Invest more or accelerate mortgage payoff?

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conlaw1234
Posts: 9
Joined: Mon Jun 11, 2018 9:58 am

Invest more or accelerate mortgage payoff?

Post by conlaw1234 » Mon Jun 18, 2018 12:56 pm

Hi Everyone - I appreciate the advice anyone is able to give.

Here is my situation and my question. I am currently putting extra money towards my mortgage because I was planning on keeping my current home as a rental property. At the current pace, I'd pay off a 30 year mortgage in 12 years. The intent was that we can keep the property as a rental property in the future. However, after crunching the numbers, the property would only generate net take home income of about $20k/year. This factors into property tax, HOA fee, maintenance, etc. This does not factor in any additional income tax I'd pay on the rental income. My wife and I plan to move from our home in 5 years or so. I think that after realizing this we would sell the property when we move rather than keeping it as a rental.

My question is should I take that extra money that I put towards the mortgage principal and invest it, add to my nest egg (currently 3 months but working towards 6) or keep paying down the mortgage?

Loik098
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Joined: Mon May 30, 2016 9:29 pm

Re: Invest more or accelerate mortgage payoff?

Post by Loik098 » Mon Jun 18, 2018 4:25 pm

Wiki here: https://www.bogleheads.org/wiki/Emergency_fund

Build the emergency fund first, then decide where to put your extra money.

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Invest more or accelerate mortgage payoff?

Post by delamer » Mon Jun 18, 2018 4:30 pm

Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.

conlaw1234
Posts: 9
Joined: Mon Jun 11, 2018 9:58 am

Re: Invest more or accelerate mortgage payoff?

Post by conlaw1234 » Mon Jun 18, 2018 4:48 pm

delamer wrote:
Mon Jun 18, 2018 4:30 pm
Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.
Interest rate on the mortgage is 2.75% for a 7 year ARM. We have about $200k in retirement dedicated accounts (401k, 403b, Roth IRAs) and about 130k in a taxable accounts.

Student debt of 155k at 2.65%.

I'm okay with paying off the student debt with the minimum payments since the rate is low.

delamer
Posts: 5125
Joined: Tue Feb 08, 2011 6:13 pm

Re: Invest more or accelerate mortgage payoff?

Post by delamer » Mon Jun 18, 2018 4:59 pm

conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
delamer wrote:
Mon Jun 18, 2018 4:30 pm
Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.
Interest rate on the mortgage is 2.75% for a 7 year ARM. We have about $200k in retirement dedicated accounts (401k, 403b, Roth IRAs) and about 130k in a taxable accounts.

Student debt of 155k at 2.65%.

I'm okay with paying off the student debt with the minimum payments since the rate is low.
I can’t see the rationale for prepaying your mortgage when you have that much student loan debt, especially given that it is not debt that can be discharged in bankruptcy.

conlaw1234
Posts: 9
Joined: Mon Jun 11, 2018 9:58 am

Re: Invest more or accelerate mortgage payoff?

Post by conlaw1234 » Mon Jun 18, 2018 5:15 pm

delamer wrote:
Mon Jun 18, 2018 4:59 pm
conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
delamer wrote:
Mon Jun 18, 2018 4:30 pm
Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.
Interest rate on the mortgage is 2.75% for a 7 year ARM. We have about $200k in retirement dedicated accounts (401k, 403b, Roth IRAs) and about 130k in a taxable accounts.

Student debt of 155k at 2.65%.

I'm okay with paying off the student debt with the minimum payments since the rate is low.
I can’t see the rationale for prepaying your mortgage when you have that much student loan debt, especially given that it is not debt that can be discharged in bankruptcy.
We both have safe jobs and are at a good combined income. I'm not worried about the student debt since it's at 2.65 and the principal is manageable (relatively speaking). I was just wondering if the returns are more likely to be greater if we take the extra mortgage payments and put it into an index such as VFIAX. Or, whether it'll be a better bet to continue to pay off the mortgage.

teddytimtam
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Joined: Mon Jan 01, 2018 9:35 pm

Re: Invest more or accelerate mortgage payoff?

Post by teddytimtam » Mon Jun 18, 2018 5:21 pm

A safe job can be made redundant anytime. A good income can be cut by half unexpectedly. I'd pay off the heavy student loans first before thinking about investments outside of your retirement.

Nate79
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Location: Portland, OR

Re: Invest more or accelerate mortgage payoff?

Post by Nate79 » Mon Jun 18, 2018 5:30 pm

conlaw1234 wrote:
Mon Jun 18, 2018 5:15 pm
delamer wrote:
Mon Jun 18, 2018 4:59 pm
conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
delamer wrote:
Mon Jun 18, 2018 4:30 pm
Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.
Interest rate on the mortgage is 2.75% for a 7 year ARM. We have about $200k in retirement dedicated accounts (401k, 403b, Roth IRAs) and about 130k in a taxable accounts.

Student debt of 155k at 2.65%.

I'm okay with paying off the student debt with the minimum payments since the rate is low.
I can’t see the rationale for prepaying your mortgage when you have that much student loan debt, especially given that it is not debt that can be discharged in bankruptcy.
We both have safe jobs and are at a good combined income. I'm not worried about the student debt since it's at 2.65 and the principal is manageable (relatively speaking). I was just wondering if the returns are more likely to be greater if we take the extra mortgage payments and put it into an index such as VFIAX. Or, whether it'll be a better bet to continue to pay off the mortgage.
It is certainly possible and has happening in the past that we enter a downturn, stocks drop significantly and do not recover for 10 years. In that case the student loan debt or the mortgage would have beaten the return of the market easily.

This is the point of guaranteed return vs nonguaranteed. There is no way to know if the market will return a certain amount, especially over short to mid term periods of time. It maybe possible to beat those rates with guaranteed returns in treasury bonds or CD's but the difference is pretty small these days.

delamer
Posts: 5125
Joined: Tue Feb 08, 2011 6:13 pm

Re: Invest more or accelerate mortgage payoff?

Post by delamer » Mon Jun 18, 2018 5:34 pm

conlaw1234 wrote:
Mon Jun 18, 2018 5:15 pm
delamer wrote:
Mon Jun 18, 2018 4:59 pm
conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
delamer wrote:
Mon Jun 18, 2018 4:30 pm
Hard to say without more information — like interest rate on mortgage, level of other savings (by type), other debt, etc.

Decisions like this should be made in the context of all your finances.
Interest rate on the mortgage is 2.75% for a 7 year ARM. We have about $200k in retirement dedicated accounts (401k, 403b, Roth IRAs) and about 130k in a taxable accounts.

Student debt of 155k at 2.65%.

I'm okay with paying off the student debt with the minimum payments since the rate is low.
I can’t see the rationale for prepaying your mortgage when you have that much student loan debt, especially given that it is not debt that can be discharged in bankruptcy.
We both have safe jobs and are at a good combined income. I'm not worried about the student debt since it's at 2.65 and the principal is manageable (relatively speaking). I was just wondering if the returns are more likely to be greater if we take the extra mortgage payments and put it into an index such as VFIAX. Or, whether it'll be a better bet to continue to pay off the mortgage.
If you are not worried about $155K in non-dischargable debt, then you have a different attitude toward finances and risk than I do.

My highest priority would be to get rid of that debt, second only to contributing enough to my 401(k) to get the full employer match.

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Meaty
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Location: Texas

Re: Invest more or accelerate mortgage payoff?

Post by Meaty » Mon Jun 18, 2018 6:15 pm

conlaw1234 wrote:
Mon Jun 18, 2018 12:56 pm
Hi Everyone - I appreciate the advice anyone is able to give.

Here is my situation and my question. I am currently putting extra money towards my mortgage because I was planning on keeping my current home as a rental property. At the current pace, I'd pay off a 30 year mortgage in 12 years. The intent was that we can keep the property as a rental property in the future. However, after crunching the numbers, the property would only generate net take home income of about $20k/year. This factors into property tax, HOA fee, maintenance, etc. This does not factor in any additional income tax I'd pay on the rental income. My wife and I plan to move from our home in 5 years or so. I think that after realizing this we would sell the property when we move rather than keeping it as a rental.

My question is should I take that extra money that I put towards the mortgage principal and invest it, add to my nest egg (currently 3 months but working towards 6) or keep paying down the mortgage?
Here’s what I’m planning - take the extra “mortgage payment” and invest in taxable. When the account balance equals the full payoff, use the proceeds to pay the mortgage in a lump sum. This preserves your liquidity while still helping payoff the note faster
"Discipline equals Freedom" - Jocko Willink

JoeRetire
Posts: 1082
Joined: Tue Jan 16, 2018 2:44 pm

Re: Invest more or accelerate mortgage payoff?

Post by JoeRetire » Mon Jun 18, 2018 6:32 pm

conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
I'm okay with paying off the student debt with the minimum payments since the rate is low.
If you consider the rate on the student loan as "low", then I would expect you to also consider the mortgage rate "low".

Admiral
Posts: 1167
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest more or accelerate mortgage payoff?

Post by Admiral » Mon Jun 18, 2018 7:07 pm

So you'll prepay a 2.75% mortgage but pay the minimum on a 2.65% student loan?

That makes no sense, IMHO.

conlaw1234
Posts: 9
Joined: Mon Jun 11, 2018 9:58 am

Re: Invest more or accelerate mortgage payoff?

Post by conlaw1234 » Mon Jun 18, 2018 7:16 pm

JoeRetire wrote:
Mon Jun 18, 2018 6:32 pm
conlaw1234 wrote:
Mon Jun 18, 2018 4:48 pm
I'm okay with paying off the student debt with the minimum payments since the rate is low.
If you consider the rate on the student loan as "low", then I would expect you to also consider the mortgage rate "low".
Yes, I do. The difference is the interest paid. My student loan would be paid off in just less than 5 years while our mortgage would be 30 years if payment isn't accelerated. Accelerating the student loan repayment would result in a savings of about 10k in interest while accelerating the mortgage would result in a savings of 230k in interest over the life of a 30 year.

conlaw1234
Posts: 9
Joined: Mon Jun 11, 2018 9:58 am

Re: Invest more or accelerate mortgage payoff?

Post by conlaw1234 » Mon Jun 18, 2018 7:18 pm

Admiral wrote:
Mon Jun 18, 2018 7:07 pm
So you'll prepay a 2.75% mortgage but pay the minimum on a 2.65% student loan?

That makes no sense, IMHO.
Only because of the difference of estimated savings in prepaying each. Estimated $10k saved in interest on the student loan vs. $230kish on the mortgage.

Admiral
Posts: 1167
Joined: Mon Oct 27, 2014 12:35 pm

Re: Invest more or accelerate mortgage payoff?

Post by Admiral » Mon Jun 18, 2018 7:28 pm

conlaw1234 wrote:
Mon Jun 18, 2018 7:18 pm
Admiral wrote:
Mon Jun 18, 2018 7:07 pm
So you'll prepay a 2.75% mortgage but pay the minimum on a 2.65% student loan?

That makes no sense, IMHO.
Only because of the difference of estimated savings in prepaying each. Estimated $10k saved in interest on the student loan vs. $230kish on the mortgage.
That is not the correct comparison. Virtually nobody keeps a 30 year loan on the same house. They move, or they refinance. First, as for prepaying:

You could beat 2.75% by buying a bond fund in a tax advantaged account (or possibly even in a taxable account, I've not looked at the rates) so pre-paying that loan is advisable if and only if you plan to stay in the house beyond the seven year ARM expiration (and you said you don't), at which point your rate will (probably) be higher and you'd want to have a lower balance to work with.

Even if you end up staying, you should invest the money and then use the proceeds to pay down the loan and refinance when the ARM expires. No brainer. But the debt is your problem. It sounds like you have more debt than assets.

TarHeel2002
Posts: 102
Joined: Sun Jun 17, 2012 2:14 pm

Re: Invest more or accelerate mortgage payoff?

Post by TarHeel2002 » Mon Jun 18, 2018 7:37 pm

I had similar questions about my low interest rate mortgage, my low interest rate student loan, and increased investing a couple of years ago. It was the responses like you received above that motivated me to pay off my student loan once and for all. 124k of student loan debt paid off in 18 months. My fixed rate on that was 3.5%. It felt good to watch it disappear. I'd do it again if I had to. YMMV.

:sharebeer

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