Torn Between Aggressive Home Payoff or Investing

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Shael_AT
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Torn Between Aggressive Home Payoff or Investing

Post by Shael_AT »

Age, 28.
Income, ~250-275k total compensation (185k base, 20k minimum cash bonus, rest is in stock).
TC for the end of this next year may be a lot higher since company stock (4 years RSU, I am embarking on year 1 payout, stock has more than doubled).

Total NW is >500k, mostly in 401k, HSA, Roth IRA and a decent 125 of this in brokerage (VTSAX/VTIAX/VWITX mix). Cash position is strong with 18 months of emergency fund, 6 in HYSA, 6 in T-Bills, 6 in Misc. cash equivalent. All easily accessible and easy to liquidate within 24-72 hours.

We have recently purchased a home, the homes worth at time of purchase was $820,000 (Tech Hub, Not SF), and so far we have been loving it. My liability on the loan is -$651,960 as of the last statement.

We are debating what to do about this. We have always been very Personal Finance and Investment savvy the last decade, and very debt averse (never carry a CC balance, paid for college by working 40-60 a week out of pocket, buy cars outright in cash) but this Mortgage is driving us both insane. It's been an emotional difficulty and I believe we experienced almost a grief like episode in the last 3-4 months just trying to rationalize our position. Maybe it's the dark weather and difficult holiday season, maybe we need more Vitamin D, but we're starting to lean towards focusing our finances in paying off the home early.

Currently, we are maxing out our Roth IRA, 401k's and HSA's. We also invest $774 a week (x 52 weeks) to our brokerage.

The thought has been to direct the $20,000 annual cash bonus along with the ~$40,000 a year we invest in non-advantaged brokerage investments instead to the principal. That would mean $40,000-$60,000 a year paid off along with the normal ~10,000 or so (25% principal, rest is interest, such is the 30 year fixed life, yo'). Theoretically, we could have this paid off in 10 years or a little less.

What's difficult is the timeline of 10 years feels... different this time around. I can't shake the feeling that putting so much money into a single, fixed asset with such a competitive interest rate is financially a bad idea. Even if my worst assumptions about a conservative market investment strategy is realized over a 10 year period, it's still a net-gain compared to paying off the 3.167 loan. Primary anxiety is locking that money up in a home and not having the diversification of investing across multiple fund classes and categories.

So, I guess, I want to seek some guidance here, really.

We're having a (really) tough time with the reality of the time horizon in front of us to pay this house off. Like, 10 years? [Wow.] The last 10 felt so long, and we had multi-vector and multi-variable goals - now it would be a single goal in a single asset class.

We've been astronomically successful up to this point but this is our first time dealing with such a large liability and planning an entire decade entirely to paying it off. On the other hand, we appreciate that the home is a fixed cost (minus maintenance, insurance and tax modifications), in a great area and is <25% of our expenses post-tax. It allows us to both own a home, realize our personal ambitions and invest the excess for a potentially greater ROI through our brokerage over the long term.

I know I've seen these posts around but I feel our shovel, age, current NW and stable job prospects differentiate our position enough to be considered for a response, as well as the emotional component we are having a unexpectedly difficult time dealing with, which we honestly did not for-see until "reality hit us".

Pay off Early in 7-10 years, singular focus
Defer paying off, invest and stay on course
Or mystery option?

Thank you for reading, look forward to some words of wisdom here

[Post edit by moderator oldcomputerguy]
Last edited by Shael_AT on Wed Jun 03, 2020 4:59 pm, edited 1 time in total.
mhalley
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Re: Torn Between Aggressive Home Payoff or Investing

Post by mhalley »

Personal finance is personal. Mathematically, it makes more sense to not pay extra on the loan. Your attitude toward debt plays a huge role. One thing to consider is that you don’t have to be all or none. Half of excess savings to brokerage, half to mortgage, 75% to brokerage, 25 to mortgage, etc.
From WCI pay off debt vs invest post
Here’s the other thing to keep in mind. Paying off debt is a good thing to do. It builds your net worth. Investing is also a good thing to do. In general, it also builds your net worth. They’re both good things to do. One of them isn’t wrong and the other right. At its worst, one is a little more right than the other. If you can’t tell which one is better for you, it probably doesn’t matter much. So don’t worry about it too much. If it is really paralyzing you from doing either of them, just split the difference and put half of your extra money toward debt and half toward your investments. Trust me, in the end, this decision isn’t the one that is going to determine whether you are financially successful or not.
https://www.whitecoatinvestor.com/pay-o ... or-invest/
Last edited by mhalley on Fri Jan 24, 2020 3:40 pm, edited 1 time in total.
bloom2708
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Re: Torn Between Aggressive Home Payoff or Investing

Post by bloom2708 »

No rules work for everyone in these scenarios.

No matter what age and net worth, $650k is a pretty big amount to owe. People certainly have larger mortgages.

I would set a target for taxable, say $200k or $250k. Enough to give you some flexibility.

Then switch to slaying the mortgage. Maybe you get it down to $300k or some number where you feel it is more reasonable and can still be a hedge against inflation and all the gems people like about a mortgage. Then switch back to taxable.

Different things motivate people. If the mortgage as it stands is driving you both "insane", then do something to move that needle.

Not every decision has to be the optimal solution. Maybe optimal is for us to hold a big mortgage until 80+ or death. That doesn't mean we would choose that "optimal" path. We paid ours off before age 40 and don't plan to go back. It has given us a lot of flexibility and the ability to power save.

Chart your own course. There are many paths that are "right" with this stuff.
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ray.james
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Re: Torn Between Aggressive Home Payoff or Investing

Post by ray.james »

You have a very good income with promising growth and young which favors investing as much as possible.

First think about where you want to be in 10 years. At 1.5-2 mill net worth, what type of diversification you want in your retirement funds, college funds for kids, daycare for kids, cash on hand needs, whether parental support is needed in golden years etc.,. Then decide where you need to contribute to get there. My point being, pay down/ pay-off the mortgage but keep the goals in mind when anxiety/analysis paralysis kicks in and tries to mess with the decisions. Mortgage bill stands in the forefront and reminds you every month but the other goals do not.

If I was in your shoes, I would max everything which you indeed are doing. Consider mega backdoor roth, 529( if you are planning kids) and then finally start paying off mortgage. There is nothing wrong with just paying off mortgage first though!
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North Texas Cajun
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Re: Torn Between Aggressive Home Payoff or Investing

Post by North Texas Cajun »

Primary anxiety is locking that money up in a home and not having the diversification of investing across multiple fund classes and categories.

Yeah, I would be anxious about that. We increased our mortgage loan payments by about $6K annually - about ten years before retirement. At your age, though, I don’t think we would have done so. Your $40K annually will be greatly compounded over the next 20 years. That’s a lot less dough you’ll have in retirement, I think.
Unladen_Swallow
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Unladen_Swallow »

I would say firstly - don't let this stress you guys out. It is not worth the stress.

There is no wrong answer, just different shades of right. You will have to give and take.


Normally I would do what you considered- pay down house with ever bonus. In 10yrs it is home. Excellent! You will be 38 when you are debt free, and still have time to boost up your taxable account. You are already contributing 40K to taxable yearly. That is in addition to making out tax advantaged. So it is not like you will pay down a mortgage at the expense of retirement savings. You are lucky to do both. But only you can decide the value of personal philosophy vs maximizing potential returns.

I will share my experience, perhaps it will provide you a data point.

We are debt averse. We also intended to retire early, and also have a comfortable retirement.

We paid off our home in 11 yrs and were debt free before 40. Best decision we ever made. The freedom in career choices allowed us to take risks both personal and professional that paid off. But we did it while maxing our tax deferred. We didn't open a taxable account until our home was paid off, but it worked.

This plan was best for us. I value security in terms of home etc. I am willing to take professional risks and have a high allocation to stock. I wouldn't pay off a mortgage instead of saving for retirement. But I would do both if I can. Looks like you are easily able to do both.
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FiveK
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Re: Torn Between Aggressive Home Payoff or Investing

Post by FiveK »

Shael_AT wrote: Fri Jan 24, 2020 3:28 pm...this Mortgage is driving us both insane. It's been an emotional difficulty and I believe we experienced almost a grief like episode in the last 3-4 months just trying to rationalize our position. Maybe it's the dark weather and difficult holiday season, maybe we need more Vitamin D, but we're starting to lean towards focusing our finances in paying off the home early.

However, we're also numbers people. The interest on the loan is 3.167%. That's crazy cheap and puts us in a good long term position, on paper.
If you think paying it early will be emotionally better for you, start doing so.

Then if you find the foregone opportunity on the investment alternative takes its own emotional toll, stop the prepayments and invest instead.

Repeat as needed.

You'll likely be fine either way.
brich79
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Re: Torn Between Aggressive Home Payoff or Investing

Post by brich79 »

I posted a thread in a similar vein last week. Basically, between all the input here and the research I did on my own, I learned what others are saying. There doesn't seem to be one absolute, right answer. Both options are good. It just kind of depends on your personality, risk tolerance, and goals.

One thing to consider about paying down the mortgage is it's a jumbo loan. Apparently non-conventional loans sometimes have more restrictions on re-casting. So, if you were considering recasting your mortgage every couple of years after a big equity payment, just make sure your lender allows it.
retire57
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Re: Torn Between Aggressive Home Payoff or Investing

Post by retire57 »

Normally I would recommend paying off the house, but such a sizable mortgage changes things. I vote to stay the course and revisit the issue in another year. You got a great rate and your home will likely appreciate no matter what you decide.

You are smart disciplined people with a enviable problem! :beer
JBTX
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Re: Torn Between Aggressive Home Payoff or Investing

Post by JBTX »

Given your size of mortgage you are likely deducting at least part of mortgage. Maybe exceeding standard deduction by $5k to $10k? To the extent you are, that portion of interest is at an after tax rate of approx 2.4%. The balance the full 3.1%.

At your age you can't go wrong holding on to it, keeping some in liquid funds and investing some. That is what I'd do. Try to get past this fear of debt. There is nothing wrong with stable manageable low interest debt. The issue with too much mortgage debt is often it causes you to buy too much house. I really have no way of knowing if that is true. There is also value in liquidity and depending on how the liquidity is invested it can be a good inflation hedge.

However, given it is a large balance, there is nothing wrong with paying a little more, just to make you feel like you are working towards something, but don't overdo it. Why is it important to pay it off in 7-10 years? Who cares?
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1789
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Re: Torn Between Aggressive Home Payoff or Investing

Post by 1789 »

I would never pay that mortgage, because i would think you likely would move out to a new place some years down the road. So I would not be aggressively paying it off. Invest and don't let psychology win over logic. Good luck!
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Re: Torn Between Aggressive Home Payoff or Investing

Post by siriusblack »

"Young man, sell to the sleeping point". (Have you ever heard that story? I forget the details -- but basically someone comes to an investing sage and says I own a large amount of stock that's highly volatile but I'm extremely confident in the investment ... but the problem is it's keeping me up every night, constantly worried about the volatility ... I know it's just short-term fluctuation and long-term it's a great investment, but I can't shake the worry ... what should I do? The sage said, "Young man, sell to the sleeping point.")

So, my 2 cents: I think you should pay down the house aggressively for a certain amount of time, until you feel a lot less anxious about it. (Maybe pay it down aggressively for 3-6 months and then see how you feel.) If you have taxable investments (I think you said 125k?) outside your emergency fund, you could consider immediately applying those to the mortgage.

(For what it's worth -- I've been through this as well. DW and I seem to be ALLERGIC to debt. We eventually decided to just give into our feelings and pay off the darn house. We don't regret it at all. In hindsight I think I was able to take more career risk as a result, which ultimately led to faster earnings growth, and we knew we could live on peanuts if we had to.)
mortfree
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Re: Torn Between Aggressive Home Payoff or Investing

Post by mortfree »

Buyer’s remorse?

You need to tune out the mortgage amount and focus on savings.

You have about 170k home equity and claim > 500k net worth. Assuming you counted the house.

That’s still a lot locked in the home for your net worth.

I would carry out your plan for savings. Save as much as you can right now.
avidlearner
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Re: Torn Between Aggressive Home Payoff or Investing

Post by avidlearner »

We paid off our mortgage in 8 years(while maxing out 401ks), Investment wise it was not a good decision, in last 3 years stock market had bigger gains than the 3.5% saved on interest but in hindsight everything is 20-20. I still don't regret it as on emotional front paying off the mortgage was the best decision for us because:-
  • It allowed my wife to start college again while working only 1 day of the week, while all her classmates were struggling with a night job and college
  • I stopped worrying too much about every dime and penny and started enjoying life more
  • We started taking a little better and longer vacations
  • Now all extra money goes to taxable and I just turned 40 so I think we can catch up on the investment side
bradpevans
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Re: Torn Between Aggressive Home Payoff or Investing

Post by bradpevans »

3.167%
I’d never pay that early

You know over the long haul your investments will beat that.
KlangFool
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Re: Torn Between Aggressive Home Payoff or Investing

Post by KlangFool »

OP,

A) You have 500K net worth and 820K house. If you do not like that fact, you should not buy the 820K house. Putting more money into the house will not let you sleep better. The only thing that will let you sleep better is if your net worth excluding the house is 1.6 million or more. Or, you sell the 820K house and downsize to something cheaper.

B) Are you going to have any kids? Do you plan to pay off this low-interest mortgage and then take a more expensive student loan for your kids?

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Last edited by KlangFool on Fri Jan 24, 2020 9:01 pm, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

How about splitting between investing and paying down debt? Build both sides of the balance sheet at same time.
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dandinsac
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Re: Torn Between Aggressive Home Payoff or Investing

Post by dandinsac »

mortfree wrote: Fri Jan 24, 2020 8:06 pm You have about 170k home equity and claim > 500k net worth. Assuming you counted the house.

That’s still a lot locked in the home for your net worth.
So, is there any rule of thumb "maximum" for home equity as a percentage of net worth?

Mine is about 22% calculated this way:

home value - loan value = home equity

home equity / (financial assets + home equity)

FWIW, I do not prepay my mortgage as it's a natural inflation hedge.
KlangFool
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Re: Torn Between Aggressive Home Payoff or Investing

Post by KlangFool »

dandinsac wrote: Fri Jan 24, 2020 9:09 pm
mortfree wrote: Fri Jan 24, 2020 8:06 pm You have about 170k home equity and claim > 500k net worth. Assuming you counted the house.

That’s still a lot locked in the home for your net worth.
So, is there any rule of thumb "maximum" for home equity as a percentage of net worth?

Mine is about 22% calculated this way:

home value - loan value = home equity

home equity / (financial assets + home equity)

FWIW, I do not prepay my mortgage as it's a natural inflation hedge.
dandinsac,

My rule of thumb.

If you need to count the home equity as part of your net worth, you have too much house as compared to your overall net worth. I do not count my home equity as part of my net worth. I do not consider the house as an investment at all.

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willthrill81
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

FiveK wrote: Fri Jan 24, 2020 4:06 pm
Shael_AT wrote: Fri Jan 24, 2020 3:28 pm...this Mortgage is driving us both insane. It's been an emotional difficulty and I believe we experienced almost a grief like episode in the last 3-4 months just trying to rationalize our position. Maybe it's the dark weather and difficult holiday season, maybe we need more Vitamin D, but we're starting to lean towards focusing our finances in paying off the home early.

However, we're also numbers people. The interest on the loan is 3.167%. That's crazy cheap and puts us in a good long term position, on paper.
If you think paying it early will be emotionally better for you, start doing so.

Then if you find the foregone opportunity on the investment alternative takes its own emotional toll, stop the prepayments and invest instead.

Repeat as needed.

You'll likely be fine either way.
:thumbsup
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Re: Torn Between Aggressive Home Payoff or Investing

Post by grabiner »

Shael_AT wrote: Fri Jan 24, 2020 3:28 pm Age, 28.
Income, ~250-275k total compensation (185k base, 20k minimum cash bonus, rest is in stock).
TC for the end of this next year may be a lot higher since company stock (4 years RSU, I am embarking on year 1 payout, stock has more than doubled).
So you are in the 24% tax bracket, and the company stock might put you in the 32% bracket.
We have recently purchased a home, the homes worth at time of purchase was $820,000 (Tech Hub, Not SF), and so far we have been loving it. My liability on the loan is -$651,960 as of the last statement.

However, we're also numbers people. The interest on the loan is 3.167%. That's crazy cheap and puts us in a good long term position, on paper.
This loan is large enough that any payments will offset deductible interest, so the return on a prepayment is 2.41% in the 24% bracket, 2.15% in the 32% bracket.

You have 30 years left on the loan, so any prepayment would effectively be making a 30-year investment with a 3.167% taxable return. (If you sell the house in 10 years, it becomes a 10-year investment instead.)

And while I am one of the main advocates of paying down a mortgage, I don't think it makes sense in your situation. Instead of paying down the mortgage, you could invest a "mortgage payoff fund" in municipal bonds, which would have about the same return for the same risk level; if appropriate (because of changes in interest rates and taxes), you can use the fund to pay the mortgage down or off.

I would suggest investing the mortgage payoff fund in Vanguard Long-Term Tax-Exempt Admiral shares, which currently yield 1.84%, or a long-term fund for your state if Vanguard offers one. Since this fund has a shorter duration, it is actually less risky than a mortgage prepayment on that long a mortgage, as compensation for the small interest-rate difference.

If you follow this strategy, you may well have enough saved in the municipal-bond fund in ten years to pay off your mortgage then, and it might well make sense at that time. However, if your bond fund is yielding 5% by then, you will be happy to have locked in the 3.167% mortgage rate for another twenty years, even if the interest is no longer deductible.
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Freetime76
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Freetime76 »

Lessons I’ve learned:
1. Do not ignore your gut feeling. If you’re uncomfortable, do something to alleviate the stress. [That “Something” should not be trying to rationalize it away.]

2. A paid off house is priceless... :D We will never ever go back to crawling to the bank for anything- even if they paid us interest - LOL! Freedom and a solid home base for us to make better/happier life decisions (career, family, and if decide to sell).

3. My home is not an asset - it costs us money to upkeep, taxes, and we have to live in it. Selling it has a high % cost, not to mention the inconvenience.

In your case, 18 mos. living expenses, :sharebeer plus working your butts off to get where you are, is absolutely superb. It gives you options. So, hypothetically, if the tech hub you’re in crashed (or, say, dispersed to other LCOL areas) and your house fair market value went down, say 20%? 40%? 60%? what would you do? Somebody loses a job and the markets flooded...including thenhousing market...that’s the scenario I’d want to be ok with my answer...

As others said, personal finance is personal, so you decide :happy For us, we’d not have that much in a house, regardless of interest rate, without being multi millionaires. (We just downsized, not retiring.) We are too scared of being Income Affluent rather than Balance Sheet Affluent. As it is, your house is maybe like a $50K annual income person having a $150K house, to put it in perspective.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by LittleMaggieMae »

As has been pointed out when you are financially stable paying off the mortgage becomes a purely personal thing.

I use to struggle with the idea that having a mortgage was ALWAYS bad. It's debt that's BAD! A paid off house is yours. You could "lose" the house if you don't pay the mortgage. And a bunch of other not quite true or not thought thru reasons a mortgage was bad.

I personally don't see (and didn't feel) the warm fuzzy of having a paid off house (I had a paid off house for six months. It was underwhelming). I still had to pay taxes and insurance (if I didn't I could "lose" my house). I still had to 'save' money for maintenance (a roof, new appliances, yard work, exterior painting, and the list goes on and on) - if I didn't do the upkeep my house would lose value. When I added up all the non Principle and Interest expenses of owning my house - I saw that the PI part wasn't all that an impressive number.

At some point in my mortgage I realized that selling the house would cover the mortgage amount I owed. That was when I got a "warm" fuzzy. If things got so bad for me financially, I could just sell the house and not "owe" anything. It was a wash. That helped me stop harping on "I owe money!! The horror! I'm doomed! They'll take my house!!. Also realizing that for me to 'loose' my house to foreclosure my financial situation would have to be dire - loosing the house to foreclosure would just be another bad thing in a long line of bad things that had happened. Maybe that's why paying it off wasn't all that mind blowing or comforting or 'feel good' for me. The chance of losing my house to foreclosure due to my financial stability was next to null. (why worry about/feel bad about something that is highly unlikely to happen?)

Maybe some soul searching about why having mortgage debt is "driving you insane" will help you determine the best course of action?

(Yes, I do generally prepay on my mortgage(s) I've currently got 2 small ones and 1 bigger one (on three properties). I prepay to mostly reach some "milestone for me" future date. If I fall on hard times - I can stop the prepayment,and still be able to handle the debts for a year or more before I have to make a decision about selling or some other course of action. the prepay amount is small and after everything else: tax advantaged savings, after tax savings, savings for fun things, etc. it's typically been about the same amount as my yearly bonus. :) )
Last edited by LittleMaggieMae on Sat Jan 25, 2020 3:22 pm, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by whodidntante »

At age 28, I would strongly favor investing and to have a 100% stock position. I would not prepay a < 3.2% mortgage until later in life when you may want to reduce leverage as an alternative to buying low-yielding bonds. What you're experiencing is called debt aversion, which is natural but not always rational.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by sawdust60 »

Your discomfort with the large mortgage might be mitigated with more savings. Select the amount you want. 60k/year for 5 years would be an additional 300k. And if you earn 2%, the cost for this flexibility is about 1% vs debt reduction.

And it's not all or nothing. Increase the monthly payment for a 15 or 20 year payoff. Some plan to be mortgage free at retirement or when kids start college.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by giacomo_bogle »

Look at it this way- The mortgage as it currently stands is about 3 times your total compensation. Way more of your net after taxes-So relax, it will take a while to pay it down.

It does look like this ratio will change with time.

You can consider putting an extra 20% of your investable assets yearly into the loan repayments (after maxing out your tax advantaged space) if you are debt averse.

Hope you have life and disability insurance....
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Re: Torn Between Aggressive Home Payoff or Investing

Post by WarAdmiral »

You are only 28, so you have only seen the 10-year bull market:). I would suggest pay off the house while things are going good for you.

Not all is lost financially when paying off the house. It will increase your monthly cash flow that you can still use to invest, perhaps when the markets the down in the future (who knows?)
Last edited by WarAdmiral on Sun Jan 26, 2020 8:02 am, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Sandtrap »

Youve gotten some outstanding suggestions.
1) Pay off Early in 7-10 years, singular focus
2) Defer paying off, invest and stay on course
Here's another point of view that goes beyond the numbers:

As a previous poster stated, personal finance is "personal" and goes beyond numbers, projections, and spreadsheets.
Given the "tone" of your missive, why not somewhere between #1 and #2, thereby appeasing your need for logic and predictability, and your need to "breath" from the oppressive weight of debt?

The case for #1 or even earlier than a 10 year payoff is your high income, and ability to do that.
Your strong financial position gives you options.

Most things are not "one or the other" but "somewhere in between".
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Re: Torn Between Aggressive Home Payoff or Investing

Post by ofcmetz »

I'm not sure why I find all these "invest or pay the house off early" threads so darn interesting, but I do. I think it's because there is the "numbers don't lie" answer and the "what makes you at peace" answer. OP, I tend to lean towards liquidity. Investments in your brokerage account and cash give you an amount of liquidity that home equity just can't. That being said, I was faced with the similar question and I put about 80% of the money that I could have put extra towards my house into investing. I started adding the other 20% towards my mortgage payments each month. Even though I lean towards investing, I still wanted to pay some towards the mortgage to feel like I'm paying it off just a little faster.

Either way you will be fine if your career stays on the track it's on. Congrats on being in such a good place financially.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Xrayman69 »

KlangFool wrote: Fri Jan 24, 2020 9:14 pm
dandinsac wrote: Fri Jan 24, 2020 9:09 pm
mortfree wrote: Fri Jan 24, 2020 8:06 pm You have about 170k home equity and claim > 500k net worth. Assuming you counted the house.

That’s still a lot locked in the home for your net worth.
So, is there any rule of thumb "maximum" for home equity as a percentage of net worth?

Mine is about 22% calculated this way:

home value - loan value = home equity

home equity / (financial assets + home equity)

FWIW, I do not prepay my mortgage as it's a natural inflation hedge.
dandinsac,

My rule of thumb.

If you need to count the home equity as part of your net worth, you have too much house as compared to your overall net worth. I do not count my home equity as part of my net worth. I do not consider the house as an investment at all.

KlangFool
+1.

My primary home is where my family and I live. It’s a must have physically, mentally and from our standpoint financially. Too many people can get into trouble early on by having the “its also an investment” mentality and buy more than capable or living in the financial edge thinking that just “selling” the home is quick and easy if they get into trouble.

OP, both are OK in and of themselves are what many do as a hedge is a combination of both. Your young age makes TIME in the market a valuable ally. I favor a 50:50 mix so as to affirm your financial emotional desire to minimize debt and to acknowledge your financial logic for risk of opportunity cost if not investing in the market. When we did this we considered the early mortgage payments as part of our bond contribution and thus the remaining was placed into all equities.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by HomeStretch »

Your after-tax mortgage rate is low enough that to me continuing to invest (rather than pay off the mortgage) should have a better financial outcome. But to help you sleep well at night, consider doing both by paying extra towards principal each month while continuing to invest the majority of your available funds. If you receive future bonuses or windfalls, consider allocating a portion to make an additional one-time payment against principal.

Spouse and I bought our house at age 28 when 30-year mortgage rates were high. From day 1 we paid extra against principal to have the mortgage paid off in 23 years at age 50. Spouse is very debt-averse after seeing both our fathers go through extended job layoffs in their 50s. Spouse had a huge earnings year and wanted to use the extra to pay off our mortgage in our late 30s, so we did. The sleep-well factor for my spouse was priceless.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by pepperz »

Logic says one thing. Your emotions say the other.

Folks here often ask “What will make you sleep at night?”

I can’t help but wonder: what if your emotions are “off” and can be changed?

Have you considered seeking out treatment for potential anxiety / obsessive compulsive thinking that might be over influencing your emotions?

Ask me why I thought to mention this. :)
Last edited by pepperz on Sun Jan 26, 2020 11:46 am, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

We're about two months from paying off our mortgage. It will have been paid off in a little over five years. In hindsight, our returns would have been far better had we put everything in stocks, but we didn't know that. The stock market could have gone backwards over the last five years, which has happened many times before. But we were still investing over 20% of our gross income during this period, so we participated nicely in the good run that stocks have had. Eliminating our mortgage will greatly reduce the likelihood of us ever losing our home, reduce our necessary expenses, reduce our need for liquidity, and improve our cash flow. In all, we have no regrets.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by KlangFool »

OP,

Many of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.

I wish you the best of luck! You are counting on your jobs and careers goes well over the next few years. Do not pre-pay your mortgage. That gives you a bigger safety margin if things do not turn up as well as you wish.

KlangFool
Last edited by KlangFool on Sun Jan 26, 2020 12:25 pm, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Financologist »

You are young, doing well and seem to have handled your station prudently. Chill out! You're well on your way.

This is like being torn between pancakes and french toast. Both delectable options.

If it were me, I would invest aggressively until retirement is ~15 yrs away. At that point the house becomes my psychological priority.

But if it's weighing on you, add 1,500 to every payment (or make chunk paydowns depending on bonuses etc..) and see how you feel.

Most importantly, do well at work and keep the cash rolling in.

Good luck
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Beehave »

KlangFool wrote: Sun Jan 26, 2020 11:38 am OP,

Many of my peers made this kind of decision during the Telecom boom. They bought at a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.

I wish you the best of luck! You are counting on your jobs and careers goes well over the next few years. Do not pre-pay your mortgage. That gives you a bigger safety margin if things do not turn up as well as you wish.

KlangFool
There's wisdom and experience in the post above. My emotions run towards being debt-free and I've acted on them in the past - - paying off my home early. I sold stock to do this and would have been better off financially had I waited. That said, I do not regret my decision because I've had peace of mind.

The wisdom of the cited post is that things can change. If things do not change (if the economy and your employment remain stable) then there is no financial harm in not paying off the mortgage. If the economy falters significantly and your employment is affected, then it will be better to have less invested in the house to provide flexibility (in case you have to walk away). If the economy falters and you retain your income, you'll become very wealthy no matter whether you pay the home off now or not. And if there's a bout of inflation, your loan will become the bargain of a lifetime.

My head says don't pay the loan off early. My heart still says get out of debt ASAP. My suggestion would be to split the difference. Your most important financial asset is your earning capacity. Living in nice circumstances with a clear mind that allows you to focus on advancing your skills and career opportunities is Job 1. I think that putting some funds towards early mortgage payout and some towards investments will contribute to your overall peace of mind and financial security.

Best wishes.

(edited to add the words "in case you have to walk away")
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Re: Torn Between Aggressive Home Payoff or Investing

Post by A-Commoner »

If you pay off your mortgage now, your house will make up close to 100% of your net worth, correct? If so, I would also be uncomfortable putting all my net worth in this 1 asset. I would instead aggressively save in the tax deferred and taxable accounts, and just pay the mortgage according to your schedule. Then, once your savings are large enough such that a paid off house will only constitute, say, 30% or less of your net worth, then I will just pay off the mortgage balance at that point. With your high income and high savings rate, you will likely get there in 5 years.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

KlangFool wrote: Sun Jan 26, 2020 11:38 amMany of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.
Unless you live in a non-recourse state, buying too much house is independent of whether pre-paying one's mortgage is a good idea. Buying too much house is always a bad idea.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by KlangFool »

willthrill81 wrote: Sun Jan 26, 2020 2:59 pm
KlangFool wrote: Sun Jan 26, 2020 11:38 amMany of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.
Unless you live in a non-recourse state, buying too much house is independent of whether pre-paying one's mortgage is a good idea. Buying too much house is always a bad idea.
willthrill81,

I disagreed. It won't matter whether it is a recourse loan or a non-recourse loan state. Pre-paying affects OP's liquidity. And, that affects OP's ability to survive in the case of unemployment.

KlangFool
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

KlangFool wrote: Sun Jan 26, 2020 3:08 pm
willthrill81 wrote: Sun Jan 26, 2020 2:59 pm
KlangFool wrote: Sun Jan 26, 2020 11:38 amMany of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.
Unless you live in a non-recourse state, buying too much house is independent of whether pre-paying one's mortgage is a good idea. Buying too much house is always a bad idea.
willthrill81,

I disagreed. It won't matter whether it is a recourse loan or a non-recourse loan state. Pre-paying affects OP's liquidity. And, that affects OP's ability to survive in the case of unemployment.

KlangFool
I agree that pre-paying a mortgage is a bad move if doing so leaves you with inadequate liquidity. But unless you have adequate liquidity, you shouldn't be investing either.
“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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Re: Torn Between Aggressive Home Payoff or Investing

Post by CheepSkate »

1) You're 28. How long do you expect to be at your current employer? 3 years? That's a typical tenure. What if your next opportunity is an hour away from your current house? Will you want more equity or more liquidity in that situation?

2) The world's "tech hub" used to be in Japan. Then the tech hub became California and Japan had a massive property market crash. Given that "tech hubs" tend to move, and given that frothy housing markets tend to crash, it may not be a bad idea to keep your equity to a minimum. There is no law of economics that says your home value can't drop 50%, or that the next tech hub can't be some Chinese region you've never heard of. I'm not talking sci-fi, I'm talking about things that already happened and could happen again. So again, equity or liquidity?

3) You are well on your way to have the option to FIRE in your 30s. However you would have to work several extra years to retire in your current location, versus lots of great less-buzzy places where you could be living free and clear, perhaps in a fancier home, in just a couple of years. Do you want to keep this option open, or bet everything on the continued appreciation of one house?
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Re: Torn Between Aggressive Home Payoff or Investing

Post by SandysDad »

willthrill81 wrote: Sun Jan 26, 2020 2:59 pm
KlangFool wrote: Sun Jan 26, 2020 11:38 amMany of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.
Unless you live in a non-recourse state, buying too much house is independent of whether pre-paying one's mortgage is a good idea. Buying too much house is always a bad idea.
Always and Never are dangerous words.

Lots of people have a decent net worth today primarily because they bought too much house relative to their rapidly growing incomes in their 20s.

Then again lots of people lost everything because they did so.

The leverage available to buy a home at the rates and terms given make what is normally a slow growing asset into a magical wealth builder if done right.

It’s not Always nor Never.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by geerhardusvos »

I live in the same city at you and we make similar income and we would never pay down our mortgage early until we hit our FI number and were closer to retirement. I am of the opinion to invest heavily during accumulation years, especially if there is a downturn put the money in the market. You might have different opinion which is fine, so do what’s right for you
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Orbuculum Nongata »

Shael_AT wrote: Fri Jan 24, 2020 3:28 pm

...Thank you for reading, look forward to some words of wisdom here
You might consider the impact of your home debt if your income declined or went away entirely for a while. There are benefits to reducing debt that go beyond returns. Completely agree with others that it’s a personal decision. Not black and white by any means.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by smitcat »

Presintense wrote: Mon Jan 27, 2020 8:35 am
Shael_AT wrote: Fri Jan 24, 2020 3:28 pm

...Thank you for reading, look forward to some words of wisdom here
You might consider the impact of your home debt if your income declined or went away entirely for a while. There are benefits to reducing debt that go beyond returns. Completely agree with others that it’s a personal decision. Not black and white by any means.
'You might consider the impact of your home debt if your income declined or went away entirely for a while.'
Yes - agreed. We have found it is much better to save the money and not pay down a mortgage early if you should encounter a declined or no income period.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by GetMeToRetirement »

My wife (SAHM) and I were having a similar debate a while back (albeit about a smaller remaining amount on our fixed 3.75% 30 yr mortgage). I was maxing out my 401k and HSA, and contributing to our two kids' 529s, and trying to figure out how to direct the rest of our money. We knew the financial analysis said investing should return more money than paying down the mortgage, but we knew we personally wanted to get rid of our mortgage sooner rather than later.

We ended up deciding to split the baby by investing some and directing $700/mo toward paying down the mortgage. How did we arrive at $700/mo? I called my mortgage company and asked them what prepay amount per month would result in paying off our mortgage the summer before our older child would start college.

The takeaway: instead of (from what I can tell) randomly choosing exactly 10 years to pay off your mortgage, maybe you can decide on a specific time or event in the future when you will need an influx of additional monthly cash, and work backwards to figure out how much to prepay monthly on your mortgage to achieve it. That might be more motivating and satisfying than simply choosing 10 years.

Of course, YMMV, but I will say that you are way ahead of the game and should always keep that in mind. Good work!
Last edited by GetMeToRetirement on Mon Jan 27, 2020 2:36 pm, edited 1 time in total.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by anon3838 »

I can’t convince you to sleep better at night.

That being said, time in the market does matter. If you were 56 years old asking this question, then paying off the mortgage early would make more sense. At your age, you have time on your side to weather market volatility longer-term, (eta: and benefit from market growth).

I agree with @klangfool, that if you had a higher net worth (not counting home equity), you’d probably feel more comfortable with the debt.

Liquidity buys you options. If you stash cash for 5-years, and you’ve turned gray from all the sleepless nights, you can still pay off/pay down the mortgage at that point. When a recession hits, and both of you are unemployed (and you’re only a few years into your aggressive 10-year payoff plan), it may be extremely difficult to sell your asset to survive. If you do end up paying the mortgage off early, you might consider getting a HELOC while you can, so that you may not be in a desperate situation to sell your home to cover your living expenses.

Paying the mortgage off, based on your personal situation, is a riskier move, IMO.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Coltrane75 »

Like KF said, a recession(s) is inevitable and you should play that out in terms of how that could effect your situation for income and home value.

I don't believe you mentioned the % of our salaried income you pay towards your housing costs (PITI, maintenance, etc). Also not sure if you're a single income home.

You're income is a bit high for your age and you're in a tech hub. We live in a very feast/famine, wild west kind of economy these days. Be wary and stash cash; that is what I would do instead of extra payments. Also, what are the chances you're going to stay in that house? You're young and things change.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

SandysDad wrote: Mon Jan 27, 2020 7:40 am
willthrill81 wrote: Sun Jan 26, 2020 2:59 pm
KlangFool wrote: Sun Jan 26, 2020 11:38 amMany of my peers made this kind of decision during the Telecom boom. They bought a house at 3.5 times or greater of their gross income. They believed that their income could only go up. And, their future is bright with no possibility of cloudy days. Then, the Telecom bust happened. The luckier ones had to move elsewhere to find a new job. But, they were stuck paying the mortgage of the expensive house that they bought and cannot sell. The unluckier one lost everything.
Unless you live in a non-recourse state, buying too much house is independent of whether pre-paying one's mortgage is a good idea. Buying too much house is always a bad idea.
Always and Never are dangerous words.

Lots of people have a decent net worth today primarily because they bought too much house relative to their rapidly growing incomes in their 20s.

Then again lots of people lost everything because they did so.

The leverage available to buy a home at the rates and terms given make what is normally a slow growing asset into a magical wealth builder if done right.

It’s not Always nor Never.
Yes, it is. If you buy too much house, then that's always a bad strategy. You might get lucky and not experience the downside risks, but that doesn't make it a good strategy.
“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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Re: Torn Between Aggressive Home Payoff or Investing

Post by dknightd »

willthrill81 wrote: Fri Jan 24, 2020 9:23 pm
:thumbsup
You are torn between emotional happiness now, and potential returns (and perhaps happiness) in the future.
When I face these decisions I usually go 50/50.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
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