30 year.

I would not be afraid of upgrading. There is nothing wrong with living an enjoyable lifestyle. I also do not have a problem with 30 year mortgages for a "forever home." If you plan on moving, try to get a 15 or 20 year mortgage. It is only if I was going to stay somewhere for the rest of my life that I would be willing to go for a 30 year mortgage. I would also make sure that if you did move into a new home, it would not negatively effect your savings rate. (In my case, I would not buy a home if I could not still save 20% of my income/max tax-advantaged into retirement/savings. If I could COMFORTABLY meet that savings goal and have the house, I would get the house... especially one that would be my home for the rest of my life.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Meg77
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Re: Investing vs Mortgage Priority

Post by Meg77 » Fri Jan 24, 2014 4:14 pm

I am just a little bit older than you and just bought a new home. I opted for the 30 year mortgage which enabled me to trade up to a nice new home with all the amenities that we would like while still maxing out retirement accounts and saving a little bit in taxable besides (a 15 year loan would have confined us to a home lacking in either location or size/age/amenities).

Being young, and mortgage interest rates being as low as they are, I'm happy with this situation. Sure I could make do with a less luxurious home and save even more and be debt free even faster, but I don't really need to. I'll be rich enough if I stick to my plan and enjoy life a little more along the way too. If I was 40 and behind on my retirement savings that's another matter entirely. Most Dave Ramsey listeners are middle aged and so his advice is skewed somewhat I think against leverage. Being 27 with a 30 year mortgage is different from being 52 with a 30 year mortgage.
"An investment in knowledge pays the best interest." - Benjamin Franklin

daave
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Re: Investing vs Mortgage Priority

Post by daave » Mon Mar 10, 2014 3:51 pm

I am also considering this question, as I am planning to buy a home in the next 2-3 years. This is the analysis I came up with (please poke any obvious holes in it!).

Right now on a 400K home with 20% down, according to bankrate.com I can get a 15-year-fixed with a $2800 monthly payment, or a 30-year-fixed with a $2000 monthly payment.

Assuming all other savings goals are being met (including all tax-advantaged space maxed out), it comes down to a question of how much that additional leverage will have been worth after 30 years. I can either a) pay $2800/month to the mortgage for 15 years, then invest $2800/month for the next 15 years or b) pay $2000/month to the mortgage and invest $800/month for all 30 years. After 30 years, in both cases I have a house, no debt, and a taxable savings account; and which works out better all depends on the annualized rate of return:

Code: Select all

RoR    $2800/m,15Y  $800/m,30Y

4%     $557,090     $691,350
5%     $668,581     $751,527
6%     $807,630     $818,363
7%     $981,669     $892,671
8%   $1,200,236     $975,366
I suppose the 15-year option is more risky because you're dollar-cost averaging into the market over a shorter period of time (only the second 15 years), so you're more likely to be unlucky and run into a bear market. Additionally you run the risk of having some catastrophe resulting in your needing the money sooner than expected.

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