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Invest or Pay Off Debt Variation

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  • Invest or Pay Off Debt Variation

    This discussion has been tackled before and it usually takes many variations. I want to discuss another variation. If home mortgage is the only debt you have at say 400k at 4% and you got lumpsum amounts (pick any amount of100k, 200k, 300k and 400k) to use. You are in the top marginal rate and use std deduction. Given the generally established observation that the market is frothy and may be due for a correction over the next 2 years, would you like to use that lumpsum to 1) Invest in market as usual. 2) Pay towards the mortgage and take the 4% return 3) Invest in Ally or equivalent and wait for an opportunity to deploy in the market if that correction comes at some point? Would your decision change if that lumpsum amount is a yearly after tax bonus amount?

    Thanks
    HI

  • #2
    assuming that you have already maxed out your tax sheltered retirement accounts, I vote for using the funds to pay off the mortgage.   A 4% tax free guaranteed rate of return is a good rate of return.   Another way to think of it is if you already paid off your mortgage, would you take out a mortgage to invest more into the stock market (you could always do this if you changed your mind too).   I suppose if you knew exactly where the bottom of the market was, you may, but I like the analogy of it is hard to catch a falling knife.    I know that you are not supposed to time the market, but I too am thinking there will be a downturn in the near future.  I thought that a couple of years ago too though, but fortunately, didn't act upon it.  I should add that I too have a mortgage, but I am not aggressively paying it off, my rate is 2.85%, but I have started to throw a few extra thousand every now and then at it every now and then.   I think that tax free bond rates of return have been around 3% this year?  so I figure that I can have some of my funds in there instead of the mortgage and come out even, but prior years, the returns have been lower so it may still be a loss.

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    • #3
      Probably split between 1 & 2. Definitely not 3

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      • #4
        Kill that mortgage!
        I wish i could do the same. I have money “trapped “ in stocks b/c i would owe 23.8 % in LTCG + NIIT taxes on any gains and that is too much. No brainer in my mind. Paid for house = awesomeness!
        The borrower is slave to the lender.
        screw a bunch of debt.

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        • #5
          I would invest in the market as usual and possibly pay off some of the mortgage principle. #3 is market timing.

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          • #6


            I want to discuss another variation.
            Click to expand...


            the answer is the same.

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            • #7
              Ummmm. Top marginal tax bracket and standard deduction?

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              • #8
                How would you feel if you paid off that mortgage for your "guaranteed 4% return" and then 1-2 years later the entire economy sank (again), including the housing market and now your home is worth just 50% of what you paid for it and all that equity you poured into it is now gone?

                That's the dilemma I have with paying off a mortgage early.  Why pour all my money into my house if I could lose all that equity overnight just like happened in 2008?  Why not just treat a mortgage like rent and see it as a necessary expense that may or may not give you some money back some day when you sell, if you're lucky.

                I'm currently sitting on a 15 year mortgage at 3.25% and I'm considering moving to a 30 year and actually taking money out so I can use it to pay off my last low interest student loan.  Why? Because if I wanted to, if the economy crashed and my home's value sank, I could just walk away from my mortgage and let the bank have my house without any long term consequence.  As long as the government treats mortgage debt as a god given right and lets us deduct it from our taxes, why not use it?

                 

                I'm just kind of being the devil's advocate here because I'm curious to hear other's thoughts.  I am actually very debt averse these day, but mortgages don't seem that important to me for some reason

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                • #9
                  @Hightower I think if the itemized deductions are close or less than the std deduction, you are not really seeing the mortgage interest deduction being beneficial. As for losing market value, it can happen to any asset. Just like you intend to ride out the downturn for equities, you can do the same for your house plus there is the added benefit of having a place to live and not having to account for a monthly payment.

                  I never considered paying off the mortgage and have only been paying the monthly amount so far. I dont see myself moving in the near future and that got me thinking about the right way to utilize any lumpsum money I can get my hands on going forward specially if I know I will have that lumpsum amount again in a specific time.

                  As some one else mentioned we dont take a HELOC on a paid off house to invest in equities, then academically why is investing in equities while you still have a mortgage not considered the same?

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                  • #10
                    I guess one thing to realize is that nothing you are proposing is outlandish or egregiously offensive to this crowd. Like asking if you should have the fish or the steak, both delicious, both enjoyable, neither a bad option. I personally would kill the mortgage. I like 4% and i like paid for homes. I know it is not really 4% due to losing the tax deduction and i know stocks (which are pretty overpriced right now in my opinion) have done way better, but I would kill that pesky mortgage. Is it wrong to either 1, or 2? nope.  Is 3 a fools errand? probably, but neither 1, 2, nor 3 is bitcoin dumb. Save. The rest is semantics but we enjoy the never ending debate.

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                    • #11


                      If home mortgage is the only debt you have at say 400k at 4% and you got lumpsum amounts
                      Click to expand...


                      Slight highjack with different inputs; 100k at 2.75%, standard deduction, 24% tax bracket, only debt we have.  Thoughts by WCI community on payoff mortgage vs 'investing'?

                       


                      1) Invest in market as usual. 2) Pay towards the mortgage and take the 4% return 3) Invest in Ally or equivalent and wait for an opportunity to deploy in the market
                      Click to expand...


                      Don't do equities 1. in Taxable currently; only Cash/ST Liquidity. 2. See above, using different inputs and 3. two points; payoff would entail total liquidation of ST funds including an EF fund and employer stock (Expected Return on stock is/expected to mimic overall economy/economic outlook) w/o touching checking account. Checking account level is capable of supporting 2-3 months of current spending without additional funds (longer w/o mortgage debt).

                       

                       

                       

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                      • #12
                        How about refinance the mortgage and invest the lump sum. Reducing the interest rate makes the marginal decision easier to make.

                        Comment


                        • #13




                          How about refinance the mortgage and invest the lump sum. Reducing the interest rate makes the marginal decision easier to make.
                          Click to expand...


                          I know market timing is a fools errand, but do any of you guys look at valuations of the market and lean one way or the other when you are on the fence? I mean, markets seem historically high and future returns unlikely to be nearly as robust as for example if you were asking these same questions in 2010.

                          I have a lot stuck in equities right now (taxable stock mutual funds  in vanguard index funds with substantial LTGC and NIIT) and my plan in the near future is to throw my income toward my ridiculously large mortgage. The mortgage rate is only 3.375 but I like the idea of a paid for home and I don't like the idea of borrowing money to invest in the stock market right now which is essentially what I would be doing when I put money into stocks rather than paying for the mortgage.

                          I see the other side of the argument. Long term stocks should return higher than 3.375 (and that is not counting my mortgage deduction).

                          So for me the priority list is as follows: 1. Max IRAs 2. pay down/off mortgage 3. Invest in taxable vanguard mutual fund accounts

                          I am also increasing my bond allocation so for me the comparison right now is to either put money towards tax exempt bond funds vs pay down the mortgage and the returns will likely be pretty close (less than 1% difference) I think. I could be wrong here but i don't think it is drastically different.

                           

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                          • #14
                            Personally, I'd pay off the mortgage, so I could take the extra cash each month and dump it in the market/taxable account.

                            Mostly though, I'd be buying flexibiltiy to just move to anywhere and not have to earn as much! (e.g. southern France, or Spain, or some place nice). Then I could work something, but it wouldn't have to be what we do today. (it could, just wouldn't have too!)

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                            • #15







                              How about refinance the mortgage and invest the lump sum. Reducing the interest rate makes the marginal decision easier to make.
                              Click to expand…


                              I know market timing is a fools errand, but do any of you guys look at valuations of the market and lean one way or the other when you are on the fence? I mean, markets seem historically high and future returns unlikely to be nearly as robust as for example if you were asking these same questions in 2010.

                              I have a lot stuck in equities right now (taxable stock mutual funds  in vanguard index funds with substantial LTGC and NIIT) and my plan in the near future is to throw my income toward my ridiculously large mortgage. The mortgage rate is only 3.375 but I like the idea of a paid for home and I don’t like the idea of borrowing money to invest in the stock market right now which is essentially what I would be doing when I put money into stocks rather than paying for the mortgage.

                              I see the other side of the argument. Long term stocks should return higher than 3.375 (and that is not counting my mortgage deduction).

                              So for me the priority list is as follows: 1. Max IRAs 2. pay down/off mortgage 3. Invest in taxable vanguard mutual fund accounts

                              I am also increasing my bond allocation so for me the comparison right now is to either put money towards tax exempt bond funds vs pay down the mortgage and the returns will likely be pretty close (less than 1% difference) I think. I could be wrong here but i don’t think it is drastically different.

                               
                              Click to expand...


                              No answer is definitely correct, but I agree that the market is iffy right now for an additional large lump-sum investment; some experts say returns will continue to be good the next few years, others I've read talk about negative average returns over the next 5 years or longer - in other words, at this point, nobody knows with stocks.

                              On the other hand, last I checked, 6 month treasuries are still over 2 percent, so that's a guaranteed return and, unlike with your mortgage, you get to use that money right away after 6 months for whatever you want (ie stocks if they happen to on sale, or reinvest in treasures, etc).  Not that there's anything wrong with paying off a mortgage either.   Or you could just divide that lump sum between the mortgage, bonds, and stocks.  No right answer, but my personal risk-averse opinion is to minimize stock investments for now and go with the other options.

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