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Mortgage Payoff While Investing Aggressively
04-25-2016, 04:00 PM
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#1
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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Mortgage Payoff While Investing Aggressively
My fiance and I have a combined income of $175k. We have no debt but do have $303k remaining on our house @ 4.625%. House value is roughly $400k here in Austin TX. We got our 30 year mortgage in 2014. I'm 32, she's 28.
I have a Roth IRA and a solo 401k, which I have been maxing out annually for 2 years now. This year the company I own is able to add an additional $40k to my solo401k.
We would like to have our house paid off as soon as possible, without sacrificing our aggressive investing strategies. My fiance will be setting up her Roth IRA in 2016.
What do you recommend as the best strategy for achieving the mortgage payoff ASAP while continuing to fund our investments aggressively?
Thank you!
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04-25-2016, 04:03 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
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I do the same.
I max out my 401K, $24,000
Max out HSA, $4,350
Max out IRA, $6,500
And I put another $4,000 per month on my mortgage that I am paying off. I just did another installment today.
Max out 401K and other tax deferred investments first. They pay extra on the mortgages.
And I also save another $125,000 after tax.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
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04-25-2016, 04:06 PM
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#3
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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I don't know much about HSA's as an investment tool. Who do you have yours through and how effective are they.
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04-25-2016, 04:06 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2016
Posts: 8,968
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I would consider making a large payment as soon as you can with whatever extra dough you have.
4.6 % is a good return. Since the market is high right now why not shift to debt reduction?
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04-25-2016, 04:09 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,821
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Can you re-fi to a lower rate? Some of us here do not consider a mortgage a bad thing. If you sink more money into the mortgage, you won't see any reduction in payments until it is all paid off. In the meantime, that money is tied up in the house.
Would you still have plenty of liquidity if you paid it off? Some people get hung up on the idea that "if I lose my job, at least I won't have that mortgage payment" - but $303K will carry you through a long dry stretch. And you still have utilities, taxes etc.
-ERD50
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04-25-2016, 04:16 PM
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#6
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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I could refi, it's just a bit of a pain. The good news is that my credit score has gone up to 790. What do you mean, would I still have plenty of liquidity if I paid it off?
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04-25-2016, 04:19 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2016
Posts: 8,968
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You don't have to pay it all off to have a profound effect on debt reduction. Any additional now reduces the principal which makes your regular payments that much more effective.
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04-25-2016, 04:21 PM
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#8
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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Makes sense.
I've been focusing on fulling funding my investments lately.
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04-25-2016, 04:22 PM
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#9
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Recycles dryer sheets
Join Date: Apr 2016
Posts: 191
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I understand you want to pay the mortgage off early and there's no problem with that.
There may be a bigger benefit by not paying it off however. That 4.625% interest rate on the mortgage is not hard to beat in another type of asset and being a fixed rate, it will just get cheaper (due to inflation) over time.
If you invested the same amount in a taxable investment, the return would likely exceed 4.625% and the gain would compound over time, unlike your mortgage. In addition, you get a tax-deduction for mortgage interest.
I prefer direct real estate investments to achieve inflation-beating returns which are not correlated to the stock market. This doesn't mean you need to buy a rental house or apartment building. The SEC recently approved the Title III portion of the JOBS Act which will open up real estate crowdfunding to non-accredited investors. There are many other alternative asset classes with which you can achieve the desired return.
If I was young again, I would aggressively save every dime and invest as aggressively as possible to achieve accredited status. This basically means that your net worth, exclusive of your house is greater than $1M or that your income exceeds certain levels and is expected to continue. I don't recall the income levels for accreditation. Being an accredited investor means you can invest in a whole new universe of private placements because the SEC thinks you have the required level of sophistication. We passed the threshold a couple of years ago and have been taking advantage of the new opportunities, but if I started 10-15 years ago, my life would be vastly different now.
Just my $0.02, offered for your benefit.
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04-25-2016, 04:23 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Jul 2009
Location: Miraflores,Peru
Posts: 1,992
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You =32
Fiance =28
Wife = ?
How many wives can you have in Texas?
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04-25-2016, 04:32 PM
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#11
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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Quote:
Originally Posted by NYEXPAT
You =32
Fiance =28
Wife = ?
How many wives can you have in Texas?
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That's funny! Good catch... Unconsciously I was typing as if it was August of 2016 already.
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04-25-2016, 04:53 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
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You're going to be in a high tax bracket.
Would your itemized deductions excluding mortgage interest, exceed the standard deduction for a couple? If so, I would keep the mortgage because your mortgage interest reduces your ordinary income so you get a 28% tax benefit from the mortgage interest. What would have gone to pay off the mortgage could be invested in equities in an after-tax account that would get preferential tax rates on qualified dividends and long-term capital gains (15% rather than 28%) and a foreign tax credit. Assuming that equities returns exceed 4.625% in the long run, which is a good bet, your after-tax return would be much better and you can always sell the equities and pay off the mortgage anytime you want to. There is some risk, but IMO it is a good bet.
If your deductions excluding mortgage interest is significantly less than the standard deduction then paying down/off the mortgage makes sense because you are not getting the full benefit of your mortgage interest.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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04-25-2016, 04:58 PM
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#14
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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Quote:
Originally Posted by pb4uski
You're going to be in a high tax bracket.
Would your itemized deductions excluding mortgage interest, exceed the standard deduction for a couple? If so, I would keep the mortgage because your mortgage interest reduces your ordinary income so you get a 28% tax benefit from the mortgage interest. What would have gone to pay off the mortgage could be invested in equities in an after-tax account that would get preferential tax rates on qualified dividends and long-term capital gains (15% rather than 28%) and a foreign tax credit. Assuming that equities returns exceed 4.625% in the long run, which is a good bet, your after-tax return would be much better and you can always sell the equities and pay off the mortgage anytime you want to. There is some risk, but IMO it is a good bet.
If your deductions excluding mortgage interest is significantly less than the standard deduction then paying down/off the mortgage makes sense because you are not getting the full benefit of your mortgage interest.
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I left this out of the original post.
My company is an LLC taxed as an S corp. I pay myself a salary then draw from the biz additional funds if needed/allowed. My personal tax bracket isn't that high.
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04-25-2016, 05:08 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
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I don't get it... will your joint income (on your tax return) be $175k? If so then you (assuming married filing jointly) would be in the 28% tax bracket wouldn't you?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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04-25-2016, 05:25 PM
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#16
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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My numbers were off a little.
- LLC made $173k
- I personally made an additional $8200 net from part time job
For this conversation I'm not including my fiance's figures. She only worked part time last year and currently isn't working. Might launch her own business in 2016.
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04-25-2016, 05:33 PM
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#17
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Thinks s/he gets paid by the post
Join Date: May 2011
Location: St. Paul
Posts: 1,847
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I do exactly the same as senator. Max out available investments, pay down the mortgage each month with extra.
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04-25-2016, 06:09 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2007
Posts: 14,328
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Quote:
Originally Posted by dsp0725
I don't know much about HSA's as an investment tool. Who do you have yours through and how effective are they.
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If you are eligible for an HSA, it is free money. Contributions are tax deductible and unlike an IRA, you never pay taxes on it as long as you use it for medical, dental, or eye care. You are still young, but for many of us, we plan to invest it and let it ride then use it to pay Medicare premiums and out of pocket costs as we age.
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04-25-2016, 06:26 PM
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#19
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Recycles dryer sheets
Join Date: Sep 2015
Location: Austin
Posts: 90
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I've been studying Dave Ramsey for about a year now and everything he teaches is pay down that mortgage as fast as possible!
I just know that if I do this, I might not be able to drop another ~$40k into my 401k next year.
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04-25-2016, 06:34 PM
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#20
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Recycles dryer sheets
Join Date: May 2015
Posts: 244
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I started out paying down my mortgage by the amount I could afford each month. I believe it was 500. In time, that amount increased and was about 5,000 monthly. One of the best feelings is when you own your home free and clear. Many people do not buy into this theory but my father paid his house off in 10 years and I did too.
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