Pay down mortgage, or invest?

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Twins Fan
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Re: Pay down mortgage, or invest?

Post by Twins Fan » Wed Dec 23, 2015 6:55 pm

It wouldn't have to be in stocks. But, why invest in bonds? Just an example and of course numbers vary, but hanging on to a 3% mortgage to invest in bonds paying 2%..... If one is going to invest to get a better return than paying off the debt, they may as well go with what is expected to actually beat the mortgage rate. That's going to be stocks more often than not. But, then we get into the risk side of things.

Again, I have not seen any Boglehead recommend to run all savings and investment accounts to zero to get that mortgage paid off. There has to be some balance, of course. Most would say to have an EF set up and fill tax advantaged space first before paying down/off a mortgage. Once all that is set and there's still discretionary income, then the decision can be made between paying down the mortgage, investing in a taxable account, or 50/50 between the two. I don't think any of them are bad decisions, and it really comes down to personal preference. It's a good spot to be in really.

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Yesterdaysnews
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Re: Pay down mortgage, or invest?

Post by Yesterdaysnews » Thu Dec 24, 2015 1:26 am

cusetownusa wrote:
Yesterdaysnews wrote:
cusetownusa wrote:
Yesterdaysnews wrote:I paid off my house in 2 yrs on a 15 yr note. The main benefit for me is the improved monthly cash flow. I can now withstand a significant drop in monthly income (hope it never happens obviously) without any significant change in lifestyle for myself and the family.

While I have a stable job you just never know when different market dynamics will turn on you and income will drop. Having a healthy positive monthly cash flow is a good safety net in my opinion.
Again, why would it be any different if you had a pile of liquid savings/investments instead of the paid off mortgage? I can see why people like to pay off their mortgage debt but I don't get this part of the reasoning. Why wouldn't your lifestyle change with a paid off house but it would by having a mortgage and the equivalent in savings instead?
Presumable you would invest that money in stocks correct? What if we are in the midst of 2008 and you lose half your income due to recession? You then have to sell to meet your cash flow needs which is the worst time.
I get that point but Why would the money have to be invested in stocks? Seems a bit risky based on your example.

Also, I am not against paying off a mortgage, I just don't understand that part of the reasoning. In fact, In the event that I lost a significant portion of my income I would feel better having $200,000 in savings and a mortgage versus no mortgage and zero savings, but that is just me I guess.
If you plan on putting it in bonds why not just pay down the note? You are getting a bond-like risk free return by paying down the note vs. buying bonds or bond funds.

I would also agree that having zero savings is bad and I would probably keep the mortgage in that example. My main argument was regarding paying down the note vs investing that money. I have always believed in having decent amount of savings.

basspond
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Re: Pay down mortgage, or invest?

Post by basspond » Thu Dec 24, 2015 1:31 am

If your savings percentage is over 25%, look at paying down your mortgage.

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mpowered
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Re: Pay down mortgage, or invest?

Post by mpowered » Thu Dec 24, 2015 1:52 am

Yes. We've been consistently maxing out our 401ks at all times. 12 Month emergency fund is all set. So the choices are, put money towards a taxable account, towards equities, not bonds, since paying down the mortgage makes much more sense than investing any portion towards bonds, and straight up paying down the mortgage.

On one hand, investing more of the money may increase our return in the long run. On the other hand, paying OFF the mortgage would greatly reduce our cashflow risk in the future, in the event something catastrophic happens. That said, in the scenario where our income goes down drastically, I'm not sure we would stay in such a high value home, even if it was fully paid off.

ControlContentment
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Re: Pay down mortgage, or invest?

Post by ControlContentment » Thu Dec 24, 2015 8:36 am

I paid cash for my house and moved from a 70/30 portfolio to a 90/10. My ability to take risk increased because my monthly expenses decreased. I now pay a "mortgage" to myself through auto deposit to brokerage, and occasionally sweep my checking account into brokerage when it gets too large.

I could go work at Walmart, or collect only SS disability, and meet my families basic needs. That is worth a lot to me. I am 36.

cusetownusa
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Re: Pay down mortgage, or invest?

Post by cusetownusa » Thu Dec 24, 2015 9:05 am

Yes, I agree on many of the points about paying off the mortgage...in fact I may do just that when I can do it all at once. I just didn't understand the logic of doing it because it would help in the event of job loss or something. I huge pile of liquid savings would be more beneficial in that situation, imo.

Also. My effective mortgage rate is a little over 2%. I don't expect bond yields to only be 2% over the life of my mortgage...good chance it would average more than that over the next 20years but maybe not. Which is why taking the guerenteed return of the mortgage payoff is a good option.

ControlContentment
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Re: Pay down mortgage, or invest?

Post by ControlContentment » Thu Dec 24, 2015 9:31 am

cusetownusa wrote:Yes, I agree on many of the points about paying off the mortgage...in fact I may do just that when I can do it all at once. I just didn't understand the logic of doing it because it would help in the event of job loss or something. I huge pile of liquid savings would be more beneficial in that situation, imo.

Also. My effective mortgage rate is a little over 2%. I don't expect bond yields to only be 2% over the life of my mortgage...good chance it would average more than that over the next 20years but maybe not. Which is why taking the guerenteed return of the mortgage payoff is a good option.
You can only invest in the present moment. Maybe pay down the mortgage until rates rise sufficiently to present a risk free alternative that creates a spread in your favor.

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mpowered
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Re: Pay down mortgage, or invest?

Post by mpowered » Thu Dec 24, 2015 11:58 am

cusetownusa wrote:Yes, I agree on many of the points about paying off the mortgage...in fact I may do just that when I can do it all at once. I just didn't understand the logic of doing it because it would help in the event of job loss or something. I huge pile of liquid savings would be more beneficial in that situation, imo.

Also. My effective mortgage rate is a little over 2%. I don't expect bond yields to only be 2% over the life of my mortgage...good chance it would average more than that over the next 20years but maybe not. Which is why taking the guerenteed return of the mortgage payoff is a good option.
Also, once you build up a 12 month emergency fund, the risk posed by job loss goes down a whole lot. 12 months is more than enough to sell your house and move into something more affordable, or that you can buy with all cash. That's how I see it anyway.

Lars_2013
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Re: Pay down mortgage, or invest?

Post by Lars_2013 » Thu Dec 24, 2015 12:25 pm

mpowered wrote:Also, once you build up a 12 month emergency fund, the risk posed by job loss goes down a whole lot. 12 months is more than enough to sell your house and move into something more affordable, or that you can buy with all cash. That's how I see it anyway.
I agree with your underlying message, but depending on one's job I think there's some risk that the event that leads to job loss might also lead to a drop in home sales and home value. For example, an extended drop in federal spending could result in job loss for many folks and a simultaneous loss in home sales and values. I'd rather not be forced to sell in that environment.

stainlessworks
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Re: Pay down mortgage, or invest?

Post by stainlessworks » Thu Dec 24, 2015 12:35 pm

I hope your combined income is substantial.

You owe $1.13MM at 3.75% for 30 years.

You're paying almost $800M in interest to own a $1.13MM home.

To accelerate pay off of your mortgage to 18-19 years, you're going to need to put down an additional $5000 to your monthly payment (assuming you're already paying about that now).

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mpowered
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Re: Pay down mortgage, or invest?

Post by mpowered » Thu Dec 24, 2015 3:31 pm

stainlessworks wrote:I hope your combined income is substantial.

You owe $1.13MM at 3.75% for 30 years.

You're paying almost $800M in interest to own a $1.13MM home.

To accelerate pay off of your mortgage to 18-19 years, you're going to need to put down an additional $5000 to your monthly payment (assuming you're already paying about that now).

Yes. I have run the numbers. An additional $5,000 a month gets the mortgage paid off in 11 years. $10,000 a month gets the mortgage paid off in 7 years. We can do either without breaking a sweat.
Lars_2013 wrote:I agree with your underlying message, but depending on one's job I think there's some risk that the event that leads to job loss might also lead to a drop in home sales and home value. For example, an extended drop in federal spending could result in job loss for many folks and a simultaneous loss in home sales and values. I'd rather not be forced to sell in that environment.
In such an environment, all housing prices will be depressed, so if I had to sell our house at a loss, I'd probably be able to buy another one at a depressed price as well. But yes, if housing prices come down at some point by say, 25%, losing 25% of a 1.8mm house is going to be more than 25% savings on a smaller house.

Shallowpockets
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Re: Pay down mortgage, or invest?

Post by Shallowpockets » Thu Dec 24, 2015 6:25 pm

Here is a way to look at it. It is what I did although my mortgage was not on the same scale as yours.
Here is a retrospective way to see for yourself. Run an amortization schedule with all your actual figures. Print it out.
Look at what your principal was at start of 2015. Look at what your principal is now. Look at the 2015 interest. Add it up. Just mark on the amortization schedule at one end and the other. Probably prints out with the principal/interest numbers.
Now figure the percentage that interest is against the principle paid for 2015.
Is it more than you could have made in the market this year? In the S and P 500. Per Bogleheads? Most likely not. More likely it is way above what the same amount the principal money could have earned.
The earlier in your mortgage years you do this, the more it is in our favor.
Here are some rounded numbers run on an amortization schedule. Numbers are rounded.
Example:
$1,000,000 cost of house @ 3.75%

A start of year 5 you still owe $919,000
End of year 5 you will still owe $899,000.
Of you pay the bank the $20,00 difference and you skip ahead one year and save 12 monthly interest payments of $2850 totaling $34,200 saved for that year 5.
So for a $20k investment you essentially reaped $34,200 dollars.
That is a 58% gain on your money.
Plus you are a year ahead on the overall 30 year mortgage timeframe.
And that is only $20k. I am sure if you have a house at that level of cost then $20k is not a make or break amount.

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