Seeking feedback on next financial move...

[ATXFIRE2034]

If I'm settled with what I'll call my "core investment strategy" (maxing 401k / roth IRA) is it better to take extra funds ($500 per month) and invest incrementally in an index fund in a taxable brokerage account or pay down debt on mortgage ($249k @ 3.375% for 30 years)? I know it depends on my goals, etc and there are a million different ways to slice and dice it. I am looking for first hand accounts from individuals that have been in a similar situation and how they feel now about their decision in hindsight. TIA!!!

 

[RunningBum]

That's a good mortgage rate. I'd invest. The cash gives you flexibility. Having money tied up in your house's equity gives you less flexibility. That's based on the info you've provided.

 

[Bruceski44]

3.375% is cheap money and it gets cheaper each year thanks to inflation. I re-fi’d at that rate and took extra money out, while keeping the LTV below 50%. It’s easy to exceed 3.375% returns, even with reasonable risk.

You also must consider the tax deduction (if you itemize) on mortgage interest. You might think you’re saving the entire mortgage payment if you pay it off, but you’re losing a tax deduction, so your savings are reduced. Being only 4 years into a 30 year amortization, my payments are mostly interest.

In hindsight I’m glad I did it and will do it again once my LTV drops below 40%. The only reason to keep the LTV at 50% or less is my plan E to get a reverse mortgage if the SHTF. That’s only after plans b through d fall through.

You might achieve peace of mind by paying down your mortgage. The cash-out from my re-fi doubled in 3.5 years (in a real estate investment) which gives me a different kind of peace. It’s a personal decision, but a house isn’t an asset unless it puts money in your pocket. Even paid off, a house is a liability, although the equity is an asset. But it still doesn’t pay you until you liquidate or mortgage it.

 

[Montecfo]

What is your marginal tax rate and are you able to itemize deductions?

If you are not able to itemize I would consider putting some money toward the mortgage.

My personal experience is in paid down mortgage using a portion of my "safe" type money. But this was at higher mortgage rates than what we have had for the past decade. My current rate is 2.69%. I have not paid it down further over the past decade or so. In fact I took a bit out.

In hindsight, I would have been better off investing that cash. Trouble is you never know what type of equity market you are going to be in. At this point, historical data suggest lower returns over the next decade than recent experience. I do not regret keeping a small mortgage as the strategy was prudent.

As you pay down your mortgage it is wise to put in place a standby HELOC so you can access the equity in emergency.

Good luck!;

 

[ckelly78z]

The 3.375% that your mortgage is, can be made in a heartbeat within the stock market. I would invest the $500 a month into growth mutual funds/equities rather than tying up your assets into the house.

 

[Andre1969]

3.375% is a great rate, and in the overall scheme of things, $249K isn't a huge amount. If $249K was the original balance, that's what, about $1100 per month, plus taxes/insurance?


So put me down on the "invest the extra $500" team.


Another strategy you might want to try, is do a little of both? A few years back, I got into the habit of paying off a little extra on the mortgage if I had a good month on the market. I forget the exact metric I used, but it was something like, if my investments appreciated $10,000 in a month, I'd put $1,000 extra on the mortgage, or something like that. But, at the time, my mortgage was a 10 year fixed, at 4.99%, so the payment was a bit high. That higher rate, and big monthly payment, made me want to pay it off more quickly.

 

[ATXFIRE2034]

Great advice and perspective, thanks @Andre1969.

3.375% is a great rate, and in the overall scheme of things, $249K isn't a huge amount. If $249K was the original balance, that's what, about $1100 per month, plus taxes/insurance?


So put me down on the "invest the extra $500" team.


Another strategy you might want to try, is do a little of both? A few years back, I got into the habit of paying off a little extra on the mortgage if I had a good month on the market. I forget the exact metric I used, but it was something like, if my investments appreciated $10,000 in a month, I'd put $1,000 extra on the mortgage, or something like that. But, at the time, my mortgage was a 10 year fixed, at 4.99%, so the payment was a bit high. That higher rate, and big monthly payment, made me want to pay it off more quickly.

 

[pb4uski]

That's a good mortgage rate. I'd invest. The cash gives you flexibility. Having money tied up in your house's equity gives you less flexibility. That's based on the info you've provided.

+1 If you lose your job or have an emergency that you need cash it is a lot easier to tap investments than your home equity.

 

[SnowballCamper]

The numbers answer is usually to invest the $500. However, I didn't do that. We paid off the house. It's a house we had built to be the forever home.

If you use an online calculator to compare, it should account for at least the following:
mortgage interest rates
home appreciation rate
expected investment return
tax on investment return
tax on a sale of the home (and transaction costs)

A thorough analysis is not trivial. I found a spreadsheet and used it a few years ago, but it didn't pop up in my first google search today. Using the $500 to invest, or to pay off the mortgage are both good uses for the $500.

 

[ckelly78z]

We always paid an extra $100 a month on our mortgage payments to try to lower our principal amount at a quicker pace. I would do this, and invest the remainder.

 

[Trawler]

In hindsight I wish I did not payoff mortgage early but when we did rates were much higher. Would have liked to have more in my taxable account when we retired early to better manage taxes and ACA tax credits prior to 65. Almost did a cash out refi when rates got this low. So we are in camp of invest the cash.

 

[Scrapr]

We always invested the cash in taxable. We had refinanced both homes to 15 year mortgages. Our (my) feeling was that we could always pay off the mortgage with the money.

 

[LRDave]

Is this home OP's forever home?

We did a bit of both. In 2013 when we sold our business, I had enough cash to pay off our main domicile and also our vacation home. We had decided our vacation home was going to become our forever home. It also had the less attractive mortgage. So we paid it off. We considered a forever home as just a source of expenses, so might as well minimize those.

The main domicile had a sweet 5 year adjustable mortgage (was at 2.375% for five years and then only adjusted up to 2.875% for the 3+ years before we sold it) and we knew we were going to unload it as soon as we could. That happy bit of luck - having the extra funds to invest from 2013-2019 - is the key to why we could retire last year.

 

[Jerry1]

My advice is to increase the amount (and percentage of the portfolio) of the taxable portion of OP’s investments. I really wish I would have accumulated more in a taxable account. More than 90% of my portfolio is in IRA’s. This gives me little in the way of flexibility in terms of tax management and managing my income in general. At that rate, I would not worry about the mortgage. You can always focus on paying off the mortgage later but right now, I’d grow my taxable account.

 

[The Cosmic Avenger]

+1 If you lose your job or have an emergency that you need cash it is a lot easier to tap investments than your home equity.

But conversely, if you lose your job it's very easy to stop contributing to a brokerage account, but not so easy to keep paying a mortgage. Personally, I think on that account it's close to a wash.


Either way, I think it comes down to your style of financial management. How long do you have on the mortgage? I assume from your username that you want to retire in 14 years. Do you want to spend a lot of time on actively managing your finances to maximize your return, or do you want to do more of a three-fund, set-it-and-forget-it kind of plan? Because if it's the former, then I would advise you to pay the minimum on the mortgage and invest any extra money in taxable accounts. If it's the latter, I'd recommend timing it so your mortgage is paid off (or close to it) when you retire. And whichever method you choose, having some money in taxable investments is a good idea for the years between your actual retirement and FRA/Medicare.

 

[RunningBum]

But conversely, if you lose your job it's very easy to stop contributing to a brokerage account, but not so easy to keep paying a mortgage. Personally, I think on that account it's close to a wash.

But...as long as they invested the money they still have it available to make mortgage payments from. I don't think it's a wash at all.

Either way, I think it comes down to your style of financial management. How long do you have on the mortgage? I assume from your username that you want to retire in 14 years. Do you want to spend a lot of time on actively managing your finances to maximize your return, or do you want to do more of a three-fund, set-it-and-forget-it kind of plan? Because if it's the former, then I would advise you to pay the minimum on the mortgage and invest any extra money in taxable accounts. If it's the latter, I'd recommend timing it so your mortgage is paid off (or close to it) when you retire. And whichever method you choose, having some money in taxable investments is a good idea for the years between your actual retirement and FRA/Medicare.

I don't see that as a priority, especially if they are going to be younger than 59.5, and unable to tap retirement accounts. Maybe he should make sure he has the ability to pay off the mortgage, but actually paying it off hurts his cash flow. Even though their expenses will be higher, as long as they have the funds to pay it, it's not a problem. Once all funds are available, do whatever you want.

I've got nothing against having a mortgage paid off, in fact I never had one on my house, but I disagree recommending it to others as a financial advantage, especially at these low mortgage rates. At least not without considering the cash flow issue.

 

[Rickt]

We wanted to pay the home off. Our interest rate was 4.2% in 2005. We paid off the home in 2008 and never contributed to the taxable account until after we paid off the home. In hindsight, we did the right thing.

You should do what you feel comfortable doing, given your career/job, debt load and investments. Good Luck!

 

[The Cosmic Avenger]

But...as long as they invested the money they still have it available to make mortgage payments from. I don't think it's a wash at all.

That depends on both the time span and the returns (if any), it's not a certainty. While you and everyone else made good points specifically about current interest rates, we should be able to agree that the money invested is subject to more volatility than the saved interest on the mortgage, which is by definition predictable (assuming they get a fixed-rate mortgage). We can't predict the future of the markets in the short term, but we can feel fairly confident of the returns over a decade or more. So the approach should also depend on the timespan, in addition to the OP's tolerance for risk.

 

[racy]

When I had a mortgage, I let inflation whittle down the real value of the interest and invested my extra income.

 

[badatmath]

I did both, but my rate was higher.

 

[rayinpenn]

We actually did both but right now if I didn’t have one of those ‘for life jobs’ I think I’d make sure I had a big emergency fund.

1. The market is astronomically high
2. No matter what your political persuasion is the arena is ‘volatile’
3. Although apparently a lot of people are happy with the US. - a good number with guns near all that Persian Gulf Oil are not. I know their always angry but right or wrong someone’s just sprayed water on the hornets nest.

Respectfully I don’t claim to be able to predict the market but to me it seems the phrase ‘pigs get burned’ is in order. I looked at my
Portfolio and discovered even thought I’m no longer on the accumulation phrase it’s grown appreciably. I’ve sold and will sell some more.

Normally I’m a debt-free-is-absolutely-awesome-guy but 2008 feels like yesterday. I know people who have never really recovered..

 

[pb4uski]

+1 If you lose your job or have an emergency that you need cash it is a lot easier to tap investments than your home equity.

But conversely, if you lose your job it's very easy to stop contributing to a brokerage account, but not so easy to keep paying a mortgage. Personally, I think on that account it's close to a wash.

Either way, I think it comes down to your style of financial management. How long do you have on the mortgage? I assume from your username that you want to retire in 14 years. Do you want to spend a lot of time on actively managing your finances to maximize your return, or do you want to do more of a three-fund, set-it-and-forget-it kind of plan? Because if it's the former, then I would advise you to pay the minimum on the mortgage and invest any extra money in taxable accounts. If it's the latter, I'd recommend timing it so your mortgage is paid off (or close to it) when you retire. And whichever method you choose, having some money in taxable investments is a good idea for the years between your actual retirement and FRA/Medicare.

Not close to a wash!

OP will be investing or making extra principal payments of $500/month. If his take home is $4k a month and his monthly living costs are $3.5k a month before the extra $500/month in investment or principal payments then if he loses his job that $3.5k/month needs to come from somewhere. To be able to say... "whew, I can defer making $500/month in extra principal payments on my mortgage" does nothing to help provide the $3.5k needed for monthly living expenses.

If he has an investment account he can use it... being able to not make extra principal payments is next to useless to pay for food, car payments, property taxes, credit card bills, or whatever. If he has $10k or $15k accumulated when he needs it that will be a lot better than having a mortgage that is $10-15k lower.

The second part is silly too. The OP can simply invest in a target-date fund if he wants to keep it simple. Investing style is a totally separate question from whether to make extra principal payments.

Think for goodness sake.