Continue to Invest or Pay Down Mortgage Question

[Montecfo]

I would agree that pools make sense in some markets. How much would you use it? Do neighbors have pools?

When we built our house in Scottsdale we put in a pool. Most home buyers expected you to have one.

I found the cost of maintaining to not be a large issue. I did the cleaning etc. Now over time as you have to replace parts I could see that becoming more of an issue.

But we used the pool most days so it was a great value for us.

 

[RunningBum]

Since you said this isn't your last house, and if you hope to pay cash for your next house, you might be better off keeping the mortgage and investing. Otherwise you might need to close on the existing house before you buy the next. With the money invested you would have it available to pay cash by selling, or short-term margin if you need some of your home equity. It just takes away the complication of having to time a buy and sell.

 

[Texas Proud]

OP, do you currently live in Austin? I’d totally get a pool if I lived in central Texas; I’m a little shocked at all the suggestions to the contrary. I suggest focusing on value. Is there something that provides 90% of what you want for 40% the cost, like an above-ground model?

I was in a very similar financial state to yours five years ago and I elected to focus on my mortgage. I maxed out my 401k and Ira contributions, then hammered what I had left on the house principal. With the big run up of the market in 2017, it hasn’t proven to be the wisest choice. But hindsight is 20/20 and I don’t regret my decision too much. I still plan on taking a brief sabbatical next year or some other semi-FIRE measure. Which isn’t too bad for 40 years old.

One of my sisters lives in Austin and has a pool... if it did not come with the house she would not have put one in... and she uses it all the time...


They can get up there to maintain... she just had to shell out $40+ K on redoing the deck around the pool...


Funny thing is that now that she is retired she is traveling to the beach a good amount of time and spending it there....

 

[Andre1969]

One of my sisters lives in Austin and has a pool... if it did not come with the house she would not have put one in... and she uses it all the time...


They can get up there to maintain... she just had to shell out $40+ K on redoing the deck around the pool...


Funny thing is that now that she is retired she is traveling to the beach a good amount of time and spending it there....

Yeah, I've been thinking about that, too. When I had the swimming pool inspected before I bought my house, while it was considered "okay", there are some spots where the paint is peeling. The inspector said that the way to fix it right, you'd have to sand it down, and then plaster it, and once it was all said and done I could be looking at around $20,000.

On the plus side, it's really just cosmetic and not structural, so he said I could put it off for awhile.


I do wonder, over time, how much use the pool will actually get. I settled on the house September 7, and by that time I think swimming pool season is past its prime in Maryland. We tried to get as much use out of it as we could in September and early October, although it rained a lot. But, the novelty hasn't worn off yet, either. I guess 2019, once the weather gets nice, will be the real test. I'm not really much of a party-thrower type, but who knows...something like this might end up making my place the default party house.



My house mate said that being in the pool almost feels like being at a resort. And, it's a bit on the large side for a residential pool...23x51 feet, ten feet at the deep end, and it has a slide. But, again, that might just be the novelty of it all. I just hope it doesn't wear off. I'm looking forward to taking a morning dip, before going in to w*rk next year!

 

[mystang52]

I have no comment about the pool question. As to invest vs pay off mortgage, why must it be one to the exclusion of the other? Whatever proportion you feel comfortable with, do both. You can feel a sense of comfort knowing the portion you use towards the mortgage is giving you an immediate 4.6% return. That's better than any safe cash investments.

 

[COcheesehead]

Folks act like paying off the mortgage is a one way street, up. Having lived through many RE markets, houses go up and down. Sometimes a lot.

 

[RunningBum]

Folks act like paying off the mortgage is a one way street, up. Having lived through many RE markets, houses go up and down. Sometimes a lot.

I don't follow what that has to do with whether or not you have a mortgage?

 

[COcheesehead]

I don't follow what that has to do with whether or not you have a mortgage?

In total return, paying it off does not guarantee you a return equal to your mortgage rate. It actually can add to your risk.

 

[Montecfo]

I don't follow what that has to do with whether or not you have a mortgage?

I started to make the same comment. Paying down your mortgage is not the same as investing in your home. You decided to pay $X for your home when you bought it and you committed to pay that sum for it. You owe what you owe. Paying down the mortgage is like creating a synthetic bond investment, with a guaranteed rate and no fluctuation in value. If you worry about having sufficient liquidity, then I recommend not paying down your mortgage. I also recommend a standby HELOC if you have material equity in your home.

Now, if you think you might default on your mortgage, then this could turn this logic on its head. But defaulting on your mortgage is not the best path to early retirement, IMHO.

 

[COcheesehead]

I get what you are saying. What I am saying is paying off is no guarantee of return. Your house as an asset is still open to the whims of the market.

 

[SecondCor521]

I don't follow what that has to do with whether or not you have a mortgage?

I didn't post the previous comment that you're replying to, but I have some thoughts:

1. A bigger mortgage creates more leverage, which is good in rising RE markets and bad in dropping RE markets.

2. Paying down the mortgage (or taking out less of a mortgage in the first place) can help a person preserve their option to move in the case where RE prices drop. If you want to sell and the market is down, a mortgage that exceeds net proceeds from the sale means you may have to come to closing with a check, possibly a large one.

I still remember stories of people who wanted to get a divorce in the RE crash and were stuck not divorcing or having to live in the same house because they were underwater and couldn't afford to both pay the lawyers and sell the house. No thank you. My ex and I got lucky; we divorced in 2006 and were able to sell for more than we paid, pay off our first and second mortgage, and walk away with enough to put down on our two modest post-divorce houses.

So the return you get on a home purchase and sale has not much to do with a mortgage or lack thereof, but a mortgage and it's relative size can affect the risk of the investment and one's life choices.

 

[Montecfo]

I didn't post the previous comment that you're replying to, but I have some thoughts:

1. A bigger mortgage creates more leverage, which is good in rising RE markets and bad in dropping RE markets.

2. Paying down the mortgage (or taking out less of a mortgage in the first place) can help a person preserve their option to move in the case where RE prices drop. If you want to sell and the market is down, a mortgage that exceeds net proceeds from the sale means you may have to come to closing with a check, possibly a large one.

I still remember stories of people who wanted to get a divorce in the RE crash and were stuck not divorcing or having to live in the same house because they were underwater and couldn't afford to both pay the lawyers and sell the house. No thank you. My ex and I got lucky; we divorced in 2006 and were able to sell for more than we paid, pay off our first and second mortgage, and walk away with enough to put down on our two modest post-divorce houses.

So the return you get on a home purchase and sale has not much to do with a mortgage or lack thereof, but a mortgage and it's relative size can affect the risk of the investment and one's life choices.

Those are good comments. I would just say they are more about real estate than mortgages.

On your divorce in the real estate crunch example, what do you think is the takeaway there relative to mortgages? I agree it is unfortunate, but would they have been better off with a lower or higher mortgage?

 

[RunningBum]

I get what you are saying. What I am saying is paying off is no guarantee of return. Your house as an asset is still open to the whims of the market.

Sure, but that's unrelated to the mortgage.

The OP has made a commitment to pay back a loan at 4.625%. They can continue to do that, or they can take some investment savings, which may have been earning more if they were willing to take some risks, or less, if they wanted a very safe investment.

If your house loses $50K by the time you sell, you're going to be down that $50K whether you had a mortgage or not. Likewise if you gain $50K, you're up either way.

You're rate of return on the specific house investment will have a greater swing because less of your money is involved, but your overall total return on all investments, including the house, stays the same (except for whatever difference between the 4.625 mortgage and how you'd invest it.).

 

[SecondCor521]

Those are good comments. I would just say they are more about real estate than mortgages.

On your divorce in the real estate crunch example, what do you think is the takeaway there relative to mortgages? I agree it is unfortunate, but would they have been better off with a lower or higher mortgage?

The point I was trying to make is that one can get stuck - at least for a while - in a house that is underwater. And being stuck in that house if one wants to move - either for a divorce or for any other reason - is a risk associated with larger mortgages that may be worth considering.

If they had a smaller mortgage, then they might not have been underwater, and they might have been able to sell even in the downturn and get away from each other sooner or more easily.

Whether they would have been better off overall is a pretty subjective question I think. Maybe they enjoyed the bigger house or the improved cash flow while they owned it and it was worth the trade off of being stuck in a house with a soon-to-be-ex. Being the recipient of my divorce, I would have mixed-but-mostly-negative feelings about living in the same house with my ex at the time.

I think it is still true that the typical person in America buys the larger house with the larger mortgage and hopes things work out. Often they do; sometimes they don't. Everyone rolls their dice and takes their chances.

 

[HI Bill]

34 years old, wife is 30.

- 285k left on mortgage (house would sell for 420k)
- 103k cash
- 240k between Roth IRA & solo401k
- No debt from cars, loans, credit cards, etc.

The past few years we've been maxing out my Roth and my solo401k w/ an employer contribution through my LLC S Corp.


Current interest on the mortgage is 4.625%

We've been sitting on our lump sum cash because we were considering putting in a pool. Current house isn't our forever home but I wanted to get an opinion on paying down the mortgage vs continuing to invest aggressively.

Let me know your thoughts please!

No pool, it would just lose money. Personally, I'd keep at least 6 months in cash as an emergency fund, and pay down the mortgage. The question is, are you able to deduct the mortgage interest? If you paid the loan down by $50-75K, would you still be able to do so? If you can't deduct the interest, then given the current stock market, I'd do the safer thing....paying down the loan by $70K would save you $3237 in interest annually.

 

[Texas Proud]

The point I was trying to make is that one can get stuck - at least for a while - in a house that is underwater. And being stuck in that house if one wants to move - either for a divorce or for any other reason - is a risk associated with larger mortgages that may be worth considering.

If they had a smaller mortgage, then they might not have been underwater, and they might have been able to sell even in the downturn and get away from each other sooner or more easily.

Whether they would have been better off overall is a pretty subjective question I think. Maybe they enjoyed the bigger house or the improved cash flow while they owned it and it was worth the trade off of being stuck in a house with a soon-to-be-ex. Being the recipient of my divorce, I would have mixed-but-mostly-negative feelings about living in the same house with my ex at the time.

I think it is still true that the typical person in America buys the larger house with the larger mortgage and hopes things work out. Often they do; sometimes they don't. Everyone rolls their dice and takes their chances.

Bad example.... if you have the money to pay off the mortgage or not then if you do not pay it off you should still have the money when it comes time to dispose of the house.... you can bring the money in at that time.. you are not stuck just because you are underwater...



Your example are of people who actually cannot pay off a mortgage and are stuck.. so they do not even have the option of paying it off...

 

[SecondCor521]

Bad example.... if you have the money to pay off the mortgage or not then if you do not pay it off you should still have the money when it comes time to dispose of the house.... you can bring the money in at that time.. you are not stuck just because you are underwater...

Your example are of people who actually cannot pay off a mortgage and are stuck.. so they do not even have the option of paying it off...

Of course. My examples are of typical people. Typical people underwater on their house usually don't have five figures in cash lying around to bring to closing.

 

[Texas Proud]

Of course. My examples are of typical people. Typical people underwater on their house usually don't have five figures in cash lying around to bring to closing.

Nor do they have the money to pay off their mortgage so it is not relevant to the OPs question....


And if you are saying that they should pay extra on the mortgage each month instead of investing, then what are they doing with that money they invested? It should be there so they can bring it to closing...


If the question was 'I am underwater on my house, should I put more money on the mortgage or blow the dough on having fun'... then I would 100% agree with you... pay it down...

 

[pb4uski]

34 years old, wife is 30.

- 285k left on mortgage (house would sell for 420k)
- 103k cash
- 240k between Roth IRA & solo401k
- No debt from cars, loans, credit cards, etc.

The past few years we've been maxing out my Roth and my solo401k w/ an employer contribution through my LLC S Corp.


Current interest on the mortgage is 4.625%

We've been sitting on our lump sum cash because we were considering putting in a pool. Current house isn't our forever home but I wanted to get an opinion on paying down the mortgage vs continuing to invest aggressively.

Let me know your thoughts please!

I would not pay it down since you can't pay it off.... your monthly mortgage payment will still be due and payable each month... it is just that the amount of principal vs interest would be different but you will lose a lot of flexibility.

If you had enough to pay it off and could then save what you previously paid to the mortgage company and rebuild then I nmight have a different view.

You have more flexibility with money in the bank.

Like others have said, explore spousal Roth IRA if you haven't already done so, and possibly using your LLC for sopuse to do more tax-deferred savings.

Not keen on pools in general and I don't see putting one in as a good investment.... especially if you don't plan to live there for a long time.

 

[SecondCor521]

Nor do they have the money to pay off their mortgage so it is not relevant to the OPs question....


And if you are saying that they should pay extra on the mortgage each month instead of investing, then what are they doing with that money they invested? It should be there so they can bring it to closing...


If the question was 'I am underwater on my house, should I put more money on the mortgage or blow the dough on having fun'... then I would 100% agree with you... pay it down...

I'm not expressing an opinion on what anyone should do. I don't have a dog in this debate, so I honestly don't really care. All I've done lately on this thread is point out that there is a risk associated with the following sequence:

1. Buy a house with a high LTV mortgage.
2. Spend or otherwise make inaccessible most available cash.
3. Have the misfortune to have the RE market decline.
4. Decide to move.

I did make some general comments in my first reply on this thread, and those were aimed at the OP. My posts after that weren't really directed at the OP; it seemed to me at that point that the thread had drifted to a general discussion.

 

[GR111]

there are good arguments for not paying off the mortgage, but to me there is no better peace of mind than a paid off home.

 

[Texas Proud]

I'm not expressing an opinion on what anyone should do. I don't have a dog in this debate, so I honestly don't really care. All I've done lately on this thread is point out that there is a risk associated with the following sequence:

1. Buy a house with a high LTV mortgage.
2. Spend or otherwise make inaccessible most available cash.
3. Have the misfortune to have the RE market decline.
4. Decide to move.

I did make some general comments in my first reply on this thread, and those were aimed at the OP. My posts after that weren't really directed at the OP; it seemed to me at that point that the thread had drifted to a general discussion.

OK, fair enough.... thanks for responding...


I was still thinking that people were answering the OPs question...

 

[Spiff]

34 years old, wife is 30.

- 285k left on mortgage (house would sell for 420k)
- 103k cash
- 240k between Roth IRA & solo401k
- No debt from cars, loans, credit cards, etc.

The past few years we've been maxing out my Roth and my solo401k w/ an employer contribution through my LLC S Corp.

Current interest on the mortgage is 4.625%

Let me know your thoughts please!

You can use this program to create some simple simulations to get a rough idea of what the different approaches might look like:

https://www.bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx

Run one scenario assuming your current rate of investing, for example, assuming an average yearly 7% or 8% or so gain on investments, and assuming 30 years to let it work its magic. ( 30 years is a lot of magic BTW, well done for taking it seriously)

Then go to a loan payoff calculator (also available on the same website) and sort out an early pay off plan you would like to consider. if you pay an extra 500 a month, find out how many years...

Go back to the saving/investing calculator, subtract $500/month from the previous investing senario for that number of years. run it, set that amount for a new starting point for your investing post mortgage payoff where you will be investing more... and run that for the remainder of the 30 years.

Very crude and simplified, but i suspect you will like the results of getting that extra money working for you earlier, rather than later.

Anyway, as for me, i did a mix. I went with a cheap house, and paid it off in only 10 years, really felt good to have that out of the way, that peace of mind was and is valuable to me. Since the house was cheap it was relatively easy to pay off, and still had a decent amount left over to invest. Run the numbers, quite important, but there is nothing wrong with balancing in consideration for things like security, quality of life.

 

[Vacation4us]

At your age your doing great. Here's my advice refi to a 15 year mortgage and keep investing in your 401 k and Roth. You will lower your costs on the mortgage and build equity faster. You will still have your cash reserves and can still pay extra to the mortgage if desired.

I am definitely in the camp of not having a mortgage asap. Frees up cash to invest. Reduces overhead. I have a 15 yr loan and pay extra. Housing ends up costing 50% of my take home pay. 2 years to go. Feels great even though I might have come out ahead if I had invested the extra money. The real question was would I have, and I know the answer is no. I would just have had more cash or a new kitchen. I am really glad I am about to own my home in California outright.

Good luck to you!

 

[ERD50]

there are good arguments for not paying off the mortgage, but to me there is no better peace of mind than a paid off home.

You should also realize, that for some of us, there is no better peace of mind than having the money that could be used to pay the mortgage, in an account working for us.

That money is available in case of an emergency, instead of being locked up in an illiquid home. If you lose your job, $200,000 will pay a mortgage, taxes, insurance, utilities, maintenance, and put food on the table and other expenses for many many months. If you put $200,000 in the house, and lose your job, you still need to pay taxes, insurance, utilities, maintenance, and put food on the table and other expenses.

For me, that liquid $200,000 would provide a lot of peace of mind.

... I am definitely in the camp of not having a mortgage asap. Frees up cash to invest. ...

I am just dumbstruck (well, for a moment, since I am typing this now!) when I read this. It is mentioned from time to time. Do posters not see the circular logic in this? I can only guess that they are so strongly in the 'pay off' camp, that they are blinded to common sense.

If you are in a position to pay off the mortgage (the only case where this discussion makes any sense at all), then you already have the money to invest!

You are actually suggesting that we pull out our investment (I thought an invested portfolio was the goal?), and apply it to the mortgage so we can now refill that investment a little each month (with the reduced cash flow). It was already full!

Do what you want, but if you want to be taken seriously, I suggest you do not use that argument. And I hope you don't actually believe it!

-ERD50