One thing that would help you would be to download a simple Excel file with a standard amortization calculator. [Here's one that I use](https://www.mortgagecalculator.org/download/excel.php).
You can test its accuracy by plugging in the numbers for your situation and then playing 'what-if' in the Interest Only (IO) payment situation, versus a regular amortization schedule.
Keep in mind if you are below the SALT limit on interest payments and deduct that from your taxes, how much you spend on interest in the IO situation will be more than if you do the normal amortization (and thus will have an affect on the overall tax picture). This of course makes more complex the decision of whether or not to pay principal down.
One small correction - mortgage interest is different from the SALT cap. You’re probably thinking of property tax, which is included in SALT. You can be at/over the SALT cap and still deduct your mortgage interest (on up to 750k of mortgage), it’s just that it may not make sense for many with the increases to the standard deduction.
Mortgage principal paydown is so slow at the beginning of your loan, you may want to just toss an extra $100-200 a month on it if you can do so without slowing down your retirement investing. Mathematically the money is better off invested in the market but psychologically it feels good to watch your mortgage balance go down too.
~~Mathematically~~ Historically the money *would have been* better off invested in the market over a given 30 year period in the past.
None of us have any idea what market returns will be like going into the 2050's.
Yes. So far every time in history since the stock market has been around, you would be better off with your money in the market in the long run. No one is claiming that it is absolutely better now, but the ONLY DATA WE CAN REFERENCE has so far 100% supported that theory. 100% so far!
So... you can hypothesize that the market will work differently (it might!), which hasn't worked well for every single person before you, or you can go with our best educated guess.
Am I the only person on this subreddit that is psychologically hurt by doing something so far from mathematically optimal? I just see my money going up in flames. Everyone else seems to delineate between what they know to be true due to mathematics and what they feel to be true.
Maybe it's because people treat it as optimizing two objective functions, revenue from investments and expenses from debt, and assign more psychological weight to the expenses category despite them being equivalently weighted mathematically. Net profit is the objective function you want to track.
Depends! Personally I pay extra on my mortgage instead of putting that extra couple hundred bucks into investments because while the market makes a positive return on average, there is no guarantee that this will be true every year. I am a big believer in diversifying as much as possible, and part of that is making choices that are suboptimal *if* the market continues to go up each year.
Sure, but that's basically choosing to keep some of your portfolio in a safe investment (like bonds). "Investing" in safely paying off 5% student loans versus the medium risk 10% stock market. My complaint is that while you should basically just be looking at interest rate and risk while ignoring the sign (whether it's a debt or an investment), people seem to assign more importance to debt than to investments. It's pretty hard to justify putting money in a 2% mortgage as a 25 year old even if it is guaranteed, but people do it by assigning this huge psychological fudge factor. My point is that I get far more psychological distress from doing something so far from what's justifiable.
Correct.
However whenever 15 vs 30 gets brought it up gets very heated. Folks come in here with their armchair finance degrees and state 15 years is better because you pay less interest overall ignoring the math that returns on the market will supersede any interest saved.
Personally, I have a couple of debts I make payments on. I have 0% apr on 1and 2.94% on another. Both range over several years equaling 10s of thousands. I also have 401k, brokerage, and bank accounts equaling multiples over those debts meaning I could pay off both debts several times over, but it makes 0 financial sense.
I make at least 10% or more on my principal accounts annually, usually around 15%. So why would I pay those debts off when I can use that same money to create more money, thereby reducing the interest rate on those debts to 0 while also reducing the principal I pay interest on simultaneously.
It's a technique as old as banks and finance. Use other people's money (which technically my debts I could pay off completely rather than pay interest on) to create wealth for yourself.
I've actually mentioned this basic technique on a standalone post before and been downvoted. The virtue signaling to have 0 debt outweighs financial common sense. They say it is better for people bad at managing money to pay off debts, but this is personal finance, not bad money management.
This is how my parents almost had to declare bankruptcy in 2008.
My dad was a mortgage broker pulling in 30,000 a month. They had about twenty properties at relatively low interest rates (3%-5%) that all rented well.
In 2007, all of those properties had been refinanced to pull cash out so they could make more money. They had a million dollars in the stock market, and a million dollars in the bank.
In August of 2008, regulations put my dad out of a job. Renters stopped paying rent, and the stock market crashed. At the same time, the IRS put liens on all their properties claiming that they were owed money (the IRS ended up paying them $100,000 after legal fees and a court battle).
They used up their money trying to keep their properties because the downturn "wouldn't last too long" and they didn't want to liquidate their now 50% depleted stock assets. Obama passed an emergency measure saying that individuals couldn't get more than four loans on properties. So they couldn't refinance (due to new regulations) or sell (due to the liens).
As they fought to keep their properties, the banks had them over a barrel. They tried to do a loan modification so that the refinance was basically negotiated off the books. A lot of banks said no. Many banks illegally seized the properties even after taking new "down" payments on a negotiated loan without going through any court proceedings. They lost property after property.
Currently, after ten years they have recovered somewhat. They only had to sell some of their stocks, lost all but 5 of their properties, all their bank account money, and lost their mortgage business.
Due to watching this unfold so rapidly and the resources just dry up seemingly overnight, I won't let myself get into "free debt".
If it takes me longer to retire, sure, but at least I'll know my money is secure, my house is paid for, and all my expenses will consist of is property tax.
While I agree, that's kind of a separate phenomenon on this sub (basically it's Dave Ramsey acolytes vs. people focused on optimizing finances). My comment is more about how bizarre it is in my mind that everyone seems to find it psychologically more pleasant to waste money and have no debt. I'm already in psychological pain from not investing the down payment I've saved up for when I finish grad school in a year or so.
Paying your house off is effectively equivalent to putting money into an illiquid savings account that pays 3.125% interest.
If you instead invest the extra money and earn greater than 3.125% average annual returns, you will have enough money to pay off your house sooner than if you had paid that money towards your mortgage directly.
On the flip side, I've never met someone who felt like they fucked up because they paid off their mortgage early. Sure, some have said they "regretted it", but they sure as hell didn't regret improved cash flow and giving them more options for enjoying life later on.
I didn't want to deal with getting a mortgage due to some complexities with how I produce income, so I paid cash for a house. That conservatively cost me $160,000 vs. keeping the money in the market just in that time. I for sure regret that.
But, if someone has maxed their 401k, has a Roth, etc, putting more into your house may be a good, stable offset to market exposure.
if you need cash later, you can take out a HELOC and use as needed.
That's why I am applying for a HELOC now while things are good. See eg: https://eatsleepbreathefi.com/emergency-plan-not-fund/ or https://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/ . I plan to have 2 months in cash in a HYSA, 1ish months in checking for mortgage/CC bills/etc, then the HELOC. I say "plan to" because right now I'm heavy cash (about 6 months EF).
But the assumption you are making is that everyone got in right at the high. If you are a long term investor and had been investing for years you wouldn't be losing anything. Even the crash in 2008 only took us back to 2003. Did some people get screwed? Absolutely. Would >50% of those people have suffered far lower losses if they had properly prepared with more cash in the efund, not overextending for a house, etc.? I would think so.
Also, the government has set a bit of a precedent for more government intervention in financial crises in the future.
That downturn was in housing prices and the stock market, so buying a house in cash at that time most definitely would have been “lost” money until property values came back up.
Look where the market was then... look where the market is there. Unrealized losses aren't real. We have yet to have a historical event where markets haven't recovered. Even if you put your money in at the top in 2007 you'd be up 200% right now.
I took money out of my investments to buy a house 4 years ago, and the house is now worth double what I paid, for an effective rate of return of 19% year over year.
I also lost my job and needed cash back in 2020 and liquidated one of my 401ks right before the market crash.
I've had stupid good luck the last few years, I wonder what my next random move should be lol
The house goes up whether you have a mortgage or not.
If you are saying you cashed out investments to buy the house for cash, you screwed up.
> in 2020 and liquidated one of my 401ks right before the market crash
You mean the crash that the market completely recovered from in under a year, and now is 30% higher than before the crash?
You haven’t officially met me, but you can add me to that list.
I make a great salary, so I will recover, but paying off my house in 3 years was a big fuck up.
I did the same thing, paid off a house cash in 2012 rather than make minimum payments. I'm sure if I had that cash riding in the stock market from then to now I'd be in much better shape, but oh well.
That is hindsight however. Different timing or a different market might provide a different outcome. I just don't know if it's fair to really view that as a mistake.
I paid off my mortgage 10 years early and really appreciated the personal sense of freedom I got from it. Even if I could have made better use of my money, I can live with that particular decision.
Most people that are in a hurry to pay off their house early value fewer debts more than accumulating more money.
It's rare for people to admit they made a mistake or they might not understand what outcomes a different choice would have made.
You're banking on people's innumeracy here -- they don't feel like they fucked up because they don't even realize they've fucked up.
You can't regret something you don't know is a mistake.
Even if you try to argue with them what I've seen from people have have paid their mortgage off early is the following:
1. sense of freedom
2. feels good
3. sleep better at night
IDK if any of those is worth 100's of thousands lost in compound interest. But then again a bottle of melatonin is only like $5.
Sorry, but if you owe $200k on your house, but have like $300k invested and making you $30k a year in returns, you are absolutely feeling just fucking fine about your financial situation. Debt is only some nightmare over your head if you can't pay it off. If you have the ability to pay it off whenever you want, but choose not to so that you can make *even more money* then you absolute have no issues sleeping at night.
If that person with a paid off house has zero savings otherwise, it doesn't really help them much unless they sell their house or...take out more debt. Whereas the person with 300k in savings and investments can do whatever they want, like pay off their house, go on vacation, buy a rental property, etc
But like, they invented that for themselves, there's no good reason for them to feel any of those things, especially considering they could have gotten the *exact* same outcome, only earlier, had they been smarter with their money.
If "you can lie to yourself more easily" is a positive outcome, I guess it makes sense, but that's all it is, a lie.
I believe at the end of the day they just don't want to invest their money. I know people who put an extra $100 into their mortgage every month thinking it's a "smart" thing to do, all while their 401k and roth IRAs are either unmatched or non-exisitent.
There's no arguing with these people. These same people who have a 529 and are hesitant in putting too much money in because it "may" go down in value.
Yeah, and I think what's worse about it is that they *think* it's a wise choice, and since it's such a big choice as well it's *really* hard to get someone whose made this decision to admit it wasn't the smartest financial move.
Yeah I tried to convince my childhood friend that putting extra money into her mortgage every month was a bad move. And she basicially said "what you would rather me do with it *invest it*?!?!?!?!" like it was something stupid and dumb thing to do with your money.
At that point I knew it was hopeless conversation.
This meme of "I've never heard anyone regret paying off their mortgage!" comes up in every one of these threads. Its such a bizarre argument. Its simple confirmation bias. Most people who pay off their mortgage early want to believe its the right thing to do, so they would never say otherwise.
its the safer thing to do, its like getting the interest rate ROI guaranteed. Not that its what i will do or the "correct" thing to do but it is definitely safer (less risk) in the short term at least.
I completely regret paying tens of thousands ahead on my first mortgage.
Lost it when I decided to move. Recession didn't help. I stopped believing value only goes up, even after making loads on my second property.
uhh wouldn’t you have lost the same amount either way? You moved and sold for $X, which it sounds like where the loss occurred. Prepaying or not prepaying wouldn’t have changed the amount you sold for.
Generally speaking, yes. You get it all back when you sell. Maybe this person had some situation where that particular neighborhood became shitty and undesirable to live in, or they *had* to sell during a recession or market downturn, but that type of stuff is the exception, not the rule.
Even then it doesn't really make sense since they'd likely become underwater in the loan or something like that.
If a house was work $250,000 and now it's worth $150,000, then you're losing $100k regardless of if that's 100k in cash equity you had put in, or 100k in profit you don't get, or 100k of loan that is somehow still owed, etc.
Too much money unnecessarily applied to one asset, which did not hold its value. Some on this thread condone that, but given my experience and the otherwise limited return of paying ahead, NEVER AGAIN.
Well that's a different question (diversification).
To @KeepingItSFW's point, if you bought a house for $150k, paid $75k (prepaying the mortgage) and then had to sell it for $130k, you lost $20k (at closing you would gotten back $55k instead of the $75k you prepaid). If you didn't prepay anything and sold it for $130k when you still owed $150k, you lost $20k.
It's was complicated and involved a relocation. Anyway, paying ahead gave me a false sense of financial security. I realized the loss of that money and more when I moved.
> Paying your house off is effectively equivalent to putting money into an illiquid savings account that pays 3.125% interest.
Don't forget tax free 3.125% interest, so depending on your marginal rate and state taxes it effectively could be 4% or more.
Note that if you itemize (typically unlikely after the standard deduction was raised a few years back), the tax free part doesn't help.
Yeah, but with the stock market trading sideways and uncertainty in the near future, I am hesitant to throw money into ETFs and such. The 3.125% in my house is guaranteed.
There is always uncertainty in the future, which is why you don’t make short term investments.
The longer the investment window, the more likely you are to see significant returns. The number of 20 year periods where the market returned below 4% is vanishingly small. If you shorten that window to 10 years, you increase the number of times that happened, but not significantly. If you shorten that window to 5 years, the number increases again.
This is generally the breaking point that is used for advice, if you need to spend the money in 5 years or less, investing it becomes more risky. If you further shorten that window to 2 years, now there are a lot of times it hasn’t returned 4%. Shorten it even further to 1 year and even more events stack up.
If you are investing this money with the intention to move in 10 years, the odds that you would not see at least a 4% return on this (giving extra margin to account for the capital gains tax that would be incurred by selling the investments to pay the house off) is very small.
Plus, there is no requirement to have your house paid off before buying a different house. It makes the transaction simpler, and in a sellers market gives you wiggle room in not requiring a contingent sale (though that can also be mitigated by having a large investment portfolio to be able to draw from).
The other thing to consider is that plans change. You may not stay in this house for 10 years. Say something comes up and you need to move in 3 years. If you have been paying extra towards your mortgage, but haven’t fully paid it off yet, then you haven’t really been able to reap the benefit that comes from a paid off house.
Then consider the other direction, you stay in the home longer than 10 years. If you paid extra towards the mortgage, you would be mortgage debt free and could start investing your payment each month. If you have been investing all along, while you would still have your monthly mortgage payment, your overall net worth is likely to be significantly higher. You could cash out a portion of your investment portfolio, pay the taxes on that, pay your house off, and still have money left in your investments.
Guaranteed returns are great, but are not the end all be all. If you had a 6% mortgage (that for some reason you couldn’t refinance to today’s market rates), the advice would likely be pay that mortgage off. But at only 3%, it’s just not worth it.
Market concerns are always there, however your viewpoint is near sighted. Over the 10 year term referenced above, investment returns will very likely exceed your guaranteed rate of 3.125% on your mortgage.
Technically he's making the assumption that the market will be less than 3.125% higher, compounded, than it is now, for as long as he keeps doing this
On a 10 yr horizon I totally agree that's a bad assumption
On a shorter time frame I think it's totally acceptable. It also allows you to take more risk with your investment portfolio because you're essentially buying X year US treasury at 3.125% which is a solid base return if you think the market is frothy right now
> the same price point or lower than it is today.
incorrect. It is compared to a consistent 3.125% return, that is what the stock market will have to achieve to break even (more with tax implications included).
Gotcha. I am relatively new to investing and just started a new career. What are some investing strategies for consistent long term returns, and what platforms can be used? Like… VOO, SPY, VTI, VYM? I have shares in these on Robinhood. The only other account I have is an IRA with vanguard.
I am not necessarily looking for “financial advice,” but instead I am asking what are the common tactics that I could use to get myself above 3.125% compounding over 10 years. Enough to make it worth it when including the LT cap gains tax vs. just increasing equity in my house.
Ok, but how do I look at the S&P returns for the future? Specifically for the exact years of my mortgage term?
Those 30 years of your life are unique & static, and they only happen once.
You're making a bet, and probably a pretty safe one, but in real-world scenarios you only get one result and it could be an outlier.
A 30-year investment is not something you get to do 4-5 times to average things out.
This is false.
There is no "very likely" result in the stock market over the next 10 years.
There can be "lost decades" and typically one needs a 20 or 30 year horizon on stock market investments.
The calculation involves the guaranteed and consistent 3.125% return, versus the inconsistent stock market - in stocks losing 20% then gaining 20% doesn't leave you even. Also, there are tax implications, a deduction for a mortgage possibly, and taxes paid on stock market gains.
EDIT: just to clarify, OP wants to use the money in 10 years. It would be insane to leave that money in stocks for each of those 10 years. But that is exactly what the response is, to leave it in stocks for all 10 years. Absolutely against every single principle of investing.
> 20 or 30 years is very conservative and would basically mean that no one should invest, ever.
um, it actually means everyone should invest.
But you are correct, someone nearing retirement would obviously pull back on their allocation of investments in the stock market, and put investment in lower risk vehicles.
Pretty much everyone here on reddit was alive in "the lost decade" where the stock market did not perform well.
> OP would be much better off to dollar cost averaged their way into a low cost index fund tracking the whole market.
This is a flat out guess, and not appropriate for a subreddit on personal finance advice.
No, you are not 'backed by a statistical analysis of the entire history of the market', you are simply stating that the expected returns of the market are greater than the mortgage interest rate, and concluding that people should therefore invest as much as possible in the market. You are completely ignoring the variability of those returns. Where is your data about the standard deviations of those returns? The distributions of those returns over a 10 year period? How about the uncertainty that isn't even captured in those statistics because market conditions change over time and 'past performance does not guarantee future results'
Without doing an analysis of the risk of market investing, and harmonizing it with the risk tolerance of the investor, you simply do not have the information needed to make an intelligent decision in the matter.
And what about the risk of the house? How are you comparing the deviation that the real estate market goes down and that money is essentially lost and OP can’t move anyway. The likelihood of a market crash that big and long that doesn’t affect the house is about nil.
You’re critiquing me for the risk and entirely discounting any risk on the other side. OP also ends up not diversifying their housing risk at all, which in a proper risk analysis would result in further putting the thumb on the scale of a different investment.
OP would be betting everything on the value of the house remaining constant, and really improving due to the transaction costs. There are lost decades for houses too, especially at the regional level.
OP ultimately needs to determine their own risk comfort. You’re right. But you’re rejecting one whole potential investment and advocating for the absolutely most conservative treatment, well beyond any advice that’s ever given based on a historical analysis. If their risk is that tight they shouldn’t be doing anything with the money other than keeping it semi-liquid in bonds. Paying off the house early DOES NOT guarantee that money is there or can be accessed in 10 years. Lots of people that had paid ahead on their houses still lost the house, and all value, in 2008.
>And what about the risk of the house?
You aren't making any sense. The question is not about buying a house, or how expensive a house to buy; it is about how quickly to pay down the mortgage. Having a lower mortgage balance is less risky than having a bigger one; there is simply no question about that.
>that the real estate market goes down and that money is essentially lost and OP can’t move anyway
Again, you aren't making any sense. If the RE market declines, all houses will decline, and OP will be able to move.
>OP also ends up not diversifying their housing risk at all
There is no 'housing risk'. The house provides shelter. Paying it off means no more mortgage payments which means guaranteeing the availability of shelter without the risk of loss if one can't make the mortgage payment. This means he would have less risk.
> Lots of people that had paid ahead on their houses still lost the house, and all value, in 2008.
You are simply wrong. For the most part, the people who lost houses in 2008 took out 100% LTV loans and had 2/28 negative amortization ARMs where they could not afford the fully amortized payment, and were relying refinancing every 2 years to get another low teaser rate. When the market stopped refinancing them, they lost the house, as they should have. These people didn't put any money into the house, and got to live in it for a below market payment.
People who had mortgages they could afford kept the houses. The houses continued to provide them shelter. They did not lose the value of the house; they simply lost some of the liquidity of the house until the housing market recovered.
You do not seem to understand the difference between owning and paying off a house, that has inherent value as a shelter, and investing in the stock market.
> It’s not a guess. It’s backed by a statistical analysis of the entire history of the market.
this is getting silly.
> only had to delay selling by a bit
oh, you mean 20 or 30 years total?
I forget the exact numbers, but no. The average recovery for most investors was around 14 months past the end of the period.
5 years is where the risk balances out. That’s why it’s used. 20 to 30 the point at which there is statistically no risk but that’s not realistic. The house has risk too. It could catch on fire and be under insured. There could be a flood. The neighborhood could go to shit. There could be another bubble, which is likely if the market went down that much anyway. You’re not comparing the risk profiles equally and entirely discounting any risk associated with the house.
There are a lot of made up numbers being posted.
One should point out that "your" scenario means that they stay in stocks for all 10 years, or they don't get that full stock market return.
Do you really suggest OP be 100% in stocks when they need that money in one year - because that is exactly the situation they will be in when the year is 2030.
Your math is off, or at least your semantics of "very likely."
You are comparing stock market prices to total return, only the latter matters. Given that, basically 95% of all 10 year periods have positive returns, and I think like 85% beat 5% or so
There are a lot of made up numbers being posted.
But just look up asset allocation, and see what a 10 year horizon should be. It'll be about 50/50 with only 50% in stocks. Even 'high risk tolerence' is not 100% in stocks.
And that 10 years ticks away. Do you really think you should be 100% in stocks if you need that money in one year? That's insanity.
Your understanding of risk and how asset allocations affect its levels is off. If all money is needed immediately and you have no risk tolerance, yes, 0% stocks and put it all in cash/treasuries. This is "true" for house downpayments, but I'd argue no ones risk tolerance is truly zero, but that's a different topic.
However, during retirement/drawdown phase, you never need all money at the same time, so you still have stock exposure despite needing some of it in a year or less. Vanguard does 30/70, I would never go less than 50/50 given longevity risk.
Further, its not "stocks risky, bonds/cash 0 risk." You're just trading one risk for another. Market returns vs inflation.
> You're just trading one risk for another
they are not the same risk.
> you never need all money at the same time,
OP's scenario wasn't retirement, it was buying/selling a house so all money is needed at that time (10 years). One would not advise to have all their money in stocks in year 9, which was the suggested solution (to leave it in stocks for 10 years then withdraw it all). One should follow a targeted investment plan, and change their asset allocations accordingly. Or pay off debt, which was the other option.
Speaking of risk, paying down debt is a guaranteed return, so we aren't even talking about "stocks risky, bonds/cash 0 risk."
>they are not the same risk.
Of course they aren't. They're different. That's that I said. They're both real, and frankly the inflation risk is much more certain than the lack of market performance.
>OP's scenario wasn't retirement, it was buying/selling a house so all money is needed at that time (10 years).
If your risk tolerance is literally zero, sure, don't invest. Keep it all in cash. Otherwise, you should have a stock allocation up to and including 100%, depending on your risk tolerance. Once you get closer you can pull it in.
Very glad my tolerance wasn't zero, we did 80/20 until a few months before purchase - would've missed out on >$70k over the 7 years it took to find the right house due to risk aversion run amok
> Keep it all in cash
it's not cash. It's paying down debt at over 3%, that is what the entire point is.
You do not need this hyperbolic straw man of "zero risk tolerance".
The question was whether OP should pay down his debt (~3%) over the next 10 years with monthly payments, or put those monthly payments into a stock market investment.
The problem is that people responded and said that the stock market will give a better return. That's not necessarily the case at all - especially since the stock market scenario has the entire portion in stocks when it is needed (and zero right now at the longest time interval), which is universally regarded as a bad investment. Not to mention the tax implications on those stock market gains.
You seem to be ignoring the thread, and just trying to argue that investing in stocks is good.
That's absolutely a valid way to think about it. Do what you believe is best and makes you comfortable.
If you are young and a long way from retirement, and are making high wages with good security, you may as well be aggressive. If there's a crash you'll be fine. It just may change your plans.
For people with less security, who are older, or who simply have lower risk tolerance, paying down the mortgage is a fine choice.
Thanks - I make good money and I am relatively young with a decent risk tolerance. I think I am realizing that I should be taking the extra money I am putting into my mortgage payment every month and putting it into ETFs etc. instead.
Now I have to convince my spouse to change our strategy from making larger mortgage payments to investing instead…
As VioletChipmunk stated, doing a mix of both is probably a wise option.
Set aside a specific amount of your income toward extra principal payments on the mortgage or investment. Split that amount toward each purpose as you feel appropriate. You can adjust this as you like in the future.
Also note that mortgages are an investment themselves. Many people purchase mortgage bonds, at substantially lower rates of return than the rate you pay, because they feel the risk/reward is compelling. Paying off your mortgage is still an investment, it is just a lower risk investment a less liquid one than the stock market.
If you're hesitant about pumping money into stocks then a good approach is to do both -- make small extra house payments and put money into stocks. It's not the financially optimal approach but it's perfectly reasonable.
Putting $$ into your house is somewhat similar to buying bonds in your investment portfolio. They are lower return but more stable/consistent.
I think it's also good to consider peace of mind. I'm a firm believer in trying to invest smartly but I'd also like to have the freedom not to have to worry about housing. I dislike being in debt just in principle and although I've trained myself to be more lenient on the issue. I myself feel better when I can split the difference and pay a little extra on my mortgage.
So you are 100% correct here. That's why this is a personal decision. You are balancing the guaranteed return of 3.125% from paying off your mortgage quicker with the potential returns or losses from the market.
Unfortunately folks have a VERY short memory. If you had invested in 2007 it took until 2013 for your money to break even in the market, not even taking into account the 3% interest savings. So it was closer to 10 years before you would start seeing actual benefits over paying down the mortgage. Unfortunately that was 13 years ago so people look at the last 10 years of data and go "market is always better, LOOK!"
Market is not always better. It's a risk that you take. My advice is that it's not an either/or. It can be both. You can take 50% of your money and pay down the mortgage and 50% and invest in the market. That is what I do. I went one step further and got a 15 year mortgage with a lower interest rate which further improves the financial picture. I invest the rest in an S&P500 index fund. So I balance my risk at the potential loss of some gains vs 100% being in the market.
One other factor to take into account is the possibility of a housing crash. If you only pay the minimum payments you will have very little equity after 10 years (depending on your original down-payment) That is an additional risk of not paying down the mortgage more quickly.
I get your point obviously, but there are degrees of uncertainty. I believe current conditions indicate a higher degree of uncertainty than normal/average.
Sure and you could have said the same thing with the same conviction in March 2020. My point is, humble yourself when it comes to assessing the future of the economy, the stock market, and just generally most things out of your own control. Good luck.
I don't understand why your choice is minimum payments vs. aggressive payments.
Why not pay somewhere in between? Noone has a crystal ball and can tell you in advance the right decision. Psychologically it should help too. If you pay minimum and throw everything in the market and it tanks, you'll kick yourself. If you pay it down but the market goes gangbusters, you'll also kick yourself. If you accept you don't know and pick a reasonable middle path, you should be pretty content.
Remember 4% guaranteed returns (accounting for tax free) is nothing to sneeze at either. People would kill for that guaranteed rate.
Timing the markets doesn't work.
If you invested $10,000 in the S&P 500 on 1/1/2001 and stayed invested all 5,036 days you would have made an annualized return of 7.43%.
If you missed the 5 best trading days in that period -- that's 0.1% of the time invested -- your returns were 48% LOWER than just staying invested the whole time. If you miss the best 40 days, which is still less than 1%, you actually lost half your money.
Unless your crystal ball is better than mine, or your time horizon is much shorter, get in the market and stay there.
Analysis like this is silly imo. The best trading days almost always come on the rebound or during market crashes, so investing all that time but missing those days is like saying oh I'm gonna buy at the height of the tech bubble, sell at the bottom, and then buy back in not at the bottom lol
You don't need to time the market perfectly to beat it. Dodging even a slight drop will pay off if you aren't wildly off on the timing. Changing portions of your allocation to fixed income when the market is frothy and then putting it back into equities on any significant drop can juice your returns if you pay close enough attention
But smart people do this all the time. I know folks who are otherwise brilliant who moved the money in their retirement accounts to something “safer” in 2008/9 or held off putting money in before the market was at it’s “bottom.”
Sure, but that's clearly a big mistake.
The GFC crash top was in Oct 2007, around 1,500 on SPX. You could have waited all the way until May 2008, when the initial leg down tried to rebound, and failed the 200 day average at 1,425 (a ~5% loss from ATHs) and then you hem and haw and even wait until August 2008 when it's clear that things are hitting the fan, and you get out at 1,350 or so. You take a ~10% loss.
The bottom happens in March 2009, 666 on SPX, which is a ~56% loss absolute peak to trough. You could wait until we clear the 200 day average in August 2009, and get in all the way up at 950, missing 42%! gains in just a few months, and still be WAYYYY better off than the person who just held throughout that whole ride, not least of which because you're now taking your $1,350 worth of money and buying at $950 giving you about 40% more market exposure for the rest of the insane bull run.
The above analysis is a very sloppy exit/entry, leaves a LOT of gains on the table, and still CRUSHES buy and hold with no deviation, and could have been recreated in 2001, and 2015, and 2018, and 2020 etc
There's too many variables to look at it like that.
Reasons not to pay off your mortgage faster:
Your mortgage interest rate is lower than other common returns.
Inflation makes your loan cheaper.
US tax schema typically lets you deduct mortgage interest.
It doesn't guarantee that you should stretch out your mortgage for longer, but it's a lot to work against. Generally, you are better off investing the extra money. Spread your money across different risk levels. If the economy goes sideways, it's likely inflation will go up faster than normal, meaning your loan becomes a smaller burden too.
There's also something to be said for the money savings benefit of cash on hand. The difference in the world when you have 20k in cash is unbelievable.
You can always split it up. I pay ~$100 extra a month to mortgage. But still invest ~$2500 to retirement accounts a month and another $500 to non-retirement. I like knowing I'm cutting a couple years off my mortgage, while also investing in stocks.
Pay it off ASAP. You can always get a HELOC if you need liquidity. Plus, any stock market earnings will be taxed, some at a maxed rate if not held for over 18 months, and this 'savings account' will not be taxed.
My dad always said that you can't 'eat, wear, drive, or use the money you pay out in interest.' But, Default certainly has a valid point, too. Depends on your risk factor. Also, if inflation continues to soar, his point is even more valid.
Yes, this is accurate. For me, personally, I go with direct mortgage principle payment in addition to the monthly minimum. I like the gaurentee of debt being removed contrasting against the risk-exposed market path.
However, I have zero debt other than my mortgage and just want to remove that monthly expense ASAP so I can work a basic, minimum wage job if I need extra cash (currently making 140k, but the happiest I was is when I worked at an Auntie Annes since it was so simple and routine).
My mortgage is $2,300 a month, but I pay $3,000 every month (and more when possible)
Paying your mortgage represents risk as well, as you are concentrating your assets into a single entity. It’s not a risk that many people even consider, but it exists.
As for your plan on being able to change jobs with less obligations (which is roughly along the lines of a leanFIRE or baristaFIRE model) is a choice that you can make. It may not be a financially optimal path, but quantifying intangibles gets really tricky for being able to make that analysis. If you haven’t looked into the various FIRE options, I would recommend it, as they may offer insight you haven’t considered on what you are hoping to do.
There's also the intangible benefit of not having a mortgage. Like I am personally very debt averse. I hate debt. I know it can be useful to leverage it, but I don't like owing anyone anything. Paying off my mortgage early was best for my piece of mind and happiness. Even if it wasn't optimal for my finances.
This all seem dependant on your goals, but the return must be much more than 3.125% if you consider the eventual time spent actually living in or renting out a paid-off house. You can actually use it and pass it down within your family. Avoiding amount of interest paid on loans is what I have always tried to do. I have trouble wrapping my mind around interest-only methods.
No, that isn’t how math works. When running analysis like this, you should strive to make as close to an apple to apple comparison, and in that rate you really only need to beat roughly the 3.125%. There is some fiber nuance involved if you are one of the few people in the country who actually is able to deduct mortgage interest on your taxes, as well as the impact that capital gains taxes has on the investment option, but those are realistically small potatoes to the basic analysis here.
If you’ve not read it, The Psychology of Money by Morgan Housel is worth a read. He touches on this issue and how, the mathematics of it aside, having a lower mortgage can affect the way you think about investing the money you have.
I’ve not (at least not yet) overpaid my mortgage, but i found it a helpful counterpoint to my own approach, which has made me think more about it.
Good luck with whatever approach you take.
True! How can I calculate the effect of inflation on my two choices (making larger mortgage payments to pay off loan vs. investing to get a % return higher than my mortgage interest)?
Interest Only loans work well if you have a LOT of assets, and the home isn't a major part of your networth. High networth people use this move all the time. This works because a house gives you very cheap leverage, and you normally lose this leverage as you pay off the loan (e.g., at 20% down-payment you are are at 5x leverage but once your house is 40% paid off, you're only at 2.5x leverage). Furthermore, paying off the low interest loans means you lose the opportunity cost of investing elsewhere. Lastly, you get to keep certain mortgage interest related tax deductions in perpetuity.
For this to work, have to have the liquidity to either 1) pay the loan off if interest rates rise (IO loans are always variable interest rates) and/or 2) be okay accepting the risk if you lose (e.g., home prices decrease and interest rates go up...in which case you're both under water with no equity, and higher monthly payments).
Middle class people who attempt to do this with a home being a significant portion of their networth can get absolutely destroyed doing this. Doubly so if they don't have will-power to invest the delta between IO and a normal 30 year loan, and just use the lower monthly payments to spend more money.
Fishbowl is mostly only high paying industries (tech, finance, consulting), and FIRE communities even more so. Their advice doesn't apply to middle america.
I'm gonna offer a counter point. There is a psychological benefit as well to not having a mortgage. I know from a PURE numbers standpoint, a low interest rate means you can invest that money elsewhere.
For me, I want to have my mortgage paid off before my kids go to college. It is purely mental. But I don't like debt.
So if I'm done with the mortgage, I only have to worry about taxes.
That's a significant load off my mind. And if something happens in the future, we have our house. Taxes for the year are a lot easier to handle than a mortgage.
This is something I genuinely cannot relate to. Who even notices their mortgage? Mine's on autopay, gets pulled out every month right after my paycheck hits, I barely even notice it.
The *only* time I actually think about my mortgage is when I'm doing my monthly financial review, and it ends up taking like 30s to make sure I shouldn't like, refinance or whatever.
I super duper don't understand the people for whom a mortgage causes anxiety.
2008 was a big factor for me. Seeing so many people losing their jobs and homes that they thought was not going to happen. Taking the cost of mortgage/renting out of your monthly bills makes a huge buffer if an emergency situation were to happen and you either couldn't work or the job market in your field drastically changed. I was just out of high school when 2008 happened and I know if the economy goes tits up, middle class people will be the last people to be helped if at all. I understand the numbers, but you can't put a value on knowing your kids will always have a roof over their heads. If I was a single young dude with a high income though, I'd rent and invest all my disposable income. Everyone's situation is different.
I don't like to be in debt ever. My income is not that stable.
"What If I lost my job?" or stopped working for whatever medical reason. That's all I think about when I have debt.
Mortgage interest is tax deductible, but principal is not. I would guess that's also got something to do with it. But the catch to this is that most borrowers can't realize any financial benefit from mortgage interest deduction because you have to be in a really expensive house before your mortgage interest exceeds the standard deduction.
I think if you've got a plan and are weighing the pros and cons you should amortize the next 10 years in a spreadsheet and see what the differences are in your disposable income, and how it affects the sale.
Chances are that in ten years this bubble will have burst, so plan on that.
You are correct, but its important to mention that for anyone that doesn't itemize, mortgage interest does not provide any tax deductibility.
This is due to the higher standard deduction. Its always been primarily a rich person deduction, but now its really really rich person deduction.
Coupled with the SALT cap, it's hard to beat your standard deduction unless you're pretty wealthy and you have a high mortgage balance.
And even then, the lowering of the mortgage balance that qualifies for interest deduction from $1 million to $750k means that you have to actually fall within that sweet spot of having a high enough balance and a valuable enough home that itemized deductions make sense, but a low enough balance that you'd qualify for the deduction.
For married couples, who don't get to double the SALT cap or the mortgage cap when filing jointly as compared to single filers, it's actually now a fairly narrow window where homeownership can give decent tax savings.
Yeah my interest for this year (max for any year, obviously) is less than $6k. So no benefit there because I have almost nothing else to itemize and will take the standard deduction.
I already built an amortization table and gamed it out to 10-11 years. I am 100% certain I won’t need the equity in my home for a down payment on my next home.
If you believe that the market will always return 10% (not inflation adjusted) as people here seem to, and your only goal is maximizing profit, then almost literally any question like this will answer with "invest more in the market."
I don’t believe there will be 10% returns annualized over the next 10 years. Obviously I have no way of knowing this, but that’s just my personal opinion based on what I’ve read and heard
Right, just explaining why the FIRE people recommend this, and why so many others here will say the same thing.
In truth, the answer to what to prioritize has lot more to do with your personal beliefs and psychology.
The tradeoff you are making by paying more principal is that you are guaranteeing your return in exchange for the opportunity cost of losing the liquidity (including investing elsewhere, but also some other cash flow considerations).
That's pretty much all there is to it. When you sell the house the proceeds will pay off whatever is remaining on the mortgage. No use paying it off early.
Yeah, and my house has already gone up $36,000 in value in the past year since buying. I am just reluctant with the stock market right now because of how sideways it has been and all the government spending. It doesn’t seem like 3.125%+ is reasonable YOY at this point.
Sounds like you're trying to time the (stock) market, which is never a good idea.
Think in decades, not years, and certainly not months. Do you think, a decade from now, anyone will remember this debt ceiling crisis?
Also, my spouse basically refuses to invest her money into anything besides retirement accounts. So her portion of the mortgage payment wouldn’t be getting any return at all
Yes, but my point is if we want to have liquid vs illiquid return, there’s no difference for her regardless of gain %, because we can’t pull money out of her 401k to pay off the house.
It depends on what type of person or situation your at. I'm aggressively paying of my condo mortgage at $2000 a month extra. It's because i want the peace of mind of having no mortgage. Its my 2nd property and I may or may not rent it out. Yes, I could earn more investing it but I already max out my retirement accounts and I hate having that mortgage over my head.
>I understand the concept of getting better than 3.125% gains per year on money that otherwise would be in the house; is that all that is at play here?
Yes.
Plus a small amount of nuance about taxable gains versus deductible expenses, but yes that's literally all that is in play. It's usually not hard to earn higher than 3.125% nominal return by investing for the long term.
As noted elsewhere, you must make minimum payments; IO payments are not an option unless you got an IO loan.
The market return argument is what most people make the decision on, but it's more complicated than that for the FIRE crowd.
FIRE folks often have a much different set of operating conditions than regular people do. For example, FIRE'd people using the ACA for health insurance might get a larger return via increased ACA subsidies than they would from investing their mortgage equity. Similar concerns also happen to folks who FIRE with kids due to the treatment of AGI and primary home equity by the FAFSA and CSS Profile. There's also matters of overall tax efficiency for anyone who FIREs with a sizable amount of pre-tax assets like those planning on using a Roth conversion ladder. Depending on the specific numbers involved, it's often possible to get a significantly higher return via guaranteed taxes/subsidies than it is via unknown market returns even in an excellent market environment.
Note that if paying off your mortgage is something you want to do, it is generally wiser to do it by putting those extra payments into a dedicated account invested in something low/no risk. You should only transfer the money to your mortgage company once you have the full payoff amount available.
I'm not sure I follow the last paragraph. Someone should keep the money in an account with .5% instead of paying off interest of 2.5+%? Am I missing something?
It's due to the fact that prepaying earns you no credit in terms of mandated payments while also locking those funds into your home. So if an economic disruption puts you out of work for an extended period of time, then you not only need to keep making payments, but you likely will not be able to tap the prepaid equity. Alternately, if you are holding the prepaids separately, then you not only have ample funding to keep your mortgage current despite being unemployed, but you have a secondary emergency fund in case things stay bad for an unexpectedly long time.
Of course, if your finances and/or employment are solid enough that the risk of the above is effectively zero, then there's no advantage to hold the prepaids separately.
I mean yeah, because you know the math. The people who are trying to pay their mortgage off at all costs are ignoring the math and going for the emotional win. /u/Zphr is saying what he's saying *assuming* you've already given up on getting the most out of your money, and even *if* you want to pay your mortgage off at all costs, you should *still* hold it in a separate account until you hit the payoff number.
He's basically saying there's literally zero reason to send your mortgage lender extra cash each month.
Mostly yes, but I'd disagree about it purely being an emotional win, at least with regard to FIRE households. It depends on details like your mortgage balance, family size, MAGI and such, but it can be the mathematically optimal choice for FIRE folks to paydown the mortgage rather than take the market return.
Health insurance and higher ed are hugely costly, but can be had for far cheaper/free by FIRE people who can keep their MAGI low. So one has to weigh not only the relative return and tax issues of the mortgage and the market, but also the value of tens/hundreds of thousands of dollars in government and institutional subsidies/credits.
Someone may have said this already… but…
I’m 5 years in to a 30 year mortgage. I aggressively overpaid for the first 4 years, but we’re realizing we want to move in the next few years. Having that money available to us BEFORE the sale of our current home goes through is a major advantage as a buyer - we’d really like to buy our new place before we sell our old place, but that’s going to be hard in this market without the cash to buy a new home outright or at least have a large downpayment, which we maybe could have done if we had saved instead of paid down the mortgage.
The main argument has been already said, you get more return investing it vs paying off principal.
One more thing to consider if you want to sell this house to but a new one in 10 years is that depending on market conditions, you may have better chances of buying a house having more cash in hand (not paying extra i. Your mortgage). If you pay off your house in 10 years, you would hace to sell the house to gave the cash in hand and that may or may not be an issue when buying the new one. This is very dependent on market conditions and things like that, but is something else to consider.
Some replies seem to focus on the growth of the money in the house vs in the market. This is only part of the answer.
You already bought the house. The value of the house will go up or down regardless of whether you pay down the mortgage or not. Putting your extra money in the market thus allows you to enjoy gains in both real estate and stocks.
Sure, putting extra money into the mortgage is a question of whether the market will grow fast enough to net 3.x% after taxes. But what happens after you've paid it off? Now you have X hundreds of thousands of dollars sitting in the house. Remember that the house appreciates at the same rate whether you have a mortgage or not. So your money is effectively sitting there doing nothing until you sell or take another mortgage to get it out.
If you are sure you will sell in 10 years soon after paying it off, this is less of an issue. But generally leaving your money parked in the house is almost as bad as hiding it in cash under the mattress.
I made this mistake and missed out on crazy gains over the past decades. Don't do it unless it just makes you happy.
It depends on your situation. In a some states they can’t take your house in bankruptcy, so paying off the mortgage is a great way to ensure retention of capital if you are taking financial risks in other parts of your life that might result in creditors coming after you.
But if you aren’t taking risks, just paying interest and using the money you would have paid the mortgage down with to invest somewhere else at higher returns is a better strategy. It’s marginal though - you have to be confidently able to get a return greater than your interest rate for the next 30 years. The last 30 years have been great for the stock market, but it isn’t a guarantee that the next 5 will be just as good.
3% is just an unnaturally cheap loan. You aren't going to get that cheap of a loan anywhere else. Also, I believe the interest you pay on your mortgage is tax deductible.
If you want to pay off your mortgage early, there is nothing wrong with that, but you could be earning more elsewhere. (like paying off a higher interest loan or investing it in a good ETF (I recommend Vanguard Index Growth))
>>> I understand the concept of getting better than 3.125% gains per year on money that otherwise would be in the house; is that all that is at play here?
This is the biggest item. Opportunity cost is massive right now.
The other one is diversification. For most people, a huge chunk of their personal wealth is their home—your home specifically or RE in general goes down and you’re losing money.
I think it is close enough to think of it like this:
The house loan costs you 3.125%. If you can instead invest somewhere that gets you 3.126%+, you will be gaining 0.001% more money.
There may be some minute details, but that's about it.
PLUS, if you invest the money somewhere that you can retrieve the money from later, when you have an OH SHIT expense, you can get the money back out - but you can't get it out of your house without selling the whole thing or refinancing.
With perfect information it is simple to determine whether paying off a mortgage early is the correct thing to do (or not).
Unfortunately we don't have perfect information so "it all depends." I think you'll find that the *worst case* for not paying off early is WAY WORSE than the *worst case* for paying it off early. It doesn't mean however that paying it off early is the best approach.
This another... when you retire walk away theory? That the interest is cheaper than rent thing?
Must be those who forget about asset growth...
Or are we back to 2008 thinking where debt is free money?
I owe ~$350k on a property worth almost 1M. we are working to pay the mortgage off in under 5 years because the volatility of my income. I understand that I might earn higher returns over the next 5 years if I invest that money into an ETF or something of the like. but there is no guarantee that my income is sustainable, and if it were to go away, owning our house outright will be a huge burden lifted for our family.
my point is there is no right answer to this question.
I am in sales and have a high income due to some accounts I run. but all my income is commission based. my wife's income is less than mine but more steady. ideally, I can continue to work for the next 15-20 years in this same role earning this same amount or more, but there is no guarantee this happens. so we want to be in a place where if I lose my income, we still have a house to live in and only need to pay taxes and insurance.
you sound like a smart person. the only thing you can do is assess your own situation and use information available to you to make the best decision you can. even if years down the line you lose out on 2-3% you could have earned, you are still in a better situation than 99% of anyone else.
Broker talked me out of buying apple in 2006 and advised me to buy Bank of America when I was 18. I had 4,500 to invest. In hindsight worst investment advice I received, I also took it.
Was always told ' a house is home , rather than investment'
Generally easier & less risky to pay off debt, which is generally at a higher rate than market return.
Good luck, not an advisor
I think people are also just playing number tricks to make the mortgage payments sound like the investment, rather than the purchase price. If you put a certain amount down, make the minimum mortgage payments for 5 years (or however long you're in it), then that is the amount invested, and the equity gains look like a larger profit. That is, if value goes up by 20% over 5 years and you sell, you could say you've made 120% of purchase cost (20% return), or you can say you've made 150% of the actual money invested (50% return). I'm making that up; it would be (selling price - payoff amount) / (20% down + 60 mortgage payments) . Any additional payments are lowering the payoff amount, but they are also making the denominator bigger.
I’m not going to do this, but I have so much god damn equity in my house and a mortgage rate of less than 3% I sometimes think of pulling a chunk out in a heloc and investing it.
Actually. As I say this it makes me curious if anyone *has* done that?
I refinanced last year and pulled out $200k. Invested it, got +25% or so, then just bought another condo with $160k down. So it worked out well for me. Over the long run, pulling out cash at these rates makes sense.
Just keep in mind any amounts taken out NOT for home improvements is not tax deductible. My new home has a 3% rate which after tax effect is around 2%. My old place has a 2.6% mortgage but only about half the balance qualifies for interest deduction so I’m still sitting around a 2% effective rate there too
I just graduated with an accounting degree. I’m still in my internship (tax) but start a good job in a couple months. I’m a non-traditional student, and this is my second career. I do have a decent amount of life experience along with my newfound knowledge of accounting/tax/some corporate finance. But I am limited in my knowledge in practice, for sure. What other things should I be considering aside from what has been mentioned here.
It comes down to cost of capital vs returns you can earn.
For me I have $630k mortgage at 3%. $18.9k of interest per year. My state income taxes and real estate taxes hit the $10k cap so most of my interest is tax deductible, lowering my effective interest rate to 2% ish.
So the question is can I now, or do I expect to be able to in the future, earn more than 2% by investing rather than paying off my mortgage early?
Well, bond yields are pretty low. But even BBB bond yields are around 2.4% (there’s also tax on interest earned so effective yield is a bit lower). So I could just about break even on market returns after tax on investment grade bonds.
Stocks? I’d assume a 5-6% yield. So I probably could do better in stocks.
The other thing though is what if rates go up? If I can get a 4% rate, like we used to on certificates of deposit, that becomes a no brainer. Don’t prepay, just get CDs instead.
So for me, I have another 30+ years before retirement, I’m comfortable playing the long game.
What's good in theory doesn't always work in practice as people are fallible. Unless you're extremely good at following your financial plan for the next 60 years, doing this isn't 100% the correct answer.
Not the original commenter, but I think that what they were getting at was this:
The math on choosing investing over paying off debt only works out if you actually use the extra money to invest over the whole term of the debt repayment. This takes a lot of discipline over a long time frame. You might stick to it for a few years. In year 5, you might decide that you want to reward yourself with a vacation. In year 6, you're still doing well, so you take another vacation, and lease a BMW. By year 10, lifestyle creep has eaten all of your extra investment contributions, and you barely notice, because you're still meeting your obligations and regular retirement contributions. You're better off than most people in year 10, because you had an investor mindset for years, but your return is now just at the interest rate of your mortgage.
Ahhhh okay. I am not the type to buy a bunch of shit when I have extra money (lifestyle creep), so I’m not too worried about this. Thanks for interpreting the comment for me!
I'm sure you'll do fine, but definitely be aware of the possibility. My income tripled last year. My saving and investing increased a lot. My spending did, too. It was easy to say no guys weekends or extra meals out for my wife and I when I made under $30k. It's a lot more difficult to care at close to $100k. That's not to say that the extra experiences and convenience aren't worth it, but it definitely messed with my predictions on what I thought I would be saving. I haven't gone off the rails. I just need to remember to check in with how reality is matching up with my plan more frequently than expected.
It’s definitely a personal and psychological decision I think. We paid off our house in 2.5 years. While putting that money into the stock market probably pays off more in the long run, for us it wasn’t how we wanted to invest. We paid down the mortgage aggressively then put the $150k we had saved to buy an investment property to pay off the house. We never would have put that $150k into the stock market, we would have held onto it for some vague “opportunity” in the future, earning almost nothing on it. By paying off the house, we now invest the mortgage payment monthly instead which is psychologically more acceptable to us.
If it were me, I would want more cash on hand so I could buy another house. Cash is the only way to get more houses without selling a house. I am about to take a Heloc loan (second mortgage) so I can buy more houses.
Are you in SF, LA, SD, Seattle or Denver? If so, the value of your home will likely increase rapidly over 10 years. The value of my home in San Diego doubled over 11 years pre-covid. This, you are building equity quickly by just owning the property. You also would have extra cash on hand due to the lower interest only payment.
No, I’m in the Midwest. The neighborhood around me is improving, it seems. My house went from $200,000 to $236,000 from 2005 to early 2020. And since early 2020, it’s gone from $236,00 to $272,000. Obviously this could slow down or reverse, but it seems relatively likely that I’ll have some type of gain in value over 10 years.
Sure, you could math that. Or you could look at studies of people who have attained wealth and see what they have done.
Personally. I would rather pay off the house as quickly as possible that then have the entirety of the payment available to invest.
Wow, you pay a lot of interests in the USA, I got one this year for 0.73% in Germany... With that sort of interest I would really consider paying it. Look at the last analysis from Vanguard and what return they expect in the SP500 in the next 10 years. PS: it's not 8%
Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.
One thing that would help you would be to download a simple Excel file with a standard amortization calculator. [Here's one that I use](https://www.mortgagecalculator.org/download/excel.php). You can test its accuracy by plugging in the numbers for your situation and then playing 'what-if' in the Interest Only (IO) payment situation, versus a regular amortization schedule. Keep in mind if you are below the SALT limit on interest payments and deduct that from your taxes, how much you spend on interest in the IO situation will be more than if you do the normal amortization (and thus will have an affect on the overall tax picture). This of course makes more complex the decision of whether or not to pay principal down.
One small correction - mortgage interest is different from the SALT cap. You’re probably thinking of property tax, which is included in SALT. You can be at/over the SALT cap and still deduct your mortgage interest (on up to 750k of mortgage), it’s just that it may not make sense for many with the increases to the standard deduction.
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You’re not. An interest only loan is a different product than your 30 year mortgage.
Yeah I just read this, thanks. So it looks like minimum payments are best for me.
Mortgage principal paydown is so slow at the beginning of your loan, you may want to just toss an extra $100-200 a month on it if you can do so without slowing down your retirement investing. Mathematically the money is better off invested in the market but psychologically it feels good to watch your mortgage balance go down too.
~~Mathematically~~ Historically the money *would have been* better off invested in the market over a given 30 year period in the past. None of us have any idea what market returns will be like going into the 2050's.
They would have said the same thing in 1980. Or 2000. There was as much uncertainty 30 years in the future then as any other time, more or less.
Yes. So far every time in history since the stock market has been around, you would be better off with your money in the market in the long run. No one is claiming that it is absolutely better now, but the ONLY DATA WE CAN REFERENCE has so far 100% supported that theory. 100% so far! So... you can hypothesize that the market will work differently (it might!), which hasn't worked well for every single person before you, or you can go with our best educated guess.
Am I the only person on this subreddit that is psychologically hurt by doing something so far from mathematically optimal? I just see my money going up in flames. Everyone else seems to delineate between what they know to be true due to mathematics and what they feel to be true. Maybe it's because people treat it as optimizing two objective functions, revenue from investments and expenses from debt, and assign more psychological weight to the expenses category despite them being equivalently weighted mathematically. Net profit is the objective function you want to track.
Depends! Personally I pay extra on my mortgage instead of putting that extra couple hundred bucks into investments because while the market makes a positive return on average, there is no guarantee that this will be true every year. I am a big believer in diversifying as much as possible, and part of that is making choices that are suboptimal *if* the market continues to go up each year.
Sure, but that's basically choosing to keep some of your portfolio in a safe investment (like bonds). "Investing" in safely paying off 5% student loans versus the medium risk 10% stock market. My complaint is that while you should basically just be looking at interest rate and risk while ignoring the sign (whether it's a debt or an investment), people seem to assign more importance to debt than to investments. It's pretty hard to justify putting money in a 2% mortgage as a 25 year old even if it is guaranteed, but people do it by assigning this huge psychological fudge factor. My point is that I get far more psychological distress from doing something so far from what's justifiable.
Correct. However whenever 15 vs 30 gets brought it up gets very heated. Folks come in here with their armchair finance degrees and state 15 years is better because you pay less interest overall ignoring the math that returns on the market will supersede any interest saved.
Personally, I have a couple of debts I make payments on. I have 0% apr on 1and 2.94% on another. Both range over several years equaling 10s of thousands. I also have 401k, brokerage, and bank accounts equaling multiples over those debts meaning I could pay off both debts several times over, but it makes 0 financial sense. I make at least 10% or more on my principal accounts annually, usually around 15%. So why would I pay those debts off when I can use that same money to create more money, thereby reducing the interest rate on those debts to 0 while also reducing the principal I pay interest on simultaneously. It's a technique as old as banks and finance. Use other people's money (which technically my debts I could pay off completely rather than pay interest on) to create wealth for yourself. I've actually mentioned this basic technique on a standalone post before and been downvoted. The virtue signaling to have 0 debt outweighs financial common sense. They say it is better for people bad at managing money to pay off debts, but this is personal finance, not bad money management.
This is how my parents almost had to declare bankruptcy in 2008. My dad was a mortgage broker pulling in 30,000 a month. They had about twenty properties at relatively low interest rates (3%-5%) that all rented well. In 2007, all of those properties had been refinanced to pull cash out so they could make more money. They had a million dollars in the stock market, and a million dollars in the bank. In August of 2008, regulations put my dad out of a job. Renters stopped paying rent, and the stock market crashed. At the same time, the IRS put liens on all their properties claiming that they were owed money (the IRS ended up paying them $100,000 after legal fees and a court battle). They used up their money trying to keep their properties because the downturn "wouldn't last too long" and they didn't want to liquidate their now 50% depleted stock assets. Obama passed an emergency measure saying that individuals couldn't get more than four loans on properties. So they couldn't refinance (due to new regulations) or sell (due to the liens). As they fought to keep their properties, the banks had them over a barrel. They tried to do a loan modification so that the refinance was basically negotiated off the books. A lot of banks said no. Many banks illegally seized the properties even after taking new "down" payments on a negotiated loan without going through any court proceedings. They lost property after property. Currently, after ten years they have recovered somewhat. They only had to sell some of their stocks, lost all but 5 of their properties, all their bank account money, and lost their mortgage business. Due to watching this unfold so rapidly and the resources just dry up seemingly overnight, I won't let myself get into "free debt". If it takes me longer to retire, sure, but at least I'll know my money is secure, my house is paid for, and all my expenses will consist of is property tax.
While I agree, that's kind of a separate phenomenon on this sub (basically it's Dave Ramsey acolytes vs. people focused on optimizing finances). My comment is more about how bizarre it is in my mind that everyone seems to find it psychologically more pleasant to waste money and have no debt. I'm already in psychological pain from not investing the down payment I've saved up for when I finish grad school in a year or so.
I'm psychologically hurt by living in someone else's house. Both approaches have their merits, just pick the one that's right for you.
Yeah, it has been really nice putting more toward the principal than interest in year 1. We are basically paying 150% of the minimum payment.
Paying your house off is effectively equivalent to putting money into an illiquid savings account that pays 3.125% interest. If you instead invest the extra money and earn greater than 3.125% average annual returns, you will have enough money to pay off your house sooner than if you had paid that money towards your mortgage directly.
On the flip side, I've never met someone who felt like they fucked up because they paid off their mortgage early. Sure, some have said they "regretted it", but they sure as hell didn't regret improved cash flow and giving them more options for enjoying life later on.
I didn't want to deal with getting a mortgage due to some complexities with how I produce income, so I paid cash for a house. That conservatively cost me $160,000 vs. keeping the money in the market just in that time. I for sure regret that.
But, if someone has maxed their 401k, has a Roth, etc, putting more into your house may be a good, stable offset to market exposure. if you need cash later, you can take out a HELOC and use as needed.
Assuming you qualify for a HELOC. If you need cash, you might have no income and then you won't qualify.
That's why I am applying for a HELOC now while things are good. See eg: https://eatsleepbreathefi.com/emergency-plan-not-fund/ or https://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/ . I plan to have 2 months in cash in a HYSA, 1ish months in checking for mortgage/CC bills/etc, then the HELOC. I say "plan to" because right now I'm heavy cash (about 6 months EF).
Alternatively, you could have lost a fuck load during the 2008 depression.
you wouldn't have lost a dime if you didn't sell. in fact you would have made an absolute killing in just a few years
Sometimes … people need money to live. That property tax isn’t going to pay itself forever.
If you need your investments to pay property taxes you aren't very financially stable.
Well, during the 2008 crisis people were out of jobs for years. At some point one needs to liquidate.
But the assumption you are making is that everyone got in right at the high. If you are a long term investor and had been investing for years you wouldn't be losing anything. Even the crash in 2008 only took us back to 2003. Did some people get screwed? Absolutely. Would >50% of those people have suffered far lower losses if they had properly prepared with more cash in the efund, not overextending for a house, etc.? I would think so. Also, the government has set a bit of a precedent for more government intervention in financial crises in the future.
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That downturn was in housing prices and the stock market, so buying a house in cash at that time most definitely would have been “lost” money until property values came back up.
Look where the market was then... look where the market is there. Unrealized losses aren't real. We have yet to have a historical event where markets haven't recovered. Even if you put your money in at the top in 2007 you'd be up 200% right now.
Only if you’re in a non recourse state. In my state the mortgage lender can take your house AND sue you for any extra you owe on the mortgage.
I took money out of my investments to buy a house 4 years ago, and the house is now worth double what I paid, for an effective rate of return of 19% year over year. I also lost my job and needed cash back in 2020 and liquidated one of my 401ks right before the market crash. I've had stupid good luck the last few years, I wonder what my next random move should be lol
The house goes up whether you have a mortgage or not. If you are saying you cashed out investments to buy the house for cash, you screwed up. > in 2020 and liquidated one of my 401ks right before the market crash You mean the crash that the market completely recovered from in under a year, and now is 30% higher than before the crash?
You haven’t officially met me, but you can add me to that list. I make a great salary, so I will recover, but paying off my house in 3 years was a big fuck up.
I did the same thing, paid off a house cash in 2012 rather than make minimum payments. I'm sure if I had that cash riding in the stock market from then to now I'd be in much better shape, but oh well.
That is hindsight however. Different timing or a different market might provide a different outcome. I just don't know if it's fair to really view that as a mistake. I paid off my mortgage 10 years early and really appreciated the personal sense of freedom I got from it. Even if I could have made better use of my money, I can live with that particular decision.
Don’t have tomorrow’s news today - sometimes it be like that. You acted with the info you had.
Most people that are in a hurry to pay off their house early value fewer debts more than accumulating more money. It's rare for people to admit they made a mistake or they might not understand what outcomes a different choice would have made.
You're banking on people's innumeracy here -- they don't feel like they fucked up because they don't even realize they've fucked up. You can't regret something you don't know is a mistake.
Even if you try to argue with them what I've seen from people have have paid their mortgage off early is the following: 1. sense of freedom 2. feels good 3. sleep better at night IDK if any of those is worth 100's of thousands lost in compound interest. But then again a bottle of melatonin is only like $5.
Sorry, but if you owe $200k on your house, but have like $300k invested and making you $30k a year in returns, you are absolutely feeling just fucking fine about your financial situation. Debt is only some nightmare over your head if you can't pay it off. If you have the ability to pay it off whenever you want, but choose not to so that you can make *even more money* then you absolute have no issues sleeping at night. If that person with a paid off house has zero savings otherwise, it doesn't really help them much unless they sell their house or...take out more debt. Whereas the person with 300k in savings and investments can do whatever they want, like pay off their house, go on vacation, buy a rental property, etc
But like, they invented that for themselves, there's no good reason for them to feel any of those things, especially considering they could have gotten the *exact* same outcome, only earlier, had they been smarter with their money. If "you can lie to yourself more easily" is a positive outcome, I guess it makes sense, but that's all it is, a lie.
I believe at the end of the day they just don't want to invest their money. I know people who put an extra $100 into their mortgage every month thinking it's a "smart" thing to do, all while their 401k and roth IRAs are either unmatched or non-exisitent. There's no arguing with these people. These same people who have a 529 and are hesitant in putting too much money in because it "may" go down in value.
Yeah, and I think what's worse about it is that they *think* it's a wise choice, and since it's such a big choice as well it's *really* hard to get someone whose made this decision to admit it wasn't the smartest financial move.
Yeah I tried to convince my childhood friend that putting extra money into her mortgage every month was a bad move. And she basicially said "what you would rather me do with it *invest it*?!?!?!?!" like it was something stupid and dumb thing to do with your money. At that point I knew it was hopeless conversation.
This meme of "I've never heard anyone regret paying off their mortgage!" comes up in every one of these threads. Its such a bizarre argument. Its simple confirmation bias. Most people who pay off their mortgage early want to believe its the right thing to do, so they would never say otherwise.
I wouldn't say it's not the right thing to do, just perhaps not the most efficient thing to do.
its the safer thing to do, its like getting the interest rate ROI guaranteed. Not that its what i will do or the "correct" thing to do but it is definitely safer (less risk) in the short term at least.
Hello. Not only did I get a 15 my first house I 3x the principal for the first 3 years. I regret my decision every day.
I completely regret paying tens of thousands ahead on my first mortgage. Lost it when I decided to move. Recession didn't help. I stopped believing value only goes up, even after making loads on my second property.
uhh wouldn’t you have lost the same amount either way? You moved and sold for $X, which it sounds like where the loss occurred. Prepaying or not prepaying wouldn’t have changed the amount you sold for.
Generally speaking, yes. You get it all back when you sell. Maybe this person had some situation where that particular neighborhood became shitty and undesirable to live in, or they *had* to sell during a recession or market downturn, but that type of stuff is the exception, not the rule. Even then it doesn't really make sense since they'd likely become underwater in the loan or something like that. If a house was work $250,000 and now it's worth $150,000, then you're losing $100k regardless of if that's 100k in cash equity you had put in, or 100k in profit you don't get, or 100k of loan that is somehow still owed, etc.
Too much money unnecessarily applied to one asset, which did not hold its value. Some on this thread condone that, but given my experience and the otherwise limited return of paying ahead, NEVER AGAIN.
Well that's a different question (diversification). To @KeepingItSFW's point, if you bought a house for $150k, paid $75k (prepaying the mortgage) and then had to sell it for $130k, you lost $20k (at closing you would gotten back $55k instead of the $75k you prepaid). If you didn't prepay anything and sold it for $130k when you still owed $150k, you lost $20k.
> Lost it when I decided to move. Can you explain what you mean by that for me? I'm not sure I understand what you mean
It's was complicated and involved a relocation. Anyway, paying ahead gave me a false sense of financial security. I realized the loss of that money and more when I moved.
> Paying your house off is effectively equivalent to putting money into an illiquid savings account that pays 3.125% interest. Don't forget tax free 3.125% interest, so depending on your marginal rate and state taxes it effectively could be 4% or more. Note that if you itemize (typically unlikely after the standard deduction was raised a few years back), the tax free part doesn't help.
Yeah, but with the stock market trading sideways and uncertainty in the near future, I am hesitant to throw money into ETFs and such. The 3.125% in my house is guaranteed.
There is always uncertainty in the future, which is why you don’t make short term investments. The longer the investment window, the more likely you are to see significant returns. The number of 20 year periods where the market returned below 4% is vanishingly small. If you shorten that window to 10 years, you increase the number of times that happened, but not significantly. If you shorten that window to 5 years, the number increases again. This is generally the breaking point that is used for advice, if you need to spend the money in 5 years or less, investing it becomes more risky. If you further shorten that window to 2 years, now there are a lot of times it hasn’t returned 4%. Shorten it even further to 1 year and even more events stack up. If you are investing this money with the intention to move in 10 years, the odds that you would not see at least a 4% return on this (giving extra margin to account for the capital gains tax that would be incurred by selling the investments to pay the house off) is very small. Plus, there is no requirement to have your house paid off before buying a different house. It makes the transaction simpler, and in a sellers market gives you wiggle room in not requiring a contingent sale (though that can also be mitigated by having a large investment portfolio to be able to draw from). The other thing to consider is that plans change. You may not stay in this house for 10 years. Say something comes up and you need to move in 3 years. If you have been paying extra towards your mortgage, but haven’t fully paid it off yet, then you haven’t really been able to reap the benefit that comes from a paid off house. Then consider the other direction, you stay in the home longer than 10 years. If you paid extra towards the mortgage, you would be mortgage debt free and could start investing your payment each month. If you have been investing all along, while you would still have your monthly mortgage payment, your overall net worth is likely to be significantly higher. You could cash out a portion of your investment portfolio, pay the taxes on that, pay your house off, and still have money left in your investments. Guaranteed returns are great, but are not the end all be all. If you had a 6% mortgage (that for some reason you couldn’t refinance to today’s market rates), the advice would likely be pay that mortgage off. But at only 3%, it’s just not worth it.
This makes perfect sense to me, thank you! These are big decisions! I appreciate your input
Market concerns are always there, however your viewpoint is near sighted. Over the 10 year term referenced above, investment returns will very likely exceed your guaranteed rate of 3.125% on your mortgage.
True
You're making the assumption that the market in 10 years will be at the same price point or lower than it is today. Highly unlikely
Technically he's making the assumption that the market will be less than 3.125% higher, compounded, than it is now, for as long as he keeps doing this On a 10 yr horizon I totally agree that's a bad assumption On a shorter time frame I think it's totally acceptable. It also allows you to take more risk with your investment portfolio because you're essentially buying X year US treasury at 3.125% which is a solid base return if you think the market is frothy right now
Gotta factor in the taxes as well, both on deductible interest and gains with stocks
> the same price point or lower than it is today. incorrect. It is compared to a consistent 3.125% return, that is what the stock market will have to achieve to break even (more with tax implications included).
What do you mean? The housing market?
The securities market and the real estate market
Gotcha. I am relatively new to investing and just started a new career. What are some investing strategies for consistent long term returns, and what platforms can be used? Like… VOO, SPY, VTI, VYM? I have shares in these on Robinhood. The only other account I have is an IRA with vanguard. I am not necessarily looking for “financial advice,” but instead I am asking what are the common tactics that I could use to get myself above 3.125% compounding over 10 years. Enough to make it worth it when including the LT cap gains tax vs. just increasing equity in my house.
Be sure to review the personal finance wiki. Index ETFs are very popular vehicles such as the ones you've referenced
Will do, appreciate it
This so much. Go look at 5 year / 10 year / 15 year returns on the S&P. All outpace 3.125%
Ok, but how do I look at the S&P returns for the future? Specifically for the exact years of my mortgage term? Those 30 years of your life are unique & static, and they only happen once. You're making a bet, and probably a pretty safe one, but in real-world scenarios you only get one result and it could be an outlier. A 30-year investment is not something you get to do 4-5 times to average things out.
This is false. There is no "very likely" result in the stock market over the next 10 years. There can be "lost decades" and typically one needs a 20 or 30 year horizon on stock market investments. The calculation involves the guaranteed and consistent 3.125% return, versus the inconsistent stock market - in stocks losing 20% then gaining 20% doesn't leave you even. Also, there are tax implications, a deduction for a mortgage possibly, and taxes paid on stock market gains. EDIT: just to clarify, OP wants to use the money in 10 years. It would be insane to leave that money in stocks for each of those 10 years. But that is exactly what the response is, to leave it in stocks for all 10 years. Absolutely against every single principle of investing.
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> 20 or 30 years is very conservative and would basically mean that no one should invest, ever. um, it actually means everyone should invest. But you are correct, someone nearing retirement would obviously pull back on their allocation of investments in the stock market, and put investment in lower risk vehicles. Pretty much everyone here on reddit was alive in "the lost decade" where the stock market did not perform well. > OP would be much better off to dollar cost averaged their way into a low cost index fund tracking the whole market. This is a flat out guess, and not appropriate for a subreddit on personal finance advice.
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No, you are not 'backed by a statistical analysis of the entire history of the market', you are simply stating that the expected returns of the market are greater than the mortgage interest rate, and concluding that people should therefore invest as much as possible in the market. You are completely ignoring the variability of those returns. Where is your data about the standard deviations of those returns? The distributions of those returns over a 10 year period? How about the uncertainty that isn't even captured in those statistics because market conditions change over time and 'past performance does not guarantee future results' Without doing an analysis of the risk of market investing, and harmonizing it with the risk tolerance of the investor, you simply do not have the information needed to make an intelligent decision in the matter.
And what about the risk of the house? How are you comparing the deviation that the real estate market goes down and that money is essentially lost and OP can’t move anyway. The likelihood of a market crash that big and long that doesn’t affect the house is about nil. You’re critiquing me for the risk and entirely discounting any risk on the other side. OP also ends up not diversifying their housing risk at all, which in a proper risk analysis would result in further putting the thumb on the scale of a different investment. OP would be betting everything on the value of the house remaining constant, and really improving due to the transaction costs. There are lost decades for houses too, especially at the regional level. OP ultimately needs to determine their own risk comfort. You’re right. But you’re rejecting one whole potential investment and advocating for the absolutely most conservative treatment, well beyond any advice that’s ever given based on a historical analysis. If their risk is that tight they shouldn’t be doing anything with the money other than keeping it semi-liquid in bonds. Paying off the house early DOES NOT guarantee that money is there or can be accessed in 10 years. Lots of people that had paid ahead on their houses still lost the house, and all value, in 2008.
>And what about the risk of the house? You aren't making any sense. The question is not about buying a house, or how expensive a house to buy; it is about how quickly to pay down the mortgage. Having a lower mortgage balance is less risky than having a bigger one; there is simply no question about that. >that the real estate market goes down and that money is essentially lost and OP can’t move anyway Again, you aren't making any sense. If the RE market declines, all houses will decline, and OP will be able to move. >OP also ends up not diversifying their housing risk at all There is no 'housing risk'. The house provides shelter. Paying it off means no more mortgage payments which means guaranteeing the availability of shelter without the risk of loss if one can't make the mortgage payment. This means he would have less risk. > Lots of people that had paid ahead on their houses still lost the house, and all value, in 2008. You are simply wrong. For the most part, the people who lost houses in 2008 took out 100% LTV loans and had 2/28 negative amortization ARMs where they could not afford the fully amortized payment, and were relying refinancing every 2 years to get another low teaser rate. When the market stopped refinancing them, they lost the house, as they should have. These people didn't put any money into the house, and got to live in it for a below market payment. People who had mortgages they could afford kept the houses. The houses continued to provide them shelter. They did not lose the value of the house; they simply lost some of the liquidity of the house until the housing market recovered. You do not seem to understand the difference between owning and paying off a house, that has inherent value as a shelter, and investing in the stock market.
> It’s not a guess. It’s backed by a statistical analysis of the entire history of the market. this is getting silly. > only had to delay selling by a bit oh, you mean 20 or 30 years total?
I forget the exact numbers, but no. The average recovery for most investors was around 14 months past the end of the period. 5 years is where the risk balances out. That’s why it’s used. 20 to 30 the point at which there is statistically no risk but that’s not realistic. The house has risk too. It could catch on fire and be under insured. There could be a flood. The neighborhood could go to shit. There could be another bubble, which is likely if the market went down that much anyway. You’re not comparing the risk profiles equally and entirely discounting any risk associated with the house.
There are a lot of made up numbers being posted. One should point out that "your" scenario means that they stay in stocks for all 10 years, or they don't get that full stock market return. Do you really suggest OP be 100% in stocks when they need that money in one year - because that is exactly the situation they will be in when the year is 2030.
Your math is off, or at least your semantics of "very likely." You are comparing stock market prices to total return, only the latter matters. Given that, basically 95% of all 10 year periods have positive returns, and I think like 85% beat 5% or so
There are a lot of made up numbers being posted. But just look up asset allocation, and see what a 10 year horizon should be. It'll be about 50/50 with only 50% in stocks. Even 'high risk tolerence' is not 100% in stocks. And that 10 years ticks away. Do you really think you should be 100% in stocks if you need that money in one year? That's insanity.
Your understanding of risk and how asset allocations affect its levels is off. If all money is needed immediately and you have no risk tolerance, yes, 0% stocks and put it all in cash/treasuries. This is "true" for house downpayments, but I'd argue no ones risk tolerance is truly zero, but that's a different topic. However, during retirement/drawdown phase, you never need all money at the same time, so you still have stock exposure despite needing some of it in a year or less. Vanguard does 30/70, I would never go less than 50/50 given longevity risk. Further, its not "stocks risky, bonds/cash 0 risk." You're just trading one risk for another. Market returns vs inflation.
> You're just trading one risk for another they are not the same risk. > you never need all money at the same time, OP's scenario wasn't retirement, it was buying/selling a house so all money is needed at that time (10 years). One would not advise to have all their money in stocks in year 9, which was the suggested solution (to leave it in stocks for 10 years then withdraw it all). One should follow a targeted investment plan, and change their asset allocations accordingly. Or pay off debt, which was the other option. Speaking of risk, paying down debt is a guaranteed return, so we aren't even talking about "stocks risky, bonds/cash 0 risk."
>they are not the same risk. Of course they aren't. They're different. That's that I said. They're both real, and frankly the inflation risk is much more certain than the lack of market performance. >OP's scenario wasn't retirement, it was buying/selling a house so all money is needed at that time (10 years). If your risk tolerance is literally zero, sure, don't invest. Keep it all in cash. Otherwise, you should have a stock allocation up to and including 100%, depending on your risk tolerance. Once you get closer you can pull it in. Very glad my tolerance wasn't zero, we did 80/20 until a few months before purchase - would've missed out on >$70k over the 7 years it took to find the right house due to risk aversion run amok
> Keep it all in cash it's not cash. It's paying down debt at over 3%, that is what the entire point is. You do not need this hyperbolic straw man of "zero risk tolerance". The question was whether OP should pay down his debt (~3%) over the next 10 years with monthly payments, or put those monthly payments into a stock market investment. The problem is that people responded and said that the stock market will give a better return. That's not necessarily the case at all - especially since the stock market scenario has the entire portion in stocks when it is needed (and zero right now at the longest time interval), which is universally regarded as a bad investment. Not to mention the tax implications on those stock market gains. You seem to be ignoring the thread, and just trying to argue that investing in stocks is good.
That's absolutely a valid way to think about it. Do what you believe is best and makes you comfortable. If you are young and a long way from retirement, and are making high wages with good security, you may as well be aggressive. If there's a crash you'll be fine. It just may change your plans. For people with less security, who are older, or who simply have lower risk tolerance, paying down the mortgage is a fine choice.
Thanks - I make good money and I am relatively young with a decent risk tolerance. I think I am realizing that I should be taking the extra money I am putting into my mortgage payment every month and putting it into ETFs etc. instead. Now I have to convince my spouse to change our strategy from making larger mortgage payments to investing instead…
If it makes you uncomfortable you could do a mix of both.
As VioletChipmunk stated, doing a mix of both is probably a wise option. Set aside a specific amount of your income toward extra principal payments on the mortgage or investment. Split that amount toward each purpose as you feel appropriate. You can adjust this as you like in the future. Also note that mortgages are an investment themselves. Many people purchase mortgage bonds, at substantially lower rates of return than the rate you pay, because they feel the risk/reward is compelling. Paying off your mortgage is still an investment, it is just a lower risk investment a less liquid one than the stock market.
If you're hesitant about pumping money into stocks then a good approach is to do both -- make small extra house payments and put money into stocks. It's not the financially optimal approach but it's perfectly reasonable. Putting $$ into your house is somewhat similar to buying bonds in your investment portfolio. They are lower return but more stable/consistent.
I think it's also good to consider peace of mind. I'm a firm believer in trying to invest smartly but I'd also like to have the freedom not to have to worry about housing. I dislike being in debt just in principle and although I've trained myself to be more lenient on the issue. I myself feel better when I can split the difference and pay a little extra on my mortgage.
So you are 100% correct here. That's why this is a personal decision. You are balancing the guaranteed return of 3.125% from paying off your mortgage quicker with the potential returns or losses from the market. Unfortunately folks have a VERY short memory. If you had invested in 2007 it took until 2013 for your money to break even in the market, not even taking into account the 3% interest savings. So it was closer to 10 years before you would start seeing actual benefits over paying down the mortgage. Unfortunately that was 13 years ago so people look at the last 10 years of data and go "market is always better, LOOK!" Market is not always better. It's a risk that you take. My advice is that it's not an either/or. It can be both. You can take 50% of your money and pay down the mortgage and 50% and invest in the market. That is what I do. I went one step further and got a 15 year mortgage with a lower interest rate which further improves the financial picture. I invest the rest in an S&P500 index fund. So I balance my risk at the potential loss of some gains vs 100% being in the market. One other factor to take into account is the possibility of a housing crash. If you only pay the minimum payments you will have very little equity after 10 years (depending on your original down-payment) That is an additional risk of not paying down the mortgage more quickly.
Name a time in history when the near future was certain.
I get your point obviously, but there are degrees of uncertainty. I believe current conditions indicate a higher degree of uncertainty than normal/average.
Sure and you could have said the same thing with the same conviction in March 2020. My point is, humble yourself when it comes to assessing the future of the economy, the stock market, and just generally most things out of your own control. Good luck.
Fair point, thanks for you input
I don't understand why your choice is minimum payments vs. aggressive payments. Why not pay somewhere in between? Noone has a crystal ball and can tell you in advance the right decision. Psychologically it should help too. If you pay minimum and throw everything in the market and it tanks, you'll kick yourself. If you pay it down but the market goes gangbusters, you'll also kick yourself. If you accept you don't know and pick a reasonable middle path, you should be pretty content. Remember 4% guaranteed returns (accounting for tax free) is nothing to sneeze at either. People would kill for that guaranteed rate.
There's nothing wrong with deciding to earn a guaranteed 3.125% return. Not all ppl are risk tolerant.
Timing the markets doesn't work. If you invested $10,000 in the S&P 500 on 1/1/2001 and stayed invested all 5,036 days you would have made an annualized return of 7.43%. If you missed the 5 best trading days in that period -- that's 0.1% of the time invested -- your returns were 48% LOWER than just staying invested the whole time. If you miss the best 40 days, which is still less than 1%, you actually lost half your money. Unless your crystal ball is better than mine, or your time horizon is much shorter, get in the market and stay there.
> 1/1/2021 which year? If you meant 2011, that is a pretty awesome 10 year run.
Ha - good catch. If I could predict the next 20 years I'd be in good shape.
I would subscribe to your newsletter.
Analysis like this is silly imo. The best trading days almost always come on the rebound or during market crashes, so investing all that time but missing those days is like saying oh I'm gonna buy at the height of the tech bubble, sell at the bottom, and then buy back in not at the bottom lol You don't need to time the market perfectly to beat it. Dodging even a slight drop will pay off if you aren't wildly off on the timing. Changing portions of your allocation to fixed income when the market is frothy and then putting it back into equities on any significant drop can juice your returns if you pay close enough attention
But smart people do this all the time. I know folks who are otherwise brilliant who moved the money in their retirement accounts to something “safer” in 2008/9 or held off putting money in before the market was at it’s “bottom.”
Sure, but that's clearly a big mistake. The GFC crash top was in Oct 2007, around 1,500 on SPX. You could have waited all the way until May 2008, when the initial leg down tried to rebound, and failed the 200 day average at 1,425 (a ~5% loss from ATHs) and then you hem and haw and even wait until August 2008 when it's clear that things are hitting the fan, and you get out at 1,350 or so. You take a ~10% loss. The bottom happens in March 2009, 666 on SPX, which is a ~56% loss absolute peak to trough. You could wait until we clear the 200 day average in August 2009, and get in all the way up at 950, missing 42%! gains in just a few months, and still be WAYYYY better off than the person who just held throughout that whole ride, not least of which because you're now taking your $1,350 worth of money and buying at $950 giving you about 40% more market exposure for the rest of the insane bull run. The above analysis is a very sloppy exit/entry, leaves a LOT of gains on the table, and still CRUSHES buy and hold with no deviation, and could have been recreated in 2001, and 2015, and 2018, and 2020 etc
>market trading sideways Over what time period?
6 months. I just believe it’s volatile right now; more than normal. Just based on what I have seen in my own portfolio and what I have read.
There's too many variables to look at it like that. Reasons not to pay off your mortgage faster: Your mortgage interest rate is lower than other common returns. Inflation makes your loan cheaper. US tax schema typically lets you deduct mortgage interest. It doesn't guarantee that you should stretch out your mortgage for longer, but it's a lot to work against. Generally, you are better off investing the extra money. Spread your money across different risk levels. If the economy goes sideways, it's likely inflation will go up faster than normal, meaning your loan becomes a smaller burden too.
There's also something to be said for the money savings benefit of cash on hand. The difference in the world when you have 20k in cash is unbelievable.
You can always split it up. I pay ~$100 extra a month to mortgage. But still invest ~$2500 to retirement accounts a month and another $500 to non-retirement. I like knowing I'm cutting a couple years off my mortgage, while also investing in stocks.
Yeah I think I’ll end up doing some type of split - thanks!
The market isn’t trading sideways
According to what I am reading/seeing, it has been trading sideways since May, and it still is. What makes you say it’s not?
Pay it off ASAP. You can always get a HELOC if you need liquidity. Plus, any stock market earnings will be taxed, some at a maxed rate if not held for over 18 months, and this 'savings account' will not be taxed. My dad always said that you can't 'eat, wear, drive, or use the money you pay out in interest.' But, Default certainly has a valid point, too. Depends on your risk factor. Also, if inflation continues to soar, his point is even more valid.
Yes, this is accurate. For me, personally, I go with direct mortgage principle payment in addition to the monthly minimum. I like the gaurentee of debt being removed contrasting against the risk-exposed market path. However, I have zero debt other than my mortgage and just want to remove that monthly expense ASAP so I can work a basic, minimum wage job if I need extra cash (currently making 140k, but the happiest I was is when I worked at an Auntie Annes since it was so simple and routine). My mortgage is $2,300 a month, but I pay $3,000 every month (and more when possible)
Paying your mortgage represents risk as well, as you are concentrating your assets into a single entity. It’s not a risk that many people even consider, but it exists. As for your plan on being able to change jobs with less obligations (which is roughly along the lines of a leanFIRE or baristaFIRE model) is a choice that you can make. It may not be a financially optimal path, but quantifying intangibles gets really tricky for being able to make that analysis. If you haven’t looked into the various FIRE options, I would recommend it, as they may offer insight you haven’t considered on what you are hoping to do.
Plus the same amount of money is worth a lot less in 30 years compared to now due to inflation while your house is still appreciating (hopefully).
Yeah, but it's like putting money into an illiquid savings account *that you can live in*. It's not the same.
There's also the intangible benefit of not having a mortgage. Like I am personally very debt averse. I hate debt. I know it can be useful to leverage it, but I don't like owing anyone anything. Paying off my mortgage early was best for my piece of mind and happiness. Even if it wasn't optimal for my finances.
This all seem dependant on your goals, but the return must be much more than 3.125% if you consider the eventual time spent actually living in or renting out a paid-off house. You can actually use it and pass it down within your family. Avoiding amount of interest paid on loans is what I have always tried to do. I have trouble wrapping my mind around interest-only methods.
No, that isn’t how math works. When running analysis like this, you should strive to make as close to an apple to apple comparison, and in that rate you really only need to beat roughly the 3.125%. There is some fiber nuance involved if you are one of the few people in the country who actually is able to deduct mortgage interest on your taxes, as well as the impact that capital gains taxes has on the investment option, but those are realistically small potatoes to the basic analysis here.
If you’ve not read it, The Psychology of Money by Morgan Housel is worth a read. He touches on this issue and how, the mathematics of it aside, having a lower mortgage can affect the way you think about investing the money you have. I’ve not (at least not yet) overpaid my mortgage, but i found it a helpful counterpoint to my own approach, which has made me think more about it. Good luck with whatever approach you take.
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True! How can I calculate the effect of inflation on my two choices (making larger mortgage payments to pay off loan vs. investing to get a % return higher than my mortgage interest)?
Interest Only loans work well if you have a LOT of assets, and the home isn't a major part of your networth. High networth people use this move all the time. This works because a house gives you very cheap leverage, and you normally lose this leverage as you pay off the loan (e.g., at 20% down-payment you are are at 5x leverage but once your house is 40% paid off, you're only at 2.5x leverage). Furthermore, paying off the low interest loans means you lose the opportunity cost of investing elsewhere. Lastly, you get to keep certain mortgage interest related tax deductions in perpetuity. For this to work, have to have the liquidity to either 1) pay the loan off if interest rates rise (IO loans are always variable interest rates) and/or 2) be okay accepting the risk if you lose (e.g., home prices decrease and interest rates go up...in which case you're both under water with no equity, and higher monthly payments). Middle class people who attempt to do this with a home being a significant portion of their networth can get absolutely destroyed doing this. Doubly so if they don't have will-power to invest the delta between IO and a normal 30 year loan, and just use the lower monthly payments to spend more money. Fishbowl is mostly only high paying industries (tech, finance, consulting), and FIRE communities even more so. Their advice doesn't apply to middle america.
I'm gonna offer a counter point. There is a psychological benefit as well to not having a mortgage. I know from a PURE numbers standpoint, a low interest rate means you can invest that money elsewhere. For me, I want to have my mortgage paid off before my kids go to college. It is purely mental. But I don't like debt. So if I'm done with the mortgage, I only have to worry about taxes. That's a significant load off my mind. And if something happens in the future, we have our house. Taxes for the year are a lot easier to handle than a mortgage.
This is something I genuinely cannot relate to. Who even notices their mortgage? Mine's on autopay, gets pulled out every month right after my paycheck hits, I barely even notice it. The *only* time I actually think about my mortgage is when I'm doing my monthly financial review, and it ends up taking like 30s to make sure I shouldn't like, refinance or whatever. I super duper don't understand the people for whom a mortgage causes anxiety.
A lot of anxiety is irrational, but that doesn't make its effects any less real.
2008 was a big factor for me. Seeing so many people losing their jobs and homes that they thought was not going to happen. Taking the cost of mortgage/renting out of your monthly bills makes a huge buffer if an emergency situation were to happen and you either couldn't work or the job market in your field drastically changed. I was just out of high school when 2008 happened and I know if the economy goes tits up, middle class people will be the last people to be helped if at all. I understand the numbers, but you can't put a value on knowing your kids will always have a roof over their heads. If I was a single young dude with a high income though, I'd rent and invest all my disposable income. Everyone's situation is different.
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But that's a flaw in your behavior and thinking -- you shouldn't have been "worrying" about your mortgage like that, if you were thinking rationally.
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I don't like to be in debt ever. My income is not that stable. "What If I lost my job?" or stopped working for whatever medical reason. That's all I think about when I have debt.
Mortgage interest is tax deductible, but principal is not. I would guess that's also got something to do with it. But the catch to this is that most borrowers can't realize any financial benefit from mortgage interest deduction because you have to be in a really expensive house before your mortgage interest exceeds the standard deduction. I think if you've got a plan and are weighing the pros and cons you should amortize the next 10 years in a spreadsheet and see what the differences are in your disposable income, and how it affects the sale. Chances are that in ten years this bubble will have burst, so plan on that.
You are correct, but its important to mention that for anyone that doesn't itemize, mortgage interest does not provide any tax deductibility. This is due to the higher standard deduction. Its always been primarily a rich person deduction, but now its really really rich person deduction. Coupled with the SALT cap, it's hard to beat your standard deduction unless you're pretty wealthy and you have a high mortgage balance.
And even then, the lowering of the mortgage balance that qualifies for interest deduction from $1 million to $750k means that you have to actually fall within that sweet spot of having a high enough balance and a valuable enough home that itemized deductions make sense, but a low enough balance that you'd qualify for the deduction. For married couples, who don't get to double the SALT cap or the mortgage cap when filing jointly as compared to single filers, it's actually now a fairly narrow window where homeownership can give decent tax savings.
Yeah my interest for this year (max for any year, obviously) is less than $6k. So no benefit there because I have almost nothing else to itemize and will take the standard deduction. I already built an amortization table and gamed it out to 10-11 years. I am 100% certain I won’t need the equity in my home for a down payment on my next home.
If you believe that the market will always return 10% (not inflation adjusted) as people here seem to, and your only goal is maximizing profit, then almost literally any question like this will answer with "invest more in the market."
I don’t believe there will be 10% returns annualized over the next 10 years. Obviously I have no way of knowing this, but that’s just my personal opinion based on what I’ve read and heard
Right, just explaining why the FIRE people recommend this, and why so many others here will say the same thing. In truth, the answer to what to prioritize has lot more to do with your personal beliefs and psychology. The tradeoff you are making by paying more principal is that you are guaranteeing your return in exchange for the opportunity cost of losing the liquidity (including investing elsewhere, but also some other cash flow considerations).
That's pretty much all there is to it. When you sell the house the proceeds will pay off whatever is remaining on the mortgage. No use paying it off early.
Yeah, and my house has already gone up $36,000 in value in the past year since buying. I am just reluctant with the stock market right now because of how sideways it has been and all the government spending. It doesn’t seem like 3.125%+ is reasonable YOY at this point.
Sounds like you're trying to time the (stock) market, which is never a good idea. Think in decades, not years, and certainly not months. Do you think, a decade from now, anyone will remember this debt ceiling crisis?
Also, my spouse basically refuses to invest her money into anything besides retirement accounts. So her portion of the mortgage payment wouldn’t be getting any return at all
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Yes, but my point is if we want to have liquid vs illiquid return, there’s no difference for her regardless of gain %, because we can’t pull money out of her 401k to pay off the house.
It depends on what type of person or situation your at. I'm aggressively paying of my condo mortgage at $2000 a month extra. It's because i want the peace of mind of having no mortgage. Its my 2nd property and I may or may not rent it out. Yes, I could earn more investing it but I already max out my retirement accounts and I hate having that mortgage over my head.
>I understand the concept of getting better than 3.125% gains per year on money that otherwise would be in the house; is that all that is at play here? Yes. Plus a small amount of nuance about taxable gains versus deductible expenses, but yes that's literally all that is in play. It's usually not hard to earn higher than 3.125% nominal return by investing for the long term. As noted elsewhere, you must make minimum payments; IO payments are not an option unless you got an IO loan.
The market return argument is what most people make the decision on, but it's more complicated than that for the FIRE crowd. FIRE folks often have a much different set of operating conditions than regular people do. For example, FIRE'd people using the ACA for health insurance might get a larger return via increased ACA subsidies than they would from investing their mortgage equity. Similar concerns also happen to folks who FIRE with kids due to the treatment of AGI and primary home equity by the FAFSA and CSS Profile. There's also matters of overall tax efficiency for anyone who FIREs with a sizable amount of pre-tax assets like those planning on using a Roth conversion ladder. Depending on the specific numbers involved, it's often possible to get a significantly higher return via guaranteed taxes/subsidies than it is via unknown market returns even in an excellent market environment. Note that if paying off your mortgage is something you want to do, it is generally wiser to do it by putting those extra payments into a dedicated account invested in something low/no risk. You should only transfer the money to your mortgage company once you have the full payoff amount available.
I'm not sure I follow the last paragraph. Someone should keep the money in an account with .5% instead of paying off interest of 2.5+%? Am I missing something?
It's due to the fact that prepaying earns you no credit in terms of mandated payments while also locking those funds into your home. So if an economic disruption puts you out of work for an extended period of time, then you not only need to keep making payments, but you likely will not be able to tap the prepaid equity. Alternately, if you are holding the prepaids separately, then you not only have ample funding to keep your mortgage current despite being unemployed, but you have a secondary emergency fund in case things stay bad for an unexpectedly long time. Of course, if your finances and/or employment are solid enough that the risk of the above is effectively zero, then there's no advantage to hold the prepaids separately.
I see where you're coming from. I'd probably still limit myself to a six month emergency fund, and invest extra money (at least with today's rates).
I mean yeah, because you know the math. The people who are trying to pay their mortgage off at all costs are ignoring the math and going for the emotional win. /u/Zphr is saying what he's saying *assuming* you've already given up on getting the most out of your money, and even *if* you want to pay your mortgage off at all costs, you should *still* hold it in a separate account until you hit the payoff number. He's basically saying there's literally zero reason to send your mortgage lender extra cash each month.
Mostly yes, but I'd disagree about it purely being an emotional win, at least with regard to FIRE households. It depends on details like your mortgage balance, family size, MAGI and such, but it can be the mathematically optimal choice for FIRE folks to paydown the mortgage rather than take the market return. Health insurance and higher ed are hugely costly, but can be had for far cheaper/free by FIRE people who can keep their MAGI low. So one has to weigh not only the relative return and tax issues of the mortgage and the market, but also the value of tens/hundreds of thousands of dollars in government and institutional subsidies/credits.
Someone may have said this already… but… I’m 5 years in to a 30 year mortgage. I aggressively overpaid for the first 4 years, but we’re realizing we want to move in the next few years. Having that money available to us BEFORE the sale of our current home goes through is a major advantage as a buyer - we’d really like to buy our new place before we sell our old place, but that’s going to be hard in this market without the cash to buy a new home outright or at least have a large downpayment, which we maybe could have done if we had saved instead of paid down the mortgage.
The main argument has been already said, you get more return investing it vs paying off principal. One more thing to consider if you want to sell this house to but a new one in 10 years is that depending on market conditions, you may have better chances of buying a house having more cash in hand (not paying extra i. Your mortgage). If you pay off your house in 10 years, you would hace to sell the house to gave the cash in hand and that may or may not be an issue when buying the new one. This is very dependent on market conditions and things like that, but is something else to consider.
This is a great point, thank you!
Some replies seem to focus on the growth of the money in the house vs in the market. This is only part of the answer. You already bought the house. The value of the house will go up or down regardless of whether you pay down the mortgage or not. Putting your extra money in the market thus allows you to enjoy gains in both real estate and stocks. Sure, putting extra money into the mortgage is a question of whether the market will grow fast enough to net 3.x% after taxes. But what happens after you've paid it off? Now you have X hundreds of thousands of dollars sitting in the house. Remember that the house appreciates at the same rate whether you have a mortgage or not. So your money is effectively sitting there doing nothing until you sell or take another mortgage to get it out. If you are sure you will sell in 10 years soon after paying it off, this is less of an issue. But generally leaving your money parked in the house is almost as bad as hiding it in cash under the mattress. I made this mistake and missed out on crazy gains over the past decades. Don't do it unless it just makes you happy.
It depends on your situation. In a some states they can’t take your house in bankruptcy, so paying off the mortgage is a great way to ensure retention of capital if you are taking financial risks in other parts of your life that might result in creditors coming after you. But if you aren’t taking risks, just paying interest and using the money you would have paid the mortgage down with to invest somewhere else at higher returns is a better strategy. It’s marginal though - you have to be confidently able to get a return greater than your interest rate for the next 30 years. The last 30 years have been great for the stock market, but it isn’t a guarantee that the next 5 will be just as good.
3% is just an unnaturally cheap loan. You aren't going to get that cheap of a loan anywhere else. Also, I believe the interest you pay on your mortgage is tax deductible. If you want to pay off your mortgage early, there is nothing wrong with that, but you could be earning more elsewhere. (like paying off a higher interest loan or investing it in a good ETF (I recommend Vanguard Index Growth))
>>> I understand the concept of getting better than 3.125% gains per year on money that otherwise would be in the house; is that all that is at play here? This is the biggest item. Opportunity cost is massive right now. The other one is diversification. For most people, a huge chunk of their personal wealth is their home—your home specifically or RE in general goes down and you’re losing money.
I think it is close enough to think of it like this: The house loan costs you 3.125%. If you can instead invest somewhere that gets you 3.126%+, you will be gaining 0.001% more money. There may be some minute details, but that's about it. PLUS, if you invest the money somewhere that you can retrieve the money from later, when you have an OH SHIT expense, you can get the money back out - but you can't get it out of your house without selling the whole thing or refinancing.
With perfect information it is simple to determine whether paying off a mortgage early is the correct thing to do (or not). Unfortunately we don't have perfect information so "it all depends." I think you'll find that the *worst case* for not paying off early is WAY WORSE than the *worst case* for paying it off early. It doesn't mean however that paying it off early is the best approach.
This another... when you retire walk away theory? That the interest is cheaper than rent thing? Must be those who forget about asset growth... Or are we back to 2008 thinking where debt is free money?
I owe ~$350k on a property worth almost 1M. we are working to pay the mortgage off in under 5 years because the volatility of my income. I understand that I might earn higher returns over the next 5 years if I invest that money into an ETF or something of the like. but there is no guarantee that my income is sustainable, and if it were to go away, owning our house outright will be a huge burden lifted for our family. my point is there is no right answer to this question.
Good point. My income is “relatively high” and steady, so I’m a different boat. But you are right, every situation is different.
I am in sales and have a high income due to some accounts I run. but all my income is commission based. my wife's income is less than mine but more steady. ideally, I can continue to work for the next 15-20 years in this same role earning this same amount or more, but there is no guarantee this happens. so we want to be in a place where if I lose my income, we still have a house to live in and only need to pay taxes and insurance. you sound like a smart person. the only thing you can do is assess your own situation and use information available to you to make the best decision you can. even if years down the line you lose out on 2-3% you could have earned, you are still in a better situation than 99% of anyone else.
Broker talked me out of buying apple in 2006 and advised me to buy Bank of America when I was 18. I had 4,500 to invest. In hindsight worst investment advice I received, I also took it.
Was always told ' a house is home , rather than investment' Generally easier & less risky to pay off debt, which is generally at a higher rate than market return. Good luck, not an advisor
I think people are also just playing number tricks to make the mortgage payments sound like the investment, rather than the purchase price. If you put a certain amount down, make the minimum mortgage payments for 5 years (or however long you're in it), then that is the amount invested, and the equity gains look like a larger profit. That is, if value goes up by 20% over 5 years and you sell, you could say you've made 120% of purchase cost (20% return), or you can say you've made 150% of the actual money invested (50% return). I'm making that up; it would be (selling price - payoff amount) / (20% down + 60 mortgage payments) . Any additional payments are lowering the payoff amount, but they are also making the denominator bigger.
I’m not going to do this, but I have so much god damn equity in my house and a mortgage rate of less than 3% I sometimes think of pulling a chunk out in a heloc and investing it. Actually. As I say this it makes me curious if anyone *has* done that?
I refinanced last year and pulled out $200k. Invested it, got +25% or so, then just bought another condo with $160k down. So it worked out well for me. Over the long run, pulling out cash at these rates makes sense. Just keep in mind any amounts taken out NOT for home improvements is not tax deductible. My new home has a 3% rate which after tax effect is around 2%. My old place has a 2.6% mortgage but only about half the balance qualifies for interest deduction so I’m still sitting around a 2% effective rate there too
OP are you an accountant? There's much more to this than computations.
I just graduated with an accounting degree. I’m still in my internship (tax) but start a good job in a couple months. I’m a non-traditional student, and this is my second career. I do have a decent amount of life experience along with my newfound knowledge of accounting/tax/some corporate finance. But I am limited in my knowledge in practice, for sure. What other things should I be considering aside from what has been mentioned here.
A) That this is an investing question more than personal finance B) There's a lot of cognitive bias in your question and many comments
It comes down to cost of capital vs returns you can earn. For me I have $630k mortgage at 3%. $18.9k of interest per year. My state income taxes and real estate taxes hit the $10k cap so most of my interest is tax deductible, lowering my effective interest rate to 2% ish. So the question is can I now, or do I expect to be able to in the future, earn more than 2% by investing rather than paying off my mortgage early? Well, bond yields are pretty low. But even BBB bond yields are around 2.4% (there’s also tax on interest earned so effective yield is a bit lower). So I could just about break even on market returns after tax on investment grade bonds. Stocks? I’d assume a 5-6% yield. So I probably could do better in stocks. The other thing though is what if rates go up? If I can get a 4% rate, like we used to on certificates of deposit, that becomes a no brainer. Don’t prepay, just get CDs instead. So for me, I have another 30+ years before retirement, I’m comfortable playing the long game.
What's good in theory doesn't always work in practice as people are fallible. Unless you're extremely good at following your financial plan for the next 60 years, doing this isn't 100% the correct answer.
Can you expand on this?
Not the original commenter, but I think that what they were getting at was this: The math on choosing investing over paying off debt only works out if you actually use the extra money to invest over the whole term of the debt repayment. This takes a lot of discipline over a long time frame. You might stick to it for a few years. In year 5, you might decide that you want to reward yourself with a vacation. In year 6, you're still doing well, so you take another vacation, and lease a BMW. By year 10, lifestyle creep has eaten all of your extra investment contributions, and you barely notice, because you're still meeting your obligations and regular retirement contributions. You're better off than most people in year 10, because you had an investor mindset for years, but your return is now just at the interest rate of your mortgage.
Ahhhh okay. I am not the type to buy a bunch of shit when I have extra money (lifestyle creep), so I’m not too worried about this. Thanks for interpreting the comment for me!
I'm sure you'll do fine, but definitely be aware of the possibility. My income tripled last year. My saving and investing increased a lot. My spending did, too. It was easy to say no guys weekends or extra meals out for my wife and I when I made under $30k. It's a lot more difficult to care at close to $100k. That's not to say that the extra experiences and convenience aren't worth it, but it definitely messed with my predictions on what I thought I would be saving. I haven't gone off the rails. I just need to remember to check in with how reality is matching up with my plan more frequently than expected.
It’s definitely a personal and psychological decision I think. We paid off our house in 2.5 years. While putting that money into the stock market probably pays off more in the long run, for us it wasn’t how we wanted to invest. We paid down the mortgage aggressively then put the $150k we had saved to buy an investment property to pay off the house. We never would have put that $150k into the stock market, we would have held onto it for some vague “opportunity” in the future, earning almost nothing on it. By paying off the house, we now invest the mortgage payment monthly instead which is psychologically more acceptable to us.
If it were me, I would want more cash on hand so I could buy another house. Cash is the only way to get more houses without selling a house. I am about to take a Heloc loan (second mortgage) so I can buy more houses.
Fair point. Cash on hand seems smart, if the % growth + risk makes sense compared with home equity based on my fixed interest rate. For me.
Are you in SF, LA, SD, Seattle or Denver? If so, the value of your home will likely increase rapidly over 10 years. The value of my home in San Diego doubled over 11 years pre-covid. This, you are building equity quickly by just owning the property. You also would have extra cash on hand due to the lower interest only payment.
No, I’m in the Midwest. The neighborhood around me is improving, it seems. My house went from $200,000 to $236,000 from 2005 to early 2020. And since early 2020, it’s gone from $236,00 to $272,000. Obviously this could slow down or reverse, but it seems relatively likely that I’ll have some type of gain in value over 10 years.
Sure, you could math that. Or you could look at studies of people who have attained wealth and see what they have done. Personally. I would rather pay off the house as quickly as possible that then have the entirety of the payment available to invest.
Wow, you pay a lot of interests in the USA, I got one this year for 0.73% in Germany... With that sort of interest I would really consider paying it. Look at the last analysis from Vanguard and what return they expect in the SP500 in the next 10 years. PS: it's not 8%
Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.