Currently have a mortgage (30-year fixed) that we are in the first year of. Locked in at 4.25% in a house that we don’t plan to live in more than 5-10 years, though nothing is certain.
I make a good income and my wife works as well and we have money to spend either investing more into the market or paying down our mortgage faster.
However, since we do not plan to pay the full mortgage as we do not plan to live in the house more then 5-10 years, would it be more wise to invest the extra income into the market or put in pre-payments (no penalty)?
Figuring the market would be better as the return (on average) beats out the rate of interest (4.25%) we are paying on our mortgage.
You’re going to need equity-like investments to make it worthwhile versus your mortgage rate, but I would keep my liquidity and take the greater returns by investing in the stock market.
I have not looked at rates lately- have you looked into a cash in conversion to a 15 year note. It can really knock down total payments.
Depends on where 15yr rates are.
We did this when we came into some extra funds years ago and it was a pretty good trade off. Principal got knocked back a lot faster. We still overpaid on top of it.
If it’s not your forever house then pay the minimum and invest the rest. But get in your forever house as soon as possible and pay it off as fast as you can. You’re income isn’t guaranteed, but your house note is coming every month, until it isn’t. Having no debt is a huge step to having “fuck you” money.
If it’s not your forever house then pay the minimum and invest the rest. But get in your forever house as soon as possible and pay it off as fast as you can. You’re income isn’t guaranteed, but your house note is coming every month, until it isn’t. Having no debt is a huge step to having “fuck you” money.
If you can stomach the volatility, you’re likely to exceed a 4.25% return in stocks over the remaining term of your mortgage.
But…
There is nothing else like the peaceful sleep you get when you are debt free. When the market/economy crashes (which it does repeatedly and regularly), or you run into personal hard times, being mortgage free is amazingly liberating.
At a minimum, I would pay off your mortgage before holding a single bond in your portfolio.
**Life’s a lot simpler without debt and there is no guaranty with stocks. **
Pay off your debt, it will make life a lot less stressful and give you a good sense of freedom.
That is my n=1 mindset. It would kill me to make the decision to invest in the market rather than pay off the house and then watch that go away because of a crash when I could have been debt free. I’m somewhat risk averse and am not a savy investor, so what works for me isn’t for everyone.
One is a guaranteed 4.25% return, the other is unknown. You could beat 4.25% by double or triple or not event break even. For myself, I always put the max in my 401k, but didn’t do any other investing. Instead I serviced my debt aggressively. I was debt free when I was around 40, and 10 years later have invested quite a bit due to excess positive cash flow. I also have wonderful peace of mind. I have won the game.
If I could buy a “risk free” investment right now that yielded 4.25% I would. Your house isn’t “risk free” by any stretch but it’s sort of comparable in that you’ll have to pay off the mortgage someday in some way. Equity markets are richly valued and that’s before you account for “earnings inflation” via… ahem… creative accounting and stock buybacks (which are unprecedented). If you look at the scatterplot below, at current valuations you can expect your 30-year annualized rate of return to be somewhere in the range of ~2-7%. 4.25% ain’t bad.
Other things to note: the whole “over the long run stocks return 7-10% per year” well, that might be true over a very long period of time but guess what? The average investor doesn’t really invest for a very long period of time relative to the historical data set from which that 7-10% per year average is derived. Depending on when you invest you could see much larger or much smaller annualized returns.
Ask Japanese investors from the 1980s how the whole “buy and hold” and “cost averaging” thing worked out for them. (chart below is a historical chart of the Nikkei 225, the Japanese equivalent of the S&P 500).
Pay off your mortgage. It barely matters how long you intend to stay there. By paying off your mortgage you essentially lock in that rate of return, with little risk.
And BTW yeah, you’re both working right now and that’s great, but which way do you think the AK economy is headed with the current administration?
How long did it take those that entered the market at the top in 99/2000 to get back?
I’d pay off my house and then I’d work on being diversified
It’s been interesting to watch the Neil Woodford fund stop all withdrawals
Just imagine if there were a run on a much bigger fund
Imagine how annoyed you’d be had you invested in the market versus paying the guaranteed house rate off just to lose 50% of your capital
Before I met some guys that worked for Blackrock on index funds, I thought that all transactions were automatic e.g. Some computer calculated the rebalanced rate of the value to be held in ftse and simply executed the trades. He corrected my ignorance by saying the size of their trades can move markets. Now, if that’s the case and you are all in and people want their money back NOW that won’t end well. They can’t sell fast enough.
I’m not sure being invested in non US dollar markets helps US investors. I think there is an argument in Europe to have some holdings in dollars even accounting for possible FX fluctuations given the basket case of economies and currency issues we have / will have. I’d still want to be broadly diversified though.
It’s not really 4.25%. Some of this interest is deductible, which lowers the return.
The effective return on this is more like 3.5%, which makes the the investment more attractive.
Even paying an extra $100 month early in a 30 year will save you a lot of money in the long run. However, there is also an advantage to liquidity and being diversified (not having all you wealth tied up in home equity, So, maybe a little of both. There really isn’t a bad choice here.
The good thing is, it sounds like you didn’t buy more house than you can afford (smart) and have some extra money to do something with.
It’s not really 4.25%. Some of this interest is deductible, which lowers the return.
The effective return on this is more like 3.5%, which makes the the investment more attractive.
Even paying an extra $100 month early in a 30 year will save you a lot of money in the long run. However, there is also an advantage to liquidity and being diversified (not having all you wealth tied up in home equity, So, maybe a little of both. There really isn’t a bad choice here.
The good thing is, it sounds like you didn’t buy more house than you can afford (smart) and have some extra money to do something with.
Only if you itemize and that is becoming a rarity with the new tax laws.
Essentially, you’re mortgage is likely tax neutral (or minimally impactful) vs. an investment that is taxed.
I have a large, new, home on a lake. I haven’t had a mortgage in 20 years. Life is so fucking much easier without debt.
Pay off your debt, it will make life a lot less stressful and give you a good sense of freedom.
**That is my n=1 mindset. It would kill me to make the decision to invest in the market rather than pay off the house and then watch that go away because of a crash when I could have been debt free. **
I paid off my debt first and then entered the stock market with money I could afford to lose. It’s much better going through life knowing that even if I stopped working (which I did for 5 years), I could live on very little without any debt. That is the freedom, you could do whatever you want and you simply can’t put a price on that.
Too many people look at things based on the few percentage points it could save you instead of the impact on your health and choices in what you do. I’m a CPA and so many in our profession focus solely on the after-tax cost of things but forget the most important non-monetary reasons for getting rid of debt.
Very tough choice. For the next few years I would lean toward liquidity. Therefore, I would invest in the market and pay the minimum. Normally, I lean toward paying down a mortgage.
If it’s not your forever house then pay the minimum and invest the rest. But get in your forever house as soon as possible and pay it off as fast as you can. You’re income isn’t guaranteed, but your house note is coming every month, until it isn’t. Having no debt is a huge step to having “fuck you” money.
That’s kinda contradictory
It isn’t to me. Paying off a house you intend to sell is just investing your money in the house instead of the market. If you’re gonna sell it and move to a bigger house you’re gonna take on debt again. So “rent†your starter house, but once you get in your forever house the sooner it’s paid off the safer you are. I rec a 15 year mortgage, Max out 401k etc, split extra money between market and extra house payments. If you can’t pay your house off in about 10 years I think you bought too much house. JMO, but I’ve done really well planning my personal finances.
Is there any pre-payment penalty? Are you paying mortgage insurance, getting that monkey off your back saves some cash, think it is when you are borrowing over 80%.
