Invest or pay off mortgage?

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nolesrule
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Re: Invest or pay off mortgage?

Post by nolesrule » Sat Dec 02, 2017 9:22 am

grabiner, thanks for the helpful info as usual. I just realized we're not throwing so much extra at the mortgage each month to go through the muni bond effort, especially if we were to spread across 2 funds. Right now it'd take close to a year just to meet the minimum purchase, and that money would be sitting in a 1.3% savings account. I guess we could "borrow" from our cash. We have more than enough cash on hand at present.

However, I think I'm going to wait until I see what happens with that which cannot yet be discussed, because it will change the after-tax rate on my mortgage to equal the before-tax rate, and at that point paying down the mortgage would make sense.

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grabiner
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Re: Invest or pay off mortgage?

Post by grabiner » Sat Dec 02, 2017 9:32 am

nolesrule wrote:
Sat Dec 02, 2017 9:22 am
grabiner, thanks for the helpful info as usual. I just realized we're not throwing so much extra at the mortgage each month to go through the muni bond effort, especially if we were to spread across 2 funds. Right now it'd take close to a year just to meet the minimum purchase, and that money would be sitting in a 1.3% savings account. I guess we could "borrow" from our cash. We have more than enough cash on hand at present.
You don't need to invest in municipal bonds. The reason to use municipal bonds for comparison is that they are the most fair comparison, because a mortgage payment benefits you in the same way as a bond investment. If you choose to invest in something else, you are making a trade-off between returns and risks; you could earn less with less risk by holding Treasury bonds (exempt from NJ tax) or more with more risk by holding stocks.

And even if you do hold bonds, you don't have to hold them in the same account. Holding bonds decreases your portfolio risk whether those bonds are munis in a taxable account or taxable bonds in a 401(k).
David Grabiner

knick17
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Re: Invest or pay off mortgage?

Post by knick17 » Sun Dec 03, 2017 10:18 pm

grabiner wrote:
Thu Nov 30, 2017 12:42 am
knick17 wrote:
Wed Nov 29, 2017 11:13 pm
I would go for the investment while paying the mortgage in instalments. If the investment goes well it shouldn't be a problem to pay the mortgage off in few yrs
If municipal-bond rates are higher than your after-tax mortgage rate, one way to do this would be to invest the extra money into a municipal-bond fund which you designate as a mortgage payoff fund. When the fund is large enough to pay off the mortgage, you can pay it off then if appropriate. In the meantime, you aren't taking on much extra risk, because the money that you could have used to pay down the mortgage is still available to pay it down.
/municipal bond fund, I don't really trust it...and interest rate is usually quite low....

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grabiner
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Re: Invest or pay off mortgage?

Post by grabiner » Sun Dec 03, 2017 10:38 pm

knick17 wrote:
Sun Dec 03, 2017 10:18 pm
grabiner wrote:
Thu Nov 30, 2017 12:42 am
knick17 wrote:
Wed Nov 29, 2017 11:13 pm
I would go for the investment while paying the mortgage in instalments. If the investment goes well it shouldn't be a problem to pay the mortgage off in few yrs
If municipal-bond rates are higher than your after-tax mortgage rate, one way to do this would be to invest the extra money into a municipal-bond fund which you designate as a mortgage payoff fund. When the fund is large enough to pay off the mortgage, you can pay it off then if appropriate. In the meantime, you aren't taking on much extra risk, because the money that you could have used to pay down the mortgage is still available to pay it down.
/municipal bond fund, I don't really trust it...and interest rate is usually quite low....
The low interest rate is the key factor for the decision. If municipal-bond rates are low, then you get a better return from paying down your mortgage than from investing in municipal bonds.

I don't hold municipal bonds in my taxable account (I hold bonds in my employer plan), but if I did, I would probably follow this strategy. My mortgage is 1.89% after federal tax, and Vanguard Intermediate-Term Tax-Exempt Admiral is currently yielding 1.99%. I have 11 years left on my mortgage, so paying down the mortgage is equivalent to buying an 11-year bond, which isn't worthwhile. But the mortgage as a whole has a duration of about 5 years, similar to the muni fund, which makes it a reasonable investment. If the muni balance after two years is enough to pay off the mortgage, I would then have the option of paying it off if rates haven't changed, or keeping it if rates were higher.

What I do instead is invest in stock in my taxable account. At some point, I might decide to sell my taxable stock to pay off the mortgage, and move an equal amount from bonds to stock in my employer plan so that I keep my stock exposure. This isn't worth doing now because I would have a huge capital gain on the stock.
David Grabiner

JBTX
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Re: Invest or pay off mortgage?

Post by JBTX » Sun Dec 03, 2017 10:46 pm

Admiral wrote:
Thu Nov 30, 2017 10:47 am
grabiner wrote:
Wed Nov 29, 2017 10:39 pm
Admiral wrote:
Wed Nov 29, 2017 10:19 am
Please post the mortgage term and how many years are left. This is important because if you have (for example) 3 years left on a 15 year note, you're paying very little interest each month, and therefore continuing to pay monthly may have minimal cost. OTOH, if you're in year 5 of a 30 year note, the interest savings may be greater and worthwhile to pay it off.
I would argue the opposite. Every dollar you put to paying down the mortgage earns the mortgage rate until the mortgage is gone. If you pay an extra $1000 on a 3.375% mortgage, your balance will be $1034 less next year, regardless of the remaining term. But the shorter the term, the faster you get that money back, and the less you benefit from locking in the right to borrow at a low rate.

If you view a mortgage as a negative bond, then making extra mortgage payments is equivalent to buying a bond, with rate equal to the mortgage rate (taxable if you are deducting your mortgage interest) and duration equal to the time until the mortgage is paid off. A 3-year bond yielding 3.375% is a better investment than a 25-year bond yielding 3.375%.

If you pay off the mortgage, rather than just paying it down, then you are buying a bond portfolio covering the entire duration. Paying off a 25-year mortgage is equivalent to buying a bond portfolio with a duration of about 10 years (not 12.5 because the later payments are worth less in present value).
There are three primary issues when considering an early payoff:
1) Do I need the liquidity that having a mortgage provides (or, put another way, do I want my extra x dollars per month in my house, or in my hand?)
2) Can I beat my mortgage rate by investing (or, put another way, can I reasonably assume that I can earn more on each dollar than my mortgage rate is costing me)?
3) How much interest am I saving with an early payoff?

Mortgages are front loaded with interest, because the rate is charged on the remaining balance. One saves more interest by paying it off sooner than by paying it off later, because the remaining balance is higher. There's always a savings, the issue is the level/amount of the savings. Yes, a dollar in the future is worth less than a dollar now. But that's a complex, inflation-based calculation that is less relevant to this decision. My point was that if one has just a few years left on a note, 90% of the payment is principal, and therefore the savings on the interest is very small. For example, on my loan, when I am in year 13, I will owe 50k, but the remaining interest will be only about $2k. I therefore might not want to put the 50k into my house if I feel I can make more investing that 50k for two years.

However, if I paid it off tomorrow, the savings is much larger: about $50k, or 13 years of interest. Putting aside the liquidity factor, the monetary benefit is significantly higher if it's earlier in the loan.

The reason to refinance to a shorter term is two-fold: A lower interest rate (presumably) and a faster payoff.
To me this is a big one for us. Most of our assets are in retirement accounts and paying off mortgage our ability to contribute to retirement accounts, pay for cars on a cash basis, etc. etc.

Admiral
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Re: Invest or pay off mortgage?

Post by Admiral » Mon Dec 04, 2017 7:28 am

I would like to see an actual post from someone who is actively and consciously investing in municipal bonds in a taxable account instead of paying down a mortgage. This sounds like a unicorn to me.

As Grabiner notes, this may work theoretically with a very low mortgage rate (due to present low return on bonds), but my guess is few if any Bogleheads actually do this. Most of us (myself and apparently Grabiner included) invest in stocks, with bonds in our tax-sheltered accounts.

tampaite
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Re: Invest or pay off mortgage?

Post by tampaite » Mon Dec 04, 2017 8:25 am

ACA wrote:
Wed Nov 29, 2017 7:58 am

45 years old and max out 401k annually. Over $800k in retirement accounts.
$150k mortgage at 3.37% on $500k home; no other debt.

Have an extra $3k monthly to invest or pay off mortgage early. Really like the idea of being debt free
IMO, Pay Off.

kathyauburn
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Re: Invest or pay off mortgage?

Post by kathyauburn » Mon Dec 04, 2017 8:32 am

ACA wrote:
Wed Nov 29, 2017 7:58 am
Really like the idea of being debt free
Same here. Never regretted paying off mortgage. Just do it.

lakja
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Re: Invest or pay off mortgage?

Post by lakja » Mon Dec 04, 2017 8:45 am

grabiner wrote:
Thu Nov 30, 2017 9:05 pm

3) How much interest am I saving with an early payoff?
This is actually equivalent to #2. If you pay off a short-term mortgage, you save a small amount of interest, but you get back the principal quickly and can then invest it and earn interest. If you pay off a long-term mortgage, you save more interest, but you also give up the opportunity to earn money on the investment.

Ignoring taxes for simplicity, say that you have a 3% loan, and you can make a $10K payment against the loan or invest the money at 3%. If there are 15 years left on the loan, paying $10K against the loan will save you $5580 in interest, but you won't get that $5580 for 15 years, when you will reduce your final year's payment by $15,580. If you had instead invested the money at 3%, it would become $15,580, and you could use that money to eliminate the final payment and break even. If there is one year left on the loan, paying $10K against the loan will save you only $300 in interest, but you will get $10,300 back in just one year, the same as if you had invested the money. And either way, you can get $15,580 in 15 years, either by investing the $10,000 now, or the $10,300 in one year for another 14 years.
I’m clear on the interest savings, but I do not understand how you’re claiming the principle is returned after paying the loan off. That only happens once the house is sold, so you’re really throwing a bunch of PI payments into a long term 0% yielding instrument that fluctuates with your home’s market value that will not be realized until selling the house or obtaining an equity line on the house.
Last edited by lakja on Mon Dec 04, 2017 9:23 am, edited 1 time in total.

WildBill
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Re: Invest or pay off mortgage?

Post by WildBill » Mon Dec 04, 2017 9:01 am

Howdy

For me, pay it off as soon as possible.

But realize that I am an ignorant hillbilly with an ingrained suspicion of and horror of debt. People pay me interest; I do not pay them.

For me, the psychological benefit of being debt free far outweighed any argument re carrying mortgage and investing for higher return than mortgage rate. It may or may not be the same for you.

Others view it differently.

Happy payoffs

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

kathyauburn
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Re: Invest or pay off mortgage?

Post by kathyauburn » Mon Dec 04, 2017 9:31 am

WildBill wrote:
Mon Dec 04, 2017 9:01 am
For me, the psychological benefit of being debt free far outweighed any argument re carrying mortgage and investing for higher return than mortgage rate.
Bingo!

Admiral
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Re: Invest or pay off mortgage?

Post by Admiral » Mon Dec 04, 2017 9:48 am

lakja wrote:
Mon Dec 04, 2017 8:45 am
grabiner wrote:
Thu Nov 30, 2017 9:05 pm

3) How much interest am I saving with an early payoff?
This is actually equivalent to #2. If you pay off a short-term mortgage, you save a small amount of interest, but you get back the principal quickly and can then invest it and earn interest. If you pay off a long-term mortgage, you save more interest, but you also give up the opportunity to earn money on the investment.

Ignoring taxes for simplicity, say that you have a 3% loan, and you can make a $10K payment against the loan or invest the money at 3%. If there are 15 years left on the loan, paying $10K against the loan will save you $5580 in interest, but you won't get that $5580 for 15 years, when you will reduce your final year's payment by $15,580. If you had instead invested the money at 3%, it would become $15,580, and you could use that money to eliminate the final payment and break even. If there is one year left on the loan, paying $10K against the loan will save you only $300 in interest, but you will get $10,300 back in just one year, the same as if you had invested the money. And either way, you can get $15,580 in 15 years, either by investing the $10,000 now, or the $10,300 in one year for another 14 years.
I’m clear on the interest savings, but I do not understand how you’re claiming the principle is returned after paying the loan off. That only happens once the house is sold, so you’re really throwing a bunch of PI payments into a long term 0% yielding instrument that fluctuates with your home’s market value that will not be realized until selling the house or obtaining an equity line on the house.
What he's saying (and he will correct me if not) is that the principal is "returned" in the sense that your payments are eliminated one year early, thus you've "made" (or had returned, or really saved is the right term) the 10k, plus the interest by having no payment. The 10k is free cash flow for 12 months. I agree the wording is somewhat confusing. The problem with this scenario is that future dollars are devalued due to inflation, so you may be "saving" that money, but in the future it won't buy as much.

EDIT to ADD: This link in helpful in understanding prepayments and how inflation affects them:

http://www.heracliteanriver.com/?p=478

Excerpt:
Suppose you have to pay $100 for some item. The company you owe this to says you can postpone the payment if you pay a 4% (simple interest) charge for each year. So, rather than paying $100 now, you pay $4, and that gives you the option to pay in another year. Say you do this for 10 years. You will have paid $4 each year, or $40 total. If you finally pay the $100 after 10 years, you’ve paid $140 total. This may seem like a really bad deal, because you’ve paid so much interest. But suppose that inflation has occurred at 3% over those 10 years. That means that $1 today will only be worth about 75 cents in its buying power in 10 years. If you paid the $100 upfront (in 2012 dollars), your money is gone. If you wait and pay the $100 in 2022 dollars, it will be equivalent (in purchasing power) to paying about $75 in 2012 dollars.
Note that these calculations assume 3% inflation which is the historical average but not the average lately. I use 2% in my long-term projections.

chevca
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Re: Invest or pay off mortgage?

Post by chevca » Mon Dec 04, 2017 11:00 am

IMO, folks play far too many mental gymnastics with their house and mortgage (not a rental). It's a purchase. Yes, probably the largest purchase we will make. Hence, we take a loan out on it.

I also don't see how one gets a return on the money they paid to finish paying off their purchase. Paying it off early will definitely save on total interest paid, and I see the return there. But, say one pays $100k for a house and pays it off over 10 years... they just paid for their purchase.

I wouldn't invest in muni bonds rather than pay down the mortgage if the spread was as little as brought up. I'd say invest in stocks or a stock/bond mix likely to beat the mortgage rate, or pay down the mortgage. Just my take on it.

ACA
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Re: Invest or pay off mortgage?

Post by ACA » Mon Dec 04, 2017 11:45 am

WildBill wrote:
Mon Dec 04, 2017 9:01 am
Howdy

For me, pay it off as soon as possible.

But realize that I am an ignorant hillbilly with an ingrained suspicion of and horror of debt. People pay me interest; I do not pay them.

For me, the psychological benefit of being debt free far outweighed any argument re carrying mortgage and investing for higher return than mortgage rate. It may or may not be the same for you.

Others view it differently.

Happy payoffs

W B
Ultimately, I feel the same way. And it's been my plan. But sometimes I think I should invest more in our taxable accounts.

You all (especially @WildBill) helped me understand that what I want to do (pay off mortgage in next three years) is the right choice for me as opposed to increasing my taxable account contributions.

Thanks!

WhiteMaxima
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Re: Invest or pay off mortgage?

Post by WhiteMaxima » Mon Dec 04, 2017 11:57 am

1/2 pay off mortgage 1/2 invest. You get benefit of both.

Admiral
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Re: Invest or pay off mortgage?

Post by Admiral » Mon Dec 04, 2017 11:59 am

WhiteMaxima wrote:
Mon Dec 04, 2017 11:57 am
1/2 pay off mortgage 1/2 invest. You get benefit of both.
Or half the benefit of each, depending on your perspective... 8-)

WhiteMaxima
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Re: Invest or pay off mortgage?

Post by WhiteMaxima » Mon Dec 04, 2017 12:04 pm

Admiral wrote:
Mon Dec 04, 2017 11:59 am
WhiteMaxima wrote:
Mon Dec 04, 2017 11:57 am
1/2 pay off mortgage 1/2 invest. You get benefit of both.
Or half the benefit of each, depending on your perspective... 8-)
Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk

Admiral
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Re: Invest or pay off mortgage?

Post by Admiral » Mon Dec 04, 2017 12:18 pm

WhiteMaxima wrote:
Mon Dec 04, 2017 12:04 pm
Admiral wrote:
Mon Dec 04, 2017 11:59 am
WhiteMaxima wrote:
Mon Dec 04, 2017 11:57 am
1/2 pay off mortgage 1/2 invest. You get benefit of both.
Or half the benefit of each, depending on your perspective... 8-)
Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk
If one has sufficient non-retirement assets and liquidity, there's very little downside risk to paying of housing debt. The only true downside risk is if the property falls in value (not impossible of course). The risk is really on the upside in this case: earning less, over time, on one's investments. It just depends on what one's current and future needs are, how much ready liquidity they already have, and their interest rate.

I, for one, have no desire to tie up my free cash in an illiquid asset, and particularly nto one that the government subsidizes with a tax deduction on my loan.

I absolutely see and appreciate the psychological benefit of an early payoff, but I try to separate my emotions from my investments. Not always easy but there it is!

WhiteMaxima
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Re: Invest or pay off mortgage?

Post by WhiteMaxima » Mon Dec 04, 2017 12:22 pm

Admiral wrote:
Mon Dec 04, 2017 12:18 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:04 pm
Admiral wrote:
Mon Dec 04, 2017 11:59 am
WhiteMaxima wrote:
Mon Dec 04, 2017 11:57 am
1/2 pay off mortgage 1/2 invest. You get benefit of both.
Or half the benefit of each, depending on your perspective... 8-)
Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk
If one has sufficient non-retirement assets and liquidity, there's very little downside risk to paying of housing debt. The only true downside risk is if the property falls in value (not impossible of course). The risk is really on the upside in this case: earning less, over time, on one's investments. It just depends on what one's current and future needs are, how much ready liquidity they already have, and their interest rate.

I, for one, have no desire to tie up my free cash in an illiquid asset, and particularly nto one that the government subsidizes with a tax deduction on my loan.

I absolutely see and appreciate the psychological benefit of an early payoff, but I try to separate my emotions from my investments. Not always easy but there it is!
The risk is if event like 2008 happened again. You fully paid house lost 1/2 of it value. If you have 20% down, you can walk away and let the bond owner take the loss or you take 100% of loss if you walk away. Remember you will never own your house if you pay down your mortgage. You will still owe county property tax. If something happens to you and you missed the tax payment, you house could be take away to pay the local tax.

Admiral
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Re: Invest or pay off mortgage?

Post by Admiral » Mon Dec 04, 2017 12:27 pm

WhiteMaxima wrote:
Mon Dec 04, 2017 12:22 pm
Admiral wrote:
Mon Dec 04, 2017 12:18 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:04 pm
Admiral wrote:
Mon Dec 04, 2017 11:59 am
WhiteMaxima wrote:
Mon Dec 04, 2017 11:57 am
1/2 pay off mortgage 1/2 invest. You get benefit of both.
Or half the benefit of each, depending on your perspective... 8-)
Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk
If one has sufficient non-retirement assets and liquidity, there's very little downside risk to paying of housing debt. The only true downside risk is if the property falls in value (not impossible of course). The risk is really on the upside in this case: earning less, over time, on one's investments. It just depends on what one's current and future needs are, how much ready liquidity they already have, and their interest rate.

I, for one, have no desire to tie up my free cash in an illiquid asset, and particularly nto one that the government subsidizes with a tax deduction on my loan.

I absolutely see and appreciate the psychological benefit of an early payoff, but I try to separate my emotions from my investments. Not always easy but there it is!
The risk is if event like 2008 happened again. You fully paid house lost 1/2 of it value. If you have 20% down, you can walk away and let the bond owner take the loss or you take 100% of loss if you walk away.
That's not really how it works. The point of owning 100% is that in a downturn you DON'T lose your house. The market value is immaterial unless you have to sell it. Presumably unless you cannot scrape up the taxes and insurance you're not going to lose a house you own...IF (as noted) you have sufficient liquidity.

WhiteMaxima
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Re: Invest or pay off mortgage?

Post by WhiteMaxima » Mon Dec 04, 2017 12:31 pm

Admiral wrote:
Mon Dec 04, 2017 12:27 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:22 pm
Admiral wrote:
Mon Dec 04, 2017 12:18 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:04 pm
Admiral wrote:
Mon Dec 04, 2017 11:59 am


Or half the benefit of each, depending on your perspective... 8-)
Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk
If one has sufficient non-retirement assets and liquidity, there's very little downside risk to paying of housing debt. The only true downside risk is if the property falls in value (not impossible of course). The risk is really on the upside in this case: earning less, over time, on one's investments. It just depends on what one's current and future needs are, how much ready liquidity they already have, and their interest rate.

I, for one, have no desire to tie up my free cash in an illiquid asset, and particularly nto one that the government subsidizes with a tax deduction on my loan.

I absolutely see and appreciate the psychological benefit of an early payoff, but I try to separate my emotions from my investments. Not always easy but there it is!
The risk is if event like 2008 happened again. You fully paid house lost 1/2 of it value. If you have 20% down, you can walk away and let the bond owner take the loss or you take 100% of loss if you walk away.
That's not really how it works. The point of owning 100% is that in a downturn you DON'T lose your house. The market value is immaterial unless you have to sell it. Presumably unless you cannot scrape up the taxes and insurance you're not going to lose a house you own...IF (as noted) you have sufficient liquidity.
What if you job situation force you to move? You can't sell because there is no buyer. This happened massively not long ago.

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Cycle
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Re: Invest or pay off mortgage?

Post by Cycle » Mon Dec 04, 2017 12:35 pm

Pay it off. Debt free rocks. We paid ours off at 33 on $375k multifamily.

WhiteMaxima
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Re: Invest or pay off mortgage?

Post by WhiteMaxima » Mon Dec 04, 2017 12:44 pm

I accelerate pay off for my previous house because I knew I will sell it so get 7% guarantee return (do laugh, that's normal mortgage rate before 2008) is very logic. Bought current house in a major job hub with 20% down. Bought another property with 20% down. At 3% interest rate and 5% appreciation rate. With 1:5 leverage, it will be foolish to pay off the loan. Put remaining into indexed vanguard fund returning 20% YOY. Blame the FED, and QE for this bubble #2. I won't invest Bond pay 2% of interest minus tax. Sorry.
Last edited by WhiteMaxima on Mon Dec 04, 2017 12:47 pm, edited 1 time in total.

chevca
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Re: Invest or pay off mortgage?

Post by chevca » Mon Dec 04, 2017 12:47 pm

WhiteMaxima wrote:
Mon Dec 04, 2017 12:31 pm
Admiral wrote:
Mon Dec 04, 2017 12:27 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:22 pm
Admiral wrote:
Mon Dec 04, 2017 12:18 pm
WhiteMaxima wrote:
Mon Dec 04, 2017 12:04 pm


Exactly. Don't put all egg in one basket though 1/2 of bebefit but also 1/2 of the risk
If one has sufficient non-retirement assets and liquidity, there's very little downside risk to paying of housing debt. The only true downside risk is if the property falls in value (not impossible of course). The risk is really on the upside in this case: earning less, over time, on one's investments. It just depends on what one's current and future needs are, how much ready liquidity they already have, and their interest rate.

I, for one, have no desire to tie up my free cash in an illiquid asset, and particularly nto one that the government subsidizes with a tax deduction on my loan.

I absolutely see and appreciate the psychological benefit of an early payoff, but I try to separate my emotions from my investments. Not always easy but there it is!
The risk is if event like 2008 happened again. You fully paid house lost 1/2 of it value. If you have 20% down, you can walk away and let the bond owner take the loss or you take 100% of loss if you walk away.
That's not really how it works. The point of owning 100% is that in a downturn you DON'T lose your house. The market value is immaterial unless you have to sell it. Presumably unless you cannot scrape up the taxes and insurance you're not going to lose a house you own...IF (as noted) you have sufficient liquidity.
What if you job situation force you to move? You can't sell because there is no buyer. This happened massively not long ago.
Then rent it out. :happy

If one owns their house free and clear, they can sell it. Just depends on how low they're willing to go. There's always a buyer at the right price.

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grabiner
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Re: Invest or pay off mortgage?

Post by grabiner » Tue Dec 05, 2017 12:17 am

chevca wrote:
Mon Dec 04, 2017 11:00 am
IMO, folks play far too many mental gymnastics with their house and mortgage (not a rental). It's a purchase. Yes, probably the largest purchase we will make. Hence, we take a loan out on it.

I also don't see how one gets a return on the money they paid to finish paying off their purchase. Paying it off early will definitely save on total interest paid, and I see the return there. But, say one pays $100k for a house and pays it off over 10 years... they just paid for their purchase.
Once you have taken out the mortgage, it is irrelevant that it is a mortgage (except for deductibility of interest and the consequences of defaulting. Any loan is a schedule of future payment obligations.

You might have a 15-year mortgage at 3% on which you owe $1558 per month. If you pay $1000 more now, you eliminate that $1558 due in the last payment; you still pay $1000 of principal but you avoid paying $558 of interest. If you don't pay $1000 and instead buy a 15-year bond worth $1558 at maturity, you would say that you are getting a 3% return on the payment.
David Grabiner

chevca
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Re: Invest or pay off mortgage?

Post by chevca » Tue Dec 05, 2017 9:42 am

Yes... but, the $1000 bond is you borrowing your money to someone else and getting a return for doing so... the other, you're just paying $1000 towards the house you bought. I get how it's like a return. But, it's really not. You're just saving the interest you would have paid to someone else that borrowed you money.

I realize it's mincing words and I'm all for paying down a mortgage in most situations. Return vs. saving... either way is better than buying lottery tickets. :happy

Savio
Posts: 10
Joined: Sun Nov 05, 2017 7:35 pm

Re: Invest or pay off mortgage?

Post by Savio » Thu Dec 07, 2017 9:16 am

Admiral wrote:
Fri Dec 01, 2017 9:47 am
Savio wrote:
Fri Dec 01, 2017 9:25 am
My personal plan is that if the market has been doing very well (which is has), then I will put my extra money into my mortgage.

If the market has been tanking, then I will put the extra into buying more stock every month. Eventually you will hit the bottom and enjoy the additional gains of the recovery.

No reason you can't change your strategy based on what is going on. Especially since both options are good.
So your plan is to time the markets, and you'll know when the bottom is, and when the top occurs? That's rarely a good plan.
Partially. I"ll always be adding funds to the market regardless of market conditions. Just like I will always be making a mortgage payment.

The extra is what I am talking about.

knick17
Posts: 72
Joined: Sun Jul 02, 2017 9:39 am

Re: Invest or pay off mortgage?

Post by knick17 » Thu Dec 07, 2017 9:22 pm

grabiner wrote:
Sun Dec 03, 2017 10:38 pm
knick17 wrote:
Sun Dec 03, 2017 10:18 pm
grabiner wrote:
Thu Nov 30, 2017 12:42 am
knick17 wrote:
Wed Nov 29, 2017 11:13 pm
I would go for the investment while paying the mortgage in instalments. If the investment goes well it shouldn't be a problem to pay the mortgage off in few yrs
If municipal-bond rates are higher than your after-tax mortgage rate, one way to do this would be to invest the extra money into a municipal-bond fund which you designate as a mortgage payoff fund. When the fund is large enough to pay off the mortgage, you can pay it off then if appropriate. In the meantime, you aren't taking on much extra risk, because the money that you could have used to pay down the mortgage is still available to pay it down.
/municipal bond fund, I don't really trust it...and interest rate is usually quite low....
The low interest rate is the key factor for the decision. If municipal-bond rates are low, then you get a better return from paying down your mortgage than from investing in municipal bonds.

I don't hold municipal bonds in my taxable account (I hold bonds in my employer plan), but if I did, I would probably follow this strategy. My mortgage is 1.89% after federal tax, and Vanguard Intermediate-Term Tax-Exempt Admiral is currently yielding 1.99%. I have 11 years left on my mortgage, so paying down the mortgage is equivalent to buying an 11-year bond, which isn't worthwhile. But the mortgage as a whole has a duration of about 5 years, similar to the muni fund, which makes it a reasonable investment. If the muni balance after two years is enough to pay off the mortgage, I would then have the option of paying it off if rates haven't changed, or keeping it if rates were higher.

What I do instead is invest in stock in my taxable account. At some point, I might decide to sell my taxable stock to pay off the mortgage, and move an equal amount from bonds to stock in my employer plan so that I keep my stock exposure. This isn't worth doing now because I would have a huge capital gain on the stock.
my point was much simpler than that...you are aying ur mortgage now and nothing will change. But if u have some extra cash to invest into a business that might bring some extra money in, it makes the mortgage lighter...

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