Extra Mortgage Payments or Invest?

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BizarroJerry
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Joined: Tue Apr 20, 2021 2:33 pm

Extra Mortgage Payments or Invest?

Post by BizarroJerry »

Wife and I just bought house recently. Combined gross income is 130k, going to 145k or so next year. Very early 30’s (31/30), retirement assets: 201k
Emergency fund: 25k (6-7 months of expenses)
Debt: 0 other than mortgage
Interest Rate: 6.75%
Loan: 152k
Current Home Value: 400k

We invest about 40k a year inclusive of company matches that are vested. I have been taking the extra 2 paychecks I get since I am paid 26x a year and basically making 2 extra principle payments a year with the goal of reducing our 30 year loan by 7 years or so. At these rates, is this an okay idea or should we not worry about paying mortgage off early and instead invest that extra 2,200 or so each year moving forward?

At these rates, every extra principle payment we make is like a 6.75% guaranteed return which is not the same argument as it was when rates were 2-3% and it made no sense to pay off early.
toddthebod
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Joined: Wed May 18, 2022 12:42 pm

Re: Extra Mortgage Payments or Invest?

Post by toddthebod »

I would max out my tax-advantaged accounts first.
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soccerrules
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Joined: Mon Nov 14, 2016 3:01 pm

Re: Extra Mortgage Payments or Invest?

Post by soccerrules »

Without knowing your goals and more information, it is a little hard to give you the best answer.

I would support the extra $2,200 going to your mortgage payoff if you will take the $15K increase projected for next year and make sure to fully fund your Roth IRAs each year going forward

Deal?
Don't let your outflow exceed your income or your upkeep will be your downfall.
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simplesimon
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Joined: Mon Feb 25, 2008 7:53 pm

Re: Extra Mortgage Payments or Invest?

Post by simplesimon »

BizarroJerry wrote: Wed Jul 10, 2024 7:28 am Wife and I just bought house recently. Combined gross income is 130k, going to 145k or so next year. Very early 30’s (31/30), retirement assets: 201k
Emergency fund: 25k (6-7 months of expenses)
Debt: 0 other than mortgage
Interest Rate: 6.75%
Loan: 152k
Current Home Value: 400k

We invest about 40k a year inclusive of company matches that are vested. I have been taking the extra 2 paychecks I get since I am paid 26x a year and basically making 2 extra principle payments a year with the goal of reducing our 30 year loan by 7 years or so. At these rates, is this an okay idea or should we not worry about paying mortgage off early and instead invest that extra 2,200 or so each year moving forward?

At these rates, every extra principle payment we make is like a 6.75% guaranteed return which is not the same argument as it was when rates were 2-3% and it made no sense to pay off early.
One can only know what the better decision is with hindsight. How about doing 50% to mortgage and 50% to invest?
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retired@50
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Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Extra Mortgage Payments or Invest?

Post by retired@50 »

BizarroJerry wrote: Wed Jul 10, 2024 7:28 am Wife and I just bought house recently. Combined gross income is 130k, going to 145k or so next year. Very early 30’s (31/30), retirement assets: 201k
Emergency fund: 25k (6-7 months of expenses)
Debt: 0 other than mortgage
Interest Rate: 6.75%
Loan: 152k
Current Home Value: 400k

We invest about 40k a year inclusive of company matches that are vested. I have been taking the extra 2 paychecks I get since I am paid 26x a year and basically making 2 extra principle payments a year with the goal of reducing our 30 year loan by 7 years or so. At these rates, is this an okay idea or should we not worry about paying mortgage off early and instead invest that extra 2,200 or so each year moving forward?

At these rates, every extra principle payment we make is like a 6.75% guaranteed return which is not the same argument as it was when rates were 2-3% and it made no sense to pay off early.
What's your asset allocation in your portfolio? 70% stock / 30% bonds, or what?

If you're a conservative investor who holds a 40/60 portfolio, then paying down the mortgage might make more sense since the expected return rivals that of your portfolio.

If you're an aggressive investor (90/10), and expect your portfolio to earn more than the mortgage rate, then invest the "extra" and pay the normal mortgage payment as the loan terms dictate.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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grabiner
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Re: Extra Mortgage Payments or Invest?

Post by grabiner »

BizarroJerry wrote: Wed Jul 10, 2024 7:28 am Interest Rate: 6.75%
Loan: 152k
Unless you donate a lot to charity, you take the standard deduction, so every prepayment you make gives a 6.75% tax-free return. The closest to a fair comparison for investment is Vanguard Long-Term Bond Index, which earns 5.08% and gives a low-risk, long-term return. (If you invest in something else, you are making a fair trade-off of risk for return; you can do this whether you pay down the mortgage or not, by changing your asset allocation.)

It's clearly better to pay down the mortgage than to do taxable investing (where the bond fund would earn only 3.96% after tax in your 22% bracket), but you don't appear to need to do any taxable investing.

For paydown versus investing more into your 401(k), it's closer. Yes, you earn 6.75% versus 5.08%, but you may also get a one-time benefit of a 22% tax deduction on contributions when you might pay only 12% tax on withdrawals. This is a one-time benefit, while the interest-rate difference compounds over time, so the two are close in value. I have a slight preference for paying down the mortgage given this spread, but it's reasonable to do it either way.
Wiki David Grabiner
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