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.

 

[Vacation4us]

Personally I am with your wife. Pay off your house. But then invest the found monthly extra cash flow in the market. The best of both worlds in my opinion.

My DGF never made 50 k a year as a government employee but died with 4 million. He only had a house payment for 4 years, then paid cash for each move up. Invested in the market heavily since his overhead was small. (Ps. He died in 2009, after the big crash in 2008 but still had 4 million)

If you invest the 200k and the market tanks and you still have the house payment and it takes 10 years for you to see the 200k again how will you feel.

If you pay off the house and then invest while the market goes up, or up and down and you end up with 100k or 400k in the market how will you feel.

IMO debt free in your 40’s can set you up really nicely for ER.

 

[pb4uski]

While I would invest the money as it seems highly likely that equities will return more than 3% annually over the next 10 years, you could pay off the mortgage and then set up what you now pay monthly for the mortgage as an automatic investment in equities and see what you have accumulated in 10 years.

 

[FlaGator]

I seldom disagree with the wise pb4uski, but will in this situation.

It’s “found money”, and you can use it to change your life.

The numbers say invest invest and let the mortgage ride, but we’re humans with emotions.

I vote pay it off, ramp up your investments with the extra cash, and KEEP YOUR WIFE HAPPY [emoji2]

 

[pb4uski]

.... you could pay off the mortgage and then set up what you now pay monthly for the mortgage as an automatic investment in equities and see what you have accumulated in 10 years.

....I vote pay it off, ramp up your investments with the extra cash, and KEEP YOUR WIFE HAPPY [emoji2]

And how are these different FlaGator?

 

[FlaGator]

Oops!

Helps to read every word, all the way thru [emoji20]

I need to stop posting while eating over the kitchen sink.....

 

[targatom2019]

The feeling of not having a mortgage is like conquering the world and it allows me to take more aggressive investing approach in the equity market. I bought a house in 1996 paid it off 2001 then invested aggressively 100% in equities until last month with 60% equities and 40% bonds. I cashed out some equities the last 18 years and bought couple rental properties out right and use monthly rental income to invest back in equites. My last working day will be July 4th at the age of 50.

Yes, pay off the mortgage !!!!

 

[donheff]

It's like a Rorschach test, no right answer. I come down on the side of pb4uski's ambivalence. I think the numbers really call for leaving the mortgage in place but emotions pull toward no debt, especially if you are at or near the draw down phase. The equation tilts more or less toward the mortgage depending on your housing market as well. In an area like mine the growth in property values would likely leverage that mortgage significantly even if the equity markets turned out to be a wash.
.

 

[joeea]

The equation tilts more or less toward the mortgage depending on your housing market as well. In an area like mine the growth in property values would likely leverage that mortgage significantly even if the equity markets turned out to be a wash.
.

I don't understand why the decision to pay off the mortgage would be affected by the housing market or growth in property values. Can you explain your thinking?

 

[donheff]

If I have a $1M mortgage with $200K down and my property is appreciating at 3%/year (it is higher here) I'm effectively making way more than 3% on the principle (~15% in year 1, declining as the principle is paid off). If I think the property values are likely to continue that upward trend I am more inclined to go for that leverage than move my $1M (already diversified at an expected return higher than 3%) into the expected 3% real property return. But there is risk so the closer I am to draw down (or the less leveraged the loan becomes over time) the less I am inclined to go with that leverage. The question is really the same as whether your assessment of the mortgage rates you can get and housing appreciation is such that it's worth pulling the equity out of your house and investing it in the market.

Edit: This is all academic. I paid off two mortgages when I ERd because I didn't want the risk that both the market and real property values would drop. I think the leverage evaluation is more applicable to the question of rent versus own. When you have to pay as much (or nearly as much) for rent as for the mortgage/tax/insurance payment, that leverage of money you will have to spend in any event is a big factor.

 

[WestwardBound]

One aspect of the decision should be your need for and access to liquidity in your overall financial plan. A paid off house is not liquid unless you have the ability to borrow against equity.

Just something to think about.

 

[target2019]

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.

We paid additional principal (1-3 months) in the 80s and 90s as we could, and have title free and clear. Rate was 8%, so a no brainer back then.

Today, I would put 200K in online savings account, to get my 2% or so. Then I would look at my amortization schedule and make additional payments so that mortgage is off the books at a future date I decide. This also allows you enough free cash to steadily invest in other investments.

 

[ERD50]

If I have a $1M mortgage with $200K down and my property is appreciating at 3%/year (it is higher here) I'm effectively making way more than 3% on the principle (~15% in year 1, declining as the principle is paid off). ....

donheff, I believe your logic is flawed. The property value in your example goes up whether you have a mortgage or not.

It is two separate calculations. The house value change is one, the cost of the mortgage versus long term gains of keeping that money invested is another. One has zero affect on the other.

And of course we can't predict the future, so we can't know that the money invested will grow beyond the cost of the mortgage, but history says that over decades, and with a low rate loan, the odds are very good. It's a personal decision to look at that as risk or opportunity, but in general, no risk, no reward.

-ERD50

 

[ERD50]

One aspect of the decision should be your need for and access to liquidity in your overall financial plan. A paid off house is not liquid unless you have the ability to borrow against equity.

Just something to think about.

Yes, liquidity is very important. It has derailed a few people who thought they were securing their safety by paying off their mortgage. You still have property tax, utilities, maintenance, etc.

The feeling of not having a mortgage is like conquering the world and it allows me to take more aggressive investing approach in the equity market. I bought a house in 1996 paid it off 2001 then invested aggressively 100% in equities until last month with 60% equities and 40% bonds. I cashed out some equities the last 18 years and bought couple rental properties out right and use monthly rental income to invest back in equites. My last working day will be July 4th at the age of 50.

Yes, pay off the mortgage !!!!

The feeling of not having a mortgage is like conquering the world ...

And some of us feel like we've conquered the world by freeing up that dead house money, investing it, and making huge sums of money. We have no idea which camp the OP , or anyone else reading, would be in.

... it allows me to take more aggressive investing approach in the equity market. ...

? With the money you don't have because you have it tied up in your house? Seems like a twisted rationalization to me.

-ERD50

 

[donheff]

donheff, I believe your logic is flawed. The property value in your example goes up whether you have a mortgage or not.

It is two separate calculations. The house value change is one, the cost of the mortgage versus long term gains of keeping that money invested is another. One has zero affect on the other.

And of course we can't predict the future, so we can't know that the money invested will grow beyond the cost of the mortgage, but history says that over decades, and with a low rate loan, the odds are very good. It's a personal decision to look at that as risk or opportunity, but in general, no risk, no reward.

-ERD50

I guess you are right. The basic question is, would it make sense to pull your equity out of the house because you believe you can do better with the funds in the market after the cost of the mortgage. Almost none of us have considered that since the 2008 meltdown.

 

[joeea]

If I have a $1M mortgage with $200K down and my property is appreciating at 3%/year (it is higher here) I'm effectively making way more than 3% on the principle (~15% in year 1, declining as the principle is paid off). If I think the property values are likely to continue that upward trend I am more inclined to go for that leverage than move my $1M (already diversified at an expected return higher than 3%) into the expected 3% real property return.

This is confusing.

Your property appreciates at the same rate without regard to having a mortgage or not having a mortgage. I don't understand how that would influence your decision.

 

[ERD50]

I guess you are right. The basic question is, would it make sense to pull your equity out of the house because you believe you can do better with the funds in the market after the cost of the mortgage. Almost none of us have considered that since the 2008 meltdown.

That would have been an ideal time to do it!

I had a mortgage before 2008, and I still have a mortgage. A lot of us here (most, probably), stayed the course, or even re-balanced into equities at that time. So I'm not sure what that has to do with the mortgage question.

-ERD50

 

[targatom2019]

? With the money you don't have because you have it tied up in your house? Seems like a twisted rationalization to me.

-ERD50

I treat the real state purchases like fixed income now. I must be doing something right because and will retire at 50 yo this July with 3.2 mill in equities and 3.5 mill in real-estate(residential & industrial). Zero debt !!!

 

[Andre1969]

I guess you are right. The basic question is, would it make sense to pull your equity out of the house because you believe you can do better with the funds in the market after the cost of the mortgage. Almost none of us have considered that since the 2008 meltdown.

I sort of lucked into doing just that, during the Great Recession. I had an HELOC, but hadn't drawn much on it. Well, as the banks were failing and credit was drying up, a lot of HELOCs were getting frozen, to where they wouldn't let you draw any more cash out, even if you still had plenty of credit available. I called my bank, and asked if they had any intention of freezing their HELOCs. They said no, but I didn't believe them.


So, I pulled the max out, and put it into an MMA, figuring it would be good to keep it there, in case I needed it. Then, as the economy started to turn around, instead of paying the HELOC down, I pulled the cash from the MMA and invested it.

 

[ERD50]

I treat the real state purchases like fixed income now. I must be doing something right because and will retire at 50 yo this July with 3.2 mill in equities and 3.5 mill in real-estate(residential & industrial). Zero debt !!!

Many roads lead to Dublin, and I'm glad that you've had success. But your anecdote is not an analysis of the pay-off versus invest decision.

-ERD50

 

[pb4uski]

In Dec 2009 I refinanced and took out $78k of cash. My primary motivation was to reduce interest from 5.800% to 4.375% and my payment went from $1,590/month to $1,782/month but it just seemed like a good time to have ample liquidity.

In Jan 2012, the month that I retired, I refied my existing balance and reduced my interest rate from 4.375% to 3.375% and reduced my payment from $1,782/month to $1,584/month.

The $78k of cash ended up invested.

 

[targatom2019]

"Many roads lead to Dublin, and I'm glad that you've had success. But your anecdote is not an analysis of the pay-off versus invest decision.

-ERD50"
__________________


Got it ! Thanks

 

[Unpaintedhuffhines]

Hi. I'm in a similar boat. $2.8M total in brokerage & 401K (little less than 50% in 401K).

Nearing retirement (maybe 12-18 months). Firecalc is at 97.5% with keeping mortgages and 100% if I pay them off. Should be enough for me right there.

1st Mortgage bal = $252K (3.5%). 23 years left
2nd Mortgage bal = $132K (5%). 18 years left

So I can knock down $2,250 monthly payments to zero, and it will cost me $385K. Still would have $2.4M in investments. Oh, I'm 58 if it makes any difference.

Why would I not do this?

 

[pb4uski]

Hi. I'm in a similar boat. $2.8M total in brokerage & 401K (little less than 50% in 401K).

Nearing retirement (maybe 12-18 months). Firecalc is at 97.5% with keeping mortgages and 100% if I pay them off. Should be enough for me right there.

1st Mortgage bal = $252K (3.5%). 23 years left
2nd Mortgage bal = $132K (5%). 18 years left

So I can knock down $2,250 monthly payments to zero, and it will cost me $385K. Still would have $2.4M in investments. Oh, I'm 58 if it makes any difference.

Why would I not do this?

I wouldn't think that mortgage vs not would make that much difference in FIRECalc. In fact, if anything having a mortgage should be beneficial since a balanced portfolio's investment returns typically exceed mortgage interest.

How are you incorporating your mortgage payments in FIRECalc?

If the spending on the Start Here tab includes your mortgage payments then you are getting bad success numbers because FIRECalc will increase withdrawals annually for inflation but your mortgage payments are fixed and the mortgage payments will never end if included in spending.

 

[joeea]

Hi. I'm in a similar boat. $2.8M total in brokerage & 401K (little less than 50% in 401K).

Nearing retirement (maybe 12-18 months). Firecalc is at 97.5% with keeping mortgages and 100% if I pay them off. Should be enough for me right there.

1st Mortgage bal = $252K (3.5%). 23 years left
2nd Mortgage bal = $132K (5%). 18 years left

So I can knock down $2,250 monthly payments to zero, and it will cost me $385K. Still would have $2.4M in investments. Oh, I'm 58 if it makes any difference.

Why would I not do this?

Because presumably there is a reason you have two mortgages, and those reasons still apply?

Because you feel good about getting more than 3.5% and 5% returns on the money you have invested?

Because having a mortgage doesn't keep you up at night, and you don't run your life by FireCalc numbers?

Because you don't consider the difference between 97.5% and 100% important enough to be bothered with?