Pay mortgage or invest in today's (Jun'19) market

[MN_1021]

Hi everyone,

I have the same age old problem.... We have an incoming inheritance and after taxes, fees and everything we will have 200K in hand. Question is Invest a 200K in market today or pay off mortgage that has 3% interest rate. The mortgage is 15 years term with 10 years left on it and round about 200K balance. I get it that the interest rate is super low but my wife thinks the simple joys of being debt free at our age of 44/DW-43 is much important to her than making another few thousand dollars if investments were to go up. Then there is a risk with any investment that it can loose money (if not a CD).

What would this group suggest we do? Any examples from your life would help us get to this decision quick too.

 

[joeea]

Hi everyone,

I have the same age old problem.... We have an incoming inheritance and after taxes, fees and everything we will have 200K in hand. Question is Invest a 200K in market today or pay off mortgage that has 3% interest rate. The mortgage is 15 years term with 10 years left on it and round about 200K balance. I get it that the interest rate is super low but my wife thinks the simple joys of being debt free at our age of 44/DW-43 is much important to her than making another few thousand dollars if investments were to go up. Then there is a risk with any investment that it can loose money (if not a CD).

What would this group suggest we do? Any examples from your life would help us get to this decision quick too.

Browsing around here you'll see that this has been asked and answered hundreds of time with no consensus. Some will say pay it off, others will say don't. There's nothing unique in your question or in today's market that will change the kinds of responses you can expect here.

If having a mortgage keeps you up at night, pay it off. If being "debt free" gives your wife that much joy, pay it off.

If you value liquidity and using someone else's money cheaply, don't pay it off. If you feel you can invest the money and earn more than 3%, don't pay it off.

I'm not paying off my 3.875% mortgage. But mortgages don't keep me awake, and my wife finds joy even in the face of a mortgage.

 

[MN_1021]

Very Helpful Joeea. Personal experiences and stories are always of great help! So, thanks again.

 

[joeea]

Very Helpful Joeea. Personal experiences and stories are always of great help! So, thanks again.

It comes down to a personal decision. Good luck.

 

[Vacation4us]

I guess you double posted, I answered in you duplicate thread. Maybe ask a moderator to combine. Good luck.

 

[JDARNELL]

I am coming into a little bit of extra in the next couple of weeks. I see nothing that I want to buy at these price levels so I am deleveraging.

 

[Dalmore]

Hi everyone,

I have the same age old problem.... We have an incoming inheritance and after taxes, fees and everything we will have 200K in hand. Question is Invest a 200K in market today or pay off mortgage that has 3% interest rate. The mortgage is 15 years term with 10 years left on it and round about 200K balance. I get it that the interest rate is super low but my wife thinks the simple joys of being debt free at our age of 44/DW-43 is much important to her than making another few thousand dollars if investments were to go up. Then there is a risk with any investment that it can loose money (if not a CD).

What would this group suggest we do? Any examples from your life would help us get to this decision quick too.

I had an almost identical problem at about the same age too. My interest rate was around 3.8% and the market wasn't doing quite as well as it is currently. The lure of being debt free was definitely attractive. We ended up basing the decision on the fact that we were planning to stay in the house for more than 10+ years, and with a volatile market and a guaranteed 3.8% interest on the money, paying off the mortgage was the thing to do. We haven't regretted the choice.

On a side story, in the mid 2000's we purchased a new car, and paid cash. Everyone at the dealership looked at us like we were crazy and should be investing the money in the stock market. It was about 6-9 months after that the market started tanking and the recession kicked in.

 

[Bamaman]

I would be inclined to sit on the money (in CD's) for awhile--and watch it. If the market takes a drop, I'd be somewhat inclined to jump into equities with the funds. Record high stock market is not necessarily the time to get into the market.

 

[corn18]

We are in the same boat, but older (53 & 49). Have enough RSU's vesting in 2 weeks to pay off the mortgage ($576k). It's also 3.875%. We haven't decided yet what we are going to do, so it will sit in FZDXX money market fund earning 2.28%. Being in the 37% tax bracket, we are almost net/net if we are earning 2.28% in FZDXX, so not in a big hurry.

I want to pay it off. It's an emotional decision for me. Never thought in a gazillion years we could pay off a mortgage. If we change our minds, we could just take out a new mortgage. We already have a large taxable account, so have enough liquidity.

That's my view.

My wife's view is the opposite. Why pay it off if we can earn more in the market? Or break even in a MM account and retain the liquidity? She's thinking with her brain.

We may just pay it down to $484k and refi to 3% @ 15 years.

Then start the process all over again with the cash that will inevitably still be sitting in FZDXX.

The current market doesn't scare us. It is what it is and NO ONE knows if we are at a high or on the way to new highs or a crash. So for us it is just about liquidity.

 

[VanWinkle]

Why not do both, half into the market and half on the house. Compromise is always a good plan.

 

[The Cosmic Avenger]

At your age, you're probably 10+ years from even early retirement, and if you don't have solid plans to use that money in 10 years, I'd say invest it. (If you had solid plans to spend it, I would say invest it for 5-8 years, and then get out if you were ahead, otherwise wait for it to come back up.) In 10 years, barring being in the depths of a bad recession right at year 10, you could conceivably have $400K or so, but you'd only be saving about $20K in interest according to Bankrate's amortization calculator. To me, that's leaving too much money on the table.

Now, don't get me wrong, we did pay off our mortgage early and don't regret doing so, but we timed it to coincide with our only child going off to college, and we started earlier than you, so it wasn't that much of an acceleration, and we still maxed out our retirement savings most of that time.

But when we paid if off, we put most of the monthly income towards other things, so that we weren't just spending it all. Maybe you're more disciplined than me, but when I have thousands in my checking with no plan for it, I want to spend it, which is why I have automatic monthly transfers for property tax, our next car, and vacations.

Although if you and your wife don't come to full agreement on this, VanWinkle's idea of splitting it isn't bad either.

 

[brydanger]

Hi everyone,

I have the same age old problem.... We have an incoming inheritance and after taxes, fees and everything we will have 200K in hand. Question is Invest a 200K in market today or pay off mortgage that has 3% interest rate. The mortgage is 15 years term with 10 years left on it and round about 200K balance. I get it that the interest rate is super low but my wife thinks the simple joys of being debt free at our age of 44/DW-43 is much important to her than making another few thousand dollars if investments were to go up. Then there is a risk with any investment that it can loose money (if not a CD).

What would this group suggest we do? Any examples from your life would help us get to this decision quick too.

Im always amazed that everyone asks this same question as an A/B multiple choice. Where's the creativity? Where's options C and D?

All I can do is tell you what we did/would do again right now if we had either saved up that amount or had a sudden windfall of that kind (which is also the main reason we RE'd before I turned 35).

My advice:
Take your 200k, divide it up and buy as many decent/rentable 3bed/2bath houses as you can in a solid/popular neighborhood close-in in your city (or a city nearby).
Even at 25% down, that should give you (at least) 2 deposits on 2 solid rental properties that are going to be at least very close to breaking even from day one.

Better yet-
Rent out your current house, downsize into one of the new homes (hopefully smaller/cheaper than your own house/mortgage) so you can get a better debt to income ratio, better deposit rate, better interest rate as a primary homeowner AND have a lower monthly mortgage after your investment.

Even better/bonus investment... make that new home you move into a fixer upper! Spend your nights/weekends single-handedly making your investment more lucrative (and save money because you're too excited creating additional value to go out eating and drinking every night).

So... you've now taken your windfall and propelled yourself into the magical world of passive income (at least eventually).
Let's look at where you're at day one:
- You lowered your own monthly mortgage/expenses
- You hold 2 properties that are both being paid off by someone else
- You have an enormous amount of write-offs to offset taxes on whatever your 9-5 income is
- At the end of the first year you'll have a renovated house that either provides quick equity (either for cash in the bank to cover repairs/vacancies/upgrades...or to do another round of the above investments).

As the years roll by toward (and after) your ER you'll have equity in all 3 properties that you can pull out to repeat the process as many times as you like. Or, you could sit and do nothing and you'll also have an ever growing payment each month above and beyond the mortgages. That equals a smaller number you need in the retirement account, which means less years before ER.


Maybe some consider this "riskier" than investing that same 200k in the stock market, but to be very clear we aren't talking about a goal of R, were talking about goal of ER!
You just invested in (assuming that 25%) $800k of real estate with only $200k (and someone else will generously be paying the other $600k off for you).

Go ahead. Call your broker up and explain that you want to buy 800k worth of stock for only 200k (and that he/she needs to front you the other 600k). Good luck with that.

It's all a growth game, right... What do you trust to give you more growth?
200k in the stock market or 800k in the housing market??

 

[OldShooter]

Well, if you had no mortgage on your house and could get a mortgage for $200K at 3%, would you borrow the money and invest it? That's basically the same question you're asking, just rephrased a little bit.

 

[pb4uski]

Well, if you had no mortgage on your house and could get a mortgage for $200K at 3%, would you borrow the money and invest it? That's basically the same question you're asking, just rephrased a little bit.

I see your point but I have to disagree... they already have the 3% mortgage.

If the decision is just financial then I think the relevant question is whether they expect whatever they put the money into to return more than 3% over the next 10 years.

Personally, I wouldn't be in any hurry to pay off a 3% mortgage.... I would invest it because I think it is more likely than not that investments will return more than 3% over the next 10 years.

 

[CardsFan]

Well, if you had no mortgage on your house and could get a mortgage for $200K at 3%, would you borrow the money and invest it? That's basically the same question you're asking, just rephrased a little bit.

I see your point but I have to disagree... they already have the 3% mortgage.

If the decision is just financial then I think the relevant question is whether they expect whatever they put the money into to return more than 3% over the next 10 years.

Personally, I wouldn't be in any hurry to pay off a 3% mortgage.... I would invest it because I think it is more likely than not that investments will return more than 3% over the next 10 years.

I see both points, but agree with pb4uski on this one. In their lower 40's they have plenty of time to pay down the house through cash flow, and inflation will make it easier in the future. Particularly with a 3% mortgage rate.

 

[OldShooter]

I see both points, but agree with pb4uski on this one. ...

There is an old bit of stock market wisdom pointing out that every day you hold a stock is the same as making a decision to buy that stock on that day. Same story on the OP's mortgage.

I'm really not pushing the OP one way or the other, but I will argue that the day after a decision is implemented there is no way from the outcome to determine which question was asked. If asking the same question different ways produces different decisions, then it's time to call in the behavioral finance guys to explain.

Either way the outcome is binary: "no mortgage" or "mortgage and investment"

 

[flintnational]

General comments on the topic. Not specific to the OP.

I get the "keep the mortgage and leave the money invested" position. When I was working, I kept a mortgage. But, at that time I was invested 100% in stocks and real estate, no bonds. Both assets had an expected return greater than the mortgage interest rate. In this scenario, investing the mortgage proceeds makes sense.

However, with today's low bond yields (assuming you hold bonds), if your expected bond yield is lower than your mortgage interest rate, it makes sense to reduce your bond holdings and pay off the mortgage. It would make sense all the way down to zero bonds remaining in the portfolio. Obviously this example ignores any tax implications associated with selling bonds and it is only looking at portfolio efficiency.

IWO, why hold a mortgage at 3% and bonds that are yielding less than 3%?

 

[pb4uski]

Actually you did remind me of something.

IF one is going to use fixed income funds yielding less than their mortgage interest rate to pay off the mortgage then I would agree it is sensible... IOW, if after you have paid off your mortgage your AA is changed then I think there is a valid argument that you are trading not paying 3% for not earning 3% so it is all a wash.

But if your AA remains the same so the funds are effectively coming out of a stocks/bonds mix then not so much.

 

[seabourne]

With the stock market being at new highs in an extremely long growth streak, I'd take a dirty market timing perspective on putting it into stocks in a lumpy manner. The 3% mortgage is low enough that, despite it being nice to retire debt, I'd probably leave it alone. Instead, you might be able to use the inheritance to maximize some untaxed savings options.

If you both aren't already maxing out your 401(k) limits, your IRA limits,any other similar tax-benefited savings, and HSA limits if available, consider setting all of those to the maximum allowed and replace the take-home money in your budget with the inheritance cash, while keeping the cash in a saving account (roughly 2% these days). You're effectively paying 1% interest (3% mortgage - 2% interest yield) for the options provided by cash. You're probably coming out ahead if you include inflation.

If there is a stock market crash in the next few years, while things are in the tank, convert a large portion of 401(k)/IRA money into RothIRA or Roth401(k) accounts as available, and use the inheritance money to pay the income taxes it triggers. Depending on your tax rates, of course, but converting when prices are down is more efficient, and you can pick how high you're willing to push your tax bracket.

Regardless, having the option to effectively borrow $200k at 1% interest (less if that mortgage interest is deductible for you) if worth keeping. Cash is Cash with all the options it entails - paying off the mortgage will limit your flexibility and in this situation, you're not really being paid to give it up.

 

[YVRRocketSurgery]

The decision kind of comes down to what your goals are, potential strategies/plans, and what you are comfortable with. And keep in mind, being on the same page with your spouse may outweigh doing something for the sake of maximizing performance.

For us, back in early aughts, we really didn't have a plan but we ended up paying off the mortgage as soon as possible since we liked the idea of being debt free. It also then allowed us to supercharge our savings. As our savings grew, that kind of opened our eyes to FIRE.
With our mortgage paid off, we also could have set up an open line of credit (backed against the house which gives a better rate) if any investment opportunities came up. But, the missus is kind of adverse to stuff like that though.

That's what worked for us. But, with the low interest rate environment, I can definitely see why people may want to slowly pay off their mortgage and allocate their capital to investments or RE if that's a fit for you.

 

[CyclingInvestor]

I am 60, retired 12 years, have been 100% in stocks for decades, and never have trouble finding stocks to invest in that I consider undervalued.

That said, when I was 43 I paid off my mortgage early to celebrate reaching an important financial milestone. Although I would have come out ahead investing that money also, the joy of being debt-free outweighed it for me. Sometimes, you just have to splurge.

 

[dirtbiker]

I'd probably split it down the middle. Half toward the mortgage and the other half invest. Continue your same monthly mortgage payment, and you'll have it paid off in short order. Plus, you'll have money to put toward your investments. The market is definitely expensive as a whole, and there are a lot of reasons to be scared of future growth (or lack thereof). However, there are also a lot of reasons to be hopeful that we will see continued growth. Timing the markets has always been a gamble, and nobody has reliably found a formula or method to repeatably time them. Stay out of the markets and it may grow and you'll miss out. Buy in and it may drop and you've lost money. There's no perfect answer if you can't see the future. This being said, there are definitely stocks out there that are undervalued. They're just harder to find when the markets are at or close to all time highs.

I'm in my mid-30s, and I'm overpaying my mortgage every month even though the interest rates are low. I also have student loans with higher interest rates. I overpay even more on those. I also contribute to my 401K and brokerage account. It would make more sense not to overpay my mortgage and funnel that money toward my student loans. But, my wife and I like the thought of living in a paid off home, so we're working toward that, even if it means leaving a little bit of money on the table. Not everything has to be about the bottom line.

 

[ERD50]

...

I'm in my mid-30s, and I'm overpaying my mortgage every month even though the interest rates are low. I also have student loans with higher interest rates. I overpay even more on those. I also contribute to my 401K and brokerage account. It would make more sense not to overpay my mortgage and funnel that money toward my student loans. But, my wife and I like the thought of living in a paid off home, so we're working toward that, even if it means leaving a little bit of money on the table. ...

But if the goal is to get the house paid off, won't you reach that goal faster by paying off the high interest loan first, and then you can plow that increased cash-flow money into the mortgage?

... Not everything has to be about the bottom line. ...

OK, but in this case (and many like it), focusing on 'the bottom line' seems to be the way to reach your goal. It doesn't need to be mutually exclusive.

I'm also not excited about pre-paying the mortgage if it is low rate, I get more excited having my money working for me. But if that's your goal, I can't see why you would not want to get rid of the high rate loan first, in pursuit of your goals. You don't get any extra cash flow until that final payment, that's important to your goal. And be careful to maintain adequate liquidity.

-ERD50

 

[dirtbiker]

But if the goal is to get the house paid off, won't you reach that goal faster by paying off the high interest loan first, and then you can plow that increased cash-flow money into the mortgage?


OK, but in this case (and many like it), focusing on 'the bottom line' seems to be the way to reach your goal. It doesn't need to be mutually exclusive.

I'm also not excited about pre-paying the mortgage if it is low rate, I get more excited having my money working for me. But if that's your goal, I can't see why you would not want to get rid of the high rate loan first, in pursuit of your goals. You don't get any extra cash flow until that final payment, that's important to your goal. And be careful to maintain adequate liquidity.

-ERD50

Two reasons. 1. We like building equity in the house as we go. I did the math both ways, and it doesn't make that big of a difference (as the interest discrepancy isn't that vast), and we're happy doing what we're doing. 2. We have a 30 year 10/1 ARM that we're four years into. If interest rates skyrocket, we'll be happy to have paid down the balance.

The other thing, and I don't want to get too far off topic, is that we have potentially more employer student loan repayment coming. If we pay too much, we essentially give up free money. So we're still paying off debt and also contributing toward investments either way. Maybe in the end, we'll be a little worse for the wear because of it. Maybe we'll make out better. We'll see.

 

[Markola]

One factor that people don’t discuss enough in these “what do I do with a windfall?” posts is whether you can invest and then keep your paws off of it for the long run to let it grow. If it becomes a piggy bank for the endless wants and needs in an American life, one might be better off in locking it up in the house by paying off the mortgage. Good luck.