Paying down mortgage vs investing

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Applejack
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Paying down mortgage vs investing

Post by Applejack » Thu Sep 13, 2018 9:37 pm

Purchasing our first home and trying to decide on a mortgage term and whether or not to make additional payments on the monthly bill versus using the extra money for savings and investments. I have played around with the mortgage calculator on bankrate.com and it's easy to see the savings when you pay the mortgage off early. It's harder for me to interpret the opportunity costs of paying off the mortgage early instead of investing elsewhere, the time value of money, etc.

We are currently planning to live in this home for a few years and will likely keep it as a rental property after that.

Any ideas on this or other factors I haven't considered? Thanks for any suggestions.

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fortfun
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Re: Paying down mortgage vs investing

Post by fortfun » Thu Sep 13, 2018 10:04 pm

Applejack wrote:
Thu Sep 13, 2018 9:37 pm
Purchasing our first home and trying to decide on a mortgage term and whether or not to make additional payments on the monthly bill versus using the extra money for savings and investments. I have played around with the mortgage calculator on bankrate.com and it's easy to see the savings when you pay the mortgage off early. It's harder for me to interpret the opportunity costs of paying off the mortgage early instead of investing elsewhere, the time value of money, etc.

We are currently planning to live in this home for a few years and will likely keep it as a rental property after that.

Any ideas on this or other factors I haven't considered? Thanks for any suggestions.
Welcome Applejack. To give you a helpful answer, we will need to know the interest rate, value of home, down payment, term, etc. It would probably be helpful if you shared your current retirement savings, emergency fund, other debt, etc. All of these things are necessary to determine whether paying extra on your mortgage makes sense.

delamer
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Re: Paying down mortgage vs investing

Post by delamer » Thu Sep 13, 2018 10:19 pm

fortfun wrote:
Thu Sep 13, 2018 10:04 pm
Applejack wrote:
Thu Sep 13, 2018 9:37 pm
Purchasing our first home and trying to decide on a mortgage term and whether or not to make additional payments on the monthly bill versus using the extra money for savings and investments. I have played around with the mortgage calculator on bankrate.com and it's easy to see the savings when you pay the mortgage off early. It's harder for me to interpret the opportunity costs of paying off the mortgage early instead of investing elsewhere, the time value of money, etc.

We are currently planning to live in this home for a few years and will likely keep it as a rental property after that.

Any ideas on this or other factors I haven't considered? Thanks for any suggestions.
Welcome Applejack. To give you a helpful answer, we will need to know the interest rate, value of home, down payment, term, etc. It would probably be helpful if you shared your current retirement savings, emergency fund, other debt, etc. All of these things are necessary to determine whether paying extra on your mortgage makes sense.
There probably is at least one new thread on this question every week.

As fortfun indicates, the decision can’t be made in a vacuum. It has to be made in the context of all your financial circumstances.

Frequently, younger people who want to pay off their mortgages aggressively underestimate the need to have liquid assets. In an emergency — like a job loss or medical situation where someone is out of work for an extended period — having access to money to pay your bills is what is important, not whether you’ve prepaid the mortgage.

Applejack
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Re: Paying down mortgage vs investing

Post by Applejack » Thu Sep 13, 2018 10:30 pm

Thanks for the reply. I will lock in a rate in the next week or two, but am looking at either 15/30 yr fixed loans which are roughly 3.75-4.25%. The house is under $300k making the mortgage payment approximately $1300-1900 depending on the term and whether we put 10 or 20% down. We could comfortably pay $3k/mo which would lower the amount paid on the loan from $100k to about $40k over the course of the loan. I'm trying to figure out if saving $60k by aggressively paying off the loan would be a better than investing it elsewhere - like low cost index funds.

Currently maximizing tax-deferred savings like 401k, IRAs, etc. and no outstanding debt. I also set aside enough for a rainy day.

mortfree
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Re: Paying down mortgage vs investing

Post by mortfree » Thu Sep 13, 2018 10:34 pm

Do you have 20% for down payment now?

Will you have 20% for down payment in the future when you buy the next place?

What’s the point of putting extra money towards a home that will be a rental?

Given the limited info and only knowing that you want two properties in the future I would go with a 30-year mortgage on this property.

Wrote this then saw you replied with some details. Didn’t bother to change anything.

Nate79
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Re: Paying down mortgage vs investing

Post by Nate79 » Thu Sep 13, 2018 10:37 pm

Applejack wrote:
Thu Sep 13, 2018 10:30 pm
Thanks for the reply. I will lock in a rate in the next week or two, but am looking at either 15/30 yr fixed loans which are roughly 3.75-4.25%. The house is under $300k making the mortgage payment approximately $1300-1900 depending on the term and whether we put 10 or 20% down. We could comfortably pay $3k/mo which would lower the amount paid on the loan from $100k to about $40k over the course of the loan. I'm trying to figure out if saving $60k by aggressively paying off the loan would be a better than investing it elsewhere - like low cost index funds.

Currently maximizing tax-deferred savings like 401k, IRAs, etc. and no outstanding debt. I also set aside enough for a rainy day.
Paying down the mortgage is a risk free tax free return of the interest rate. So depends on what return (and at what risk and considering tax implication) you expect the investments to have and then compare to the mortgage rate.

Grt2bOutdoors
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Re: Paying down mortgage vs investing

Post by Grt2bOutdoors » Thu Sep 13, 2018 10:39 pm

Applejack wrote:
Thu Sep 13, 2018 10:30 pm
Thanks for the reply. I will lock in a rate in the next week or two, but am looking at either 15/30 yr fixed loans which are roughly 3.75-4.25%. The house is under $300k making the mortgage payment approximately $1300-1900 depending on the term and whether we put 10 or 20% down. We could comfortably pay $3k/mo which would lower the amount paid on the loan from $100k to about $40k over the course of the loan. I'm trying to figure out if saving $60k by aggressively paying off the loan would be a better than investing it elsewhere - like low cost index funds.

Currently maximizing tax-deferred savings like 401k, IRAs, etc. and no outstanding debt. I also set aside enough for a rainy day.
Do you have 20% to put down as a downpayment? If yes, then put it down. Markets - no one knows where they will go, but many folks, myself included have a feeling that returns going forward will be muted, at least for the next 10 years and that includes a disruption. A disruption, the kind that makes you look at your portfolio and say 1 or 2 things. 1) OMG, the value of our account just dropped by 30%. 2) OMG! I feel like a kid in a candy store, buy, buy, buy! 3) The market dropped, I hardly noticed in my low/no debt home. :)

Which one of the two scenarios above do you think you and spouse fall into? Maybe you fall into 1 and spouse into choice 2? In any event, that will determine your need for liquidity. If you are nervous about a 30% decline, then liquidity is important to you and your money should not be invested in index funds. If you fall into choice 2, you'll want to ensure you have either liquid funds on the side or you have an appropriate asset allocation that contains a healthy slug of fixed income for balancing and to lower volatility.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Applejack
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Re: Paying down mortgage vs investing

Post by Applejack » Thu Sep 13, 2018 10:59 pm

Really appreciate the time and shared thoughts.

Erwin007
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Re: Paying down mortgage vs investing

Post by Erwin007 » Fri Sep 14, 2018 12:11 am

Investing grows by compound interest, while the mortgage payment is simple interest.

Invest the extra money.

Stradovinski
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Re: Paying down mortgage vs investing

Post by Stradovinski » Fri Sep 14, 2018 6:31 am

I had this situation and took the 30 year. You could always make additional principal payments to retire the loan in 15 years or so, however you would retain the flexibility to make the lower payment should the need arise. If you change your mind and decide to invest the option is there, or you could split it somewhere down the middle. The interest difference of paying down the 30 year early isn't so bad compared to a 15.

Especially with it eventually becoming a rental, I'd rather have more flexibility with my future home over tying so much up into a required payment for a rental.

Nissanzx1
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Re: Paying down mortgage vs investing

Post by Nissanzx1 » Fri Sep 14, 2018 6:43 am

I'd advise you to put a minimum of 20% down to avoid costly PMI.

Do you have a 6 month emergency fund in addition to the home down payment? Are you free of other debts? If so, go for it and I would be funding 10-15% of your income into retirement while you pay down the loan. It takes time but you will enjoy having a paid for home. It's a game changer.

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Toons
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Re: Paying down mortgage vs investing

Post by Toons » Fri Sep 14, 2018 8:12 am

Strive to become "debt free"
Including mortgage.
Once you get there,
If being debt free doesn't suit you.
Borrow money,
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Erwin007
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Re: Paying down mortgage vs investing

Post by Erwin007 » Fri Sep 14, 2018 1:22 pm

Toons wrote:
Fri Sep 14, 2018 8:12 am
Strive to become "debt free"
Including mortgage.
Once you get there,
If being debt free doesn't suit you.
Borrow money,
:happy
Except then you’ve lost out on years of compounding. The emotional decision may be to pay off the mortgage but the smart/better financial decision is to pay the minimum on the mortgage and invest the difference if you want to come out ahead financially, especially with mortgage rates around 4%.

samta09
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Re: Paying down mortgage vs investing

Post by samta09 » Fri Sep 14, 2018 2:00 pm

Erwin007 wrote:
Fri Sep 14, 2018 1:22 pm
Toons wrote:
Fri Sep 14, 2018 8:12 am
Strive to become "debt free"
Including mortgage.
Once you get there,
If being debt free doesn't suit you.
Borrow money,
:happy
Except then you’ve lost out on years of compounding. The emotional decision may be to pay off the mortgage but the smart/better financial decision is to pay the minimum on the mortgage and invest the difference if you want to come out ahead financially, especially with mortgage rates around 4%.
I plan on putting extra money toward taxable accounts versus paying toward the 3.6% mortgage but in order to have a chance of beating this rate, i’d have to invest in riskier funds like Total Stock or similar.

When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.

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grabiner
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Re: Paying down mortgage vs investing

Post by grabiner » Fri Sep 14, 2018 8:32 pm

Erwin007 wrote:
Fri Sep 14, 2018 12:11 am
Investing grows by compound interest, while the mortgage payment is simple interest.
The mortgage payment also compounds. If you make an extra mortgage payment, you pay the same amount in the next month, but less of that payment is interest and more is principal.

For a simple example, suppose you have a mortgage at 4% APR, and a bank account at 4% APY; both of these are annual rates. If you have $10,000 in the bank account, you will have $10,400 next year, and $10,816 the following year. If you instead use this $10,000 to pay down the mortgage, your mortgage balance will be $10,400 lower next year because you paid $400 less interest, and will be $10,816 lower the following year because you paid $416 less interest. Thus it is break-even if you earn the same amount on your investments as the rate on your mortgage. (Both of these numbers should take taxes into account; you come out well ahead if you buy bonds in your IRA earning 3.5% rather than paying down a 4% mortgage with tax-deductible interest, but behind if the mortgage is not tax-deductible.)
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grabiner
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Re: Paying down mortgage vs investing

Post by grabiner » Fri Sep 14, 2018 8:37 pm

samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Wiki David Grabiner

Stradovinski
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Re: Paying down mortgage vs investing

Post by Stradovinski » Fri Sep 14, 2018 9:00 pm

grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.

Erwin007
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Re: Paying down mortgage vs investing

Post by Erwin007 » Fri Sep 14, 2018 9:40 pm

grabiner wrote:
Fri Sep 14, 2018 8:32 pm
Erwin007 wrote:
Fri Sep 14, 2018 12:11 am
Investing grows by compound interest, while the mortgage payment is simple interest.
The mortgage payment also compounds. If you make an extra mortgage payment, you pay the same amount in the next month, but less of that payment is interest and more is principal.

For a simple example, suppose you have a mortgage at 4% APR, and a bank account at 4% APY; both of these are annual rates. If you have $10,000 in the bank account, you will have $10,400 next year, and $10,816 the following year. If you instead use this $10,000 to pay down the mortgage, your mortgage balance will be $10,400 lower next year because you paid $400 less interest, and will be $10,816 lower the following year because you paid $416 less interest. Thus it is break-even if you earn the same amount on your investments as the rate on your mortgage. (Both of these numbers should take taxes into account; you come out well ahead if you buy bonds in your IRA earning 3.5% rather than paying down a 4% mortgage with tax-deductible interest, but behind if the mortgage is not tax-deductible.)
But this only works if the stock market returns the same amount as your mortgage rate. If the stock market returns more, you lose money by paying extra to your mortgage. Over how many 10, 15, or 30 year periods has the stock market averaged less than 4% annual growth? Your example also doesn’t account for growth due to dividends, and reinvested dividends.

We can continue to spout these “feel goodisms” about being debt free on this board, but the math says otherwise, which I’m just trying to point out.

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grabiner
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Re: Paying down mortgage vs investing

Post by grabiner » Sat Sep 15, 2018 12:01 am

Erwin007 wrote:
Fri Sep 14, 2018 9:40 pm
grabiner wrote:
Fri Sep 14, 2018 8:32 pm
Erwin007 wrote:
Fri Sep 14, 2018 12:11 am
Investing grows by compound interest, while the mortgage payment is simple interest.
The mortgage payment also compounds. If you make an extra mortgage payment, you pay the same amount in the next month, but less of that payment is interest and more is principal.

For a simple example, suppose you have a mortgage at 4% APR, and a bank account at 4% APY; both of these are annual rates. If you have $10,000 in the bank account, you will have $10,400 next year, and $10,816 the following year. If you instead use this $10,000 to pay down the mortgage, your mortgage balance will be $10,400 lower next year because you paid $400 less interest, and will be $10,816 lower the following year because you paid $416 less interest. Thus it is break-even if you earn the same amount on your investments as the rate on your mortgage. (Both of these numbers should take taxes into account; you come out well ahead if you buy bonds in your IRA earning 3.5% rather than paying down a 4% mortgage with tax-deductible interest, but behind if the mortgage is not tax-deductible.)
But this only works if the stock market returns the same amount as your mortgage rate. If the stock market returns more, you lose money by paying extra to your mortgage. Over how many 10, 15, or 30 year periods has the stock market averaged less than 4% annual growth? Your example also doesn’t account for growth due to dividends, and reinvested dividends.
I was responding to the specific issue you mentioned, which was simple versus compound interest.

I agree that the stock market is likely to return more than paying down a mortgage. However, it also has more risk. Investing is a trade-off between return and risk; this is why most investors hold some bonds, even though the stock market has higher expected returns than the bond market. And it is an equally good reason you might pay down a mortgage for a risk-free return, rather than invest in stock for a risky return.

Therefore, the fair comparison is between the return from paying down a loan and investing in a low-risk bond, as in my example. These are two options which give about the same risk, so you should choose the one with the better return (unless you need liquidity). If paying down the loan is better than buying bonds, but you would prefer to take more risk, then you can still pay down the loan, and sell your bonds to buy more stock.

If your investments are 100% stock, then you don't have the option of selling bonds to buy more stock, so it might make sense to buy stock rather than paying down your mortgage, if this is consistent with your risk tolerance.
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NextMil
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Re: Paying down mortgage vs investing

Post by NextMil » Sat Sep 15, 2018 4:43 am

Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.

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Re: Paying down mortgage vs investing

Post by Dulocracy » Sat Sep 15, 2018 9:47 am

I would know that if you do not put down 20% on a mortgage you will likely wind up with PMI or private mortgage insurance, which will mean greatly increased cost to pay for insurance that you will not default on the mortgage. Because of that if you have a 20% down payment, you will save a lot of hidden fees by paying it.

In your situation you may want to consider getting the 15 year mortgage instead of the 30-year mortgage. At those rates you are kind of on the cusp of whether or not it is worth it to pay down the mortgage. The 15-year mortgage will give you a lower interest rate and you will pay it off much more quickly. That in and of itself has a built-in automatic early payment on a monthly basis. You can then ignore making extra payments because that is how you got a lower interest rate. Then use any and all additional money to pay down the mortgage.

One thing that you may want to look into is an idea that used to be prevalent on this site but is now dead on this site, and that is the idea of a reverse bond by paying down the mortgage. For those less comfortable with buns, or those more debt averse, if one tracks ones extra payments on the mortgage, you can pay down your mortgage as a part of your bond allocation. This only works, however if you continue to make your mortgage payments into your bond portion of your portfolio until you have made your portfolio right after the mortgage is paid off. If you do not do this reclamation, you just had a more risky portfolio all along. The logic of this is in part that some people have been afraid of increasing interest rates in the bond market, but more importantly the rate that one gets on a mortgage pay down is usually better than the rate they would get by investing in bonds at current levels. Of course if interest rates go up a good deal after you start the strategy, you would want to pay attention and stop using the strategy when the interest Allowed by bonds is higher then the interest you are saving on your mortgage.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

delamer
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Re: Paying down mortgage vs investing

Post by delamer » Sat Sep 15, 2018 11:03 am

Dulocracy wrote:
Sat Sep 15, 2018 9:47 am
I would know that if you do not put down 20% on a mortgage you will likely wind up with PMI or private mortgage insurance, which will mean greatly increased cost to pay for insurance that you will not default on the mortgage. Because of that if you have a 20% down payment, you will save a lot of hidden fees by paying it.

In your situation you may want to consider getting the 15 year mortgage instead of the 30-year mortgage. At those rates you are kind of on the cusp of whether or not it is worth it to pay down the mortgage. The 15-year mortgage will give you a lower interest rate and you will pay it off much more quickly. That in and of itself has a built-in automatic early payment on a monthly basis. You can then ignore making extra payments because that is how you got a lower interest rate. Then use any and all additional money to pay down the mortgage.

One thing that you may want to look into is an idea that used to be prevalent on this site but is now dead on this site, and that is the idea of a reverse bond by paying down the mortgage. For those less comfortable with buns, or those more debt averse, if one tracks ones extra payments on the mortgage, you can pay down your mortgage as a part of your bond allocation. This only works, however if you continue to make your mortgage payments into your bond portion of your portfolio until you have made your portfolio right after the mortgage is paid off. If you do not do this reclamation, you just had a more risky portfolio all along. The logic of this is in part that some people have been afraid of increasing interest rates in the bond market, but more importantly the rate that one gets on a mortgage pay down is usually better than the rate they would get by investing in bonds at current levels. Of course if interest rates go up a good deal after you start the strategy, you would want to pay attention and stop using the strategy when the interest Allowed by bonds is higher then the interest you are saving on your mortgage.
It is pretty common to use a 80% 1st mortgage and a 10% 2nd mortgage (at a higher or variable interest rate) to purchase a home.

PMI is not the only way to go.

Erwin007
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Re: Paying down mortgage vs investing

Post by Erwin007 » Sat Sep 15, 2018 11:11 am

NextMil wrote:
Sat Sep 15, 2018 4:43 am
Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.
Who said anything about pulling money out at 40% tax rate? If you’ve been investing the extra money for years instead of paying extra to the mortgage you’re not paying long term capital gains rates anyway, and if the market is truly down as you say then you may not even be paying any tax.

delamer
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Re: Paying down mortgage vs investing

Post by delamer » Sat Sep 15, 2018 11:18 am

NextMil wrote:
Sat Sep 15, 2018 4:43 am
Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.
If I need $5,000 next week for a medical bill that otherwise will be sent to collections and have no HELOC, how can I use my house equity in my house to get the $5,000?

I can’t.

But if I have $5,000 in an IRA or taxable investment account, it most certainly is liquid. I can transfer the money to my checking account and pay the bill. It might not be a great solution because of the tax hit or because the investment value has tanked, but it is better than the credit hit and being hounded by collections.

NextMil
Posts: 505
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying down mortgage vs investing

Post by NextMil » Sat Sep 15, 2018 11:35 am

Erwin007 wrote:
Sat Sep 15, 2018 11:11 am
NextMil wrote:
Sat Sep 15, 2018 4:43 am
Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.
Who said anything about pulling money out at 40% tax rate? If you’ve been investing the extra money for years instead of paying extra to the mortgage you’re not paying long term capital gains rates anyway, and if the market is truly down as you say then you may not even be paying any tax.
But then you are taking it at 40% loss or unparking it at the worst possible times.

NextMil
Posts: 505
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying down mortgage vs investing

Post by NextMil » Sat Sep 15, 2018 11:39 am

delamer wrote:
Sat Sep 15, 2018 11:18 am
NextMil wrote:
Sat Sep 15, 2018 4:43 am
Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm
samta09 wrote:
Fri Sep 14, 2018 2:00 pm
When I hear one advantage of not paying off early is due to liquidity, does that mean that the money would be invested in safer investments like ibonds, money market, or CDs? Doing so would be safer but would not beat 3.6% mortgage rate.
And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.
If I need $5,000 next week for a medical bill that otherwise will be sent to collections and have no HELOC, how can I use my house equity in my house to get the $5,000?

I can’t.

But if I have $5,000 in an IRA or taxable investment account, it most certainly is liquid. I can transfer the money to my checking account and pay the bill. It might not be a great solution because of the tax hit or because the investment value has tanked, but it is better than the credit hit and being hounded by collections.
My point is that its just as easy to tap your home if not easier than tapping retirement accounts. The illiquid stuff is nonsense - you can easily put a heloc on your paid down equity. Thats why they call it a home EQUITY line of credit.

Order of operation is Emergency fund then HELOC. Why in the world anyone would take money out of investments is just beyond me, and the argument it is more liquid is just illogical, especially if you are tapping retirement accounts.

delamer
Posts: 6284
Joined: Tue Feb 08, 2011 6:13 pm

Re: Paying down mortgage vs investing

Post by delamer » Sat Sep 15, 2018 11:48 am

NextMil wrote:
Sat Sep 15, 2018 11:39 am
delamer wrote:
Sat Sep 15, 2018 11:18 am
NextMil wrote:
Sat Sep 15, 2018 4:43 am
Stradovinski wrote:
Fri Sep 14, 2018 9:00 pm
grabiner wrote:
Fri Sep 14, 2018 8:37 pm


And that is the fair comparison, but taxes can make it worthwhile. The current yield on low-risk 15-year bonds is 3.88% (Vanguard Long-Term Bond Index), so if you aren't maxing out your IRA, you come out ahead investing in that fund in your IRA rather than paying down a 15-year mortgage at a rate less than 3.88% after tax.

Liquidity is an independent reason not to pay down a mortgage. If you make an extra mortgage payment, you won't get the money back until the mortgage is gone, and it can be expensive to take the money back out of the house (via a home-equity loan). Thus, if you might need the money for some other purpose, keeping it liquid is a benefit. However, this primarily applies to putting the extra mortgage payment in a taxable account, unless you are over 59-1/2. If you contribute more to your 401(k) rather than paying down the mortgage, you can't get the money out of your 401(k) without penalty.
Well said. One other thing to consider if going with the longer term/investing option is a Roth IRA, rather than investing the extra in a 401k. You can take out contributions to a Roth (not earnings) anytime without penalty.

As stated, once the money is in the house, it's pretty much stuck there, and therefore illiquid.
I never understood why the invest crowd seems to think it’s any more difficult to pull money out of a house than it is from retirement investments. The taxes or what it does to a Roth always seem to me to be so much worse, much more illiquid in my mind, sure you can pull it out of the account but at a 40% tax rate in a down market how is that easier than getting it out of your house? And if it’s parked in investments it’s not liquid and subject to the whims of the market which would be terrible in crisis times of needing it. They are also sometimes the same ones who suggest using a heloc for an emergency fund. Never understood this thinking.
If I need $5,000 next week for a medical bill that otherwise will be sent to collections and have no HELOC, how can I use my house equity in my house to get the $5,000?

I can’t.

But if I have $5,000 in an IRA or taxable investment account, it most certainly is liquid. I can transfer the money to my checking account and pay the bill. It might not be a great solution because of the tax hit or because the investment value has tanked, but it is better than the credit hit and being hounded by collections.
My point is that its just as easy to tap your home if not easier than tapping retirement accounts. The illiquid stuff is nonsense - you can easily put a heloc on your paid down equity. Thats why they call it a home EQUITY line of credit.

Order of operation is Emergency fund then HELOC. Why in the world anyone would take money out of investments is just beyond me, and the argument it is more liquid is just illogical, especially if you are tapping retirement accounts.
In your earlier comment, you said you didn’t understand using a HELOC for an emergency fund.

But now you are saying you can easily have HELOC and use it as a backup emergency fund.

Which is it?

(And remember that not everyone owns a home or has sufficient equity fur a HELOC.)

NextMil
Posts: 505
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying down mortgage vs investing

Post by NextMil » Sat Sep 15, 2018 11:55 am

delamer wrote:
Sat Sep 15, 2018 11:48 am

In your earlier comment, you said you didn’t understand using a HELOC for an emergency fund.

But now you are saying you can easily have HELOC and use it as a backup emergency fund.

Which is it?

(And remember that not everyone owns a home or has sufficient equity fur a HELOC.)
Right my point that the same crowd that says you are making your money illiquid by paying down your mortgage also turns around and says you can use a HELOC as your emergency fund. Its illogical.

If your money is illiquid by paying down your mortgage, but you can you use a HELOC as your emergency fund, then which is actually true? They cannot both be true.

I realize that its just absurd arguments that both sides make to try to prove their point in a black and white manner, which is why I finally decided to spilt the difference on it and dump some on mortgage and some in taxable. Its not black and white despite the absurd arguments of parochial positions.

Applejack
Posts: 4
Joined: Thu Sep 13, 2018 9:19 pm

Re: Paying down mortgage vs investing

Post by Applejack » Sat Sep 15, 2018 1:08 pm

Obviously a lot of factors to consider. I guess our biggest decision is how long we plan to keep this first purchase. The area is expanding and won't stop anytime soon. Because of that reason, our plan will be to live there for 3-4 years while saving for our next place. We'll then try our hand at renting it out and hope the value climbs.

I think to split the difference we'll pay 20% down, take the lower rate with the 15 year loan, and instead of adding extra on top of that each month, will keep any additional savings more accessible hoping the market makes a correction in the near future.

Having not bought a house this can be a pretty confusing process. I appreciate all the comments and suggestions.

delamer
Posts: 6284
Joined: Tue Feb 08, 2011 6:13 pm

Re: Paying down mortgage vs investing

Post by delamer » Sat Sep 15, 2018 1:34 pm

NextMil wrote:
Sat Sep 15, 2018 11:55 am
delamer wrote:
Sat Sep 15, 2018 11:48 am

In your earlier comment, you said you didn’t understand using a HELOC for an emergency fund.

But now you are saying you can easily have HELOC and use it as a backup emergency fund.

Which is it?

(And remember that not everyone owns a home or has sufficient equity fur a HELOC.)
Right my point that the same crowd that says you are making your money illiquid by paying down your mortgage also turns around and says you can use a HELOC as your emergency fund. Its illogical.

If your money is illiquid by paying down your mortgage, but you can you use a HELOC as your emergency fund, then which is actually true? They cannot both be true.

I realize that its just absurd arguments that both sides make to try to prove their point in a black and white manner, which is why I finally decided to spilt the difference on it and dump some on mortgage and some in taxable. Its not black and white despite the absurd arguments of parochial positions.
I understand your point now.

A reasonable recommendation would be that if you pay off or pay down your mortgage and you have limited liquidity in an emergency fund, then set up a HELOC so that you have access to the equity in your home in an emergency situation,

NextMil
Posts: 505
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying down mortgage vs investing

Post by NextMil » Sat Sep 15, 2018 5:15 pm

delamer wrote:
Sat Sep 15, 2018 1:34 pm

I understand your point now.

A reasonable recommendation would be that if you pay off or pay down your mortgage and you have limited liquidity in an emergency fund, then set up a HELOC so that you have access to the equity in your home in an emergency situation,
Agreed. Sorry if I was unclear before, its hard to wade through the noise without being loud.

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