Announcement

Collapse
No announcement yet.

Pay off mortgage?

Collapse
X
Collapse
First Prev Next Last
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Pay off mortgage?

    Long time reader of the WCI. I reviewed the forum but could not find a great answer on what I should do with my home mortgage.

    Question: Pay off home mortgage (now being used as a rental property) or invest in a taxable account?

    My financial situation:
    Income: 280,000/y
    401k, 457, backdoor Roth IRA all maxed each year
    35k in emergency fund
    Student loan: 63k refinanced down to 0.9%

    Home mortgage owed: 177k at 3.75% 7/1 ARM with scheduled interest change starting 2025
    Mortgage payment: 1100/mo
    Rental income: 1400/mo

    I have been paying ~900/mo extra towards the mortgage to reduce my overall interest costs in the long term but I am unsure if this is the best idea. Am I better off paying the minimum mortgage payment and invest the difference in a taxable account?

    Thanks for the help





  • #2
    Do you need the cash flow? Doesn't sound like it since paying down the mortgage and you believe in that 3.75 is too much...at least 900 per month at least.

    Are.you done real estate investing? Plow capital into that if not. If done and want cash flow in near future ....yes payoff the mortgage

    Comment


    • #3
      You'd probably come out ahead in the long run if you invested the money, however, I will say that I don't think paying off the mortgage is the wrong answer.

      Comment


      • #4
        neither...refinance then re-evaluate like your student loans....

        Comment


        • #5
          Pay $65K/year to have it paid off in 3 years.

          The wealthy don't keep debt for long, even if they can invest the money instead. Never kept any debt over 5 years. Got me to multiple fold FI mid-career as a PCP.

          Comment


          • #6
            Thanks for the replies. I tried to refinance the mortgage but after discussing with multiple different lenders, my current rate of 3.75 can't be beat as an investment property.
            I used Dave Ramsey's mortgage payoff calculator https://www.daveramsey.com/mortgage-payoff-calculator which showed ~$34,000 in interest saved if paying off the mortgage early. Seems to me that investing the money (moderate-high risk index funds) would give me a larger return. Are there any good online calculators that you recommend to compare investing vs paying off mortgage early?

            Comment


            • #7
              https://usehhaf.org/loan-information...is-calculator/

              That is a really simple calculator. I would tell you that this decision is as much about the psychological importance of having no debt as it is maximizing wealth.

              The numbers should favor investing but I know many people that have taken out 15 year loans instead of 30s. Having no debt obligations makes people behave differently. Our outlook really changed when we paid off our student loans. We have now termed our taxable account the “mortgage payoff account”, helps the mental accounting.

              Comment


              • #8
                Originally posted by stevej99 View Post
                Long time reader of the WCI. I reviewed the forum but could not find a great answer on what I should do with my home mortgage.

                Question: Pay off home mortgage (now being used as a rental property) or invest in a taxable account?

                My financial situation:
                Income: 280,000/y
                401k, 457, backdoor Roth IRA all maxed each year
                35k in emergency fund
                Student loan: 63k refinanced down to 0.9%

                Home mortgage owed: 177k at 3.75% 7/1 ARM with scheduled interest change starting 2025
                Mortgage payment: 1100/mo
                Rental income: 1400/mo

                I have been paying ~900/mo extra towards the mortgage to reduce my overall interest costs in the long term but I am unsure if this is the best idea. Am I better off paying the minimum mortgage payment and invest the difference in a taxable account?

                Thanks for the help



                Yes x1000. Makes less than zero sense to pay it off. Save that or invest it wisely to your asset allocation.

                Argument for cash flow also makes no sense, as you clearly already have it since you could pay off the mortgage, its left pocket to right pocket stuff.

                You just use any real two calculators. Give yourself whatever allocation you want, pick a low number to be conservative say 4-5%. Then do the mortgage.

                People often just focus on the difference between the mortgage/investing gains, but remember you'll have the principal too, and its essentially an emergency fund and allows you most liquidity and options.

                Decide one day you'd rather pay debt off, cash out and do it. But taxes? Great that means you made a profit and are still better off.

                Will never understand those rushing to pay off something that is literally getting cheaper to pay the longer you wait.

                I've attached two graphs. One is what happens to a dollar over time due to different rates of inflation, just make your mortgage payment the zero line and pick something less than 2%.

                The other is rolling 30 year returns on the market, you can be conservative and assume less here even.

                You can only put dollars earlier into one of these things, one destroys it at a certain pace, the other grows it (most likely).

                And after all you already have someone paying it down, just put the full rent in if you want.
                Attached Files
                Last edited by Zaphod; 08-17-2020, 05:49 PM.

                Comment


                • #9
                  Is there a difference fiscally if you pay it off or you accumulate enough of an equity position that you could pay it off(post capital gains sales tax) anytime that you want? Yes it's costing you whatever you mortgage interest to basically to hold that equity position but if you're beating that interest rate with stocks, etc... then technically you're increasing your NW.

                  Comment


                  • #10
                    Originally posted by Zaphod View Post
                    Yes x1000. Makes less than zero sense to pay it off. Save that or invest it wisely to your asset allocation.
                    .
                    So you're an advocate for 30y mortgage (or interest only even), invest it all, and don't payoff until you're ready hit the retire button?

                    I'm along with you while in the growth phase of career until mid-career where desire for balance risk gains importance. Then again, one could advocate aggressive even past FI up to the point of retirement (or beyond for some).

                    Comment


                    • #11
                      Remember, this is a rental not your home. At least for me the difference is important psychologically. I generally speaking want no mortgage on my home in retirement. (Though there are good arguments to keep a low interest mortgage in some cases.) But the rental should always be evaluated as an investment. The key point in your set up is that you have to refinance this mortgage whether or not you want to. Why? Because it is an ARM due in 2025. Since I doubt mortgage interest rates are going to get much better, even for rental properties, I’d start shopping for refi deals. To your question: what about paying it off instead? The answer comes from examining two questions. First, what is your opportunity cost? Will you otherwise invest in the stock market? In a small business down the street? Maybe a real estate syndication? Second, what do you plan to do with the cash flow. When I was in your situation I did not want to pay tax on the extra income, had positive cash flow (I.e., the tenants were paying off the mortgage and all my expenses, plus some) and the stock market was doing great. Easy decision for me to keep the mortgages on the rental properties. Tenants paid off one, and I eventually paid off the other because the interest deduction was becoming minuscule. Now, I have two cash flow properties set up for retirement. Anyway, if you answer what you want to do with the cash flow, then consider your opportunity cost (what you would otherwise be doing with the Money necessary to pay off the mortgage), I think you will answer whether to refi or pay-off.

                      Comment


                      • #12
                        Paying the mortgage off is lower risk than investing in stocks. It is also lower reward, on average, but it is a 100% safe bet. You know exactly how much you will gain with this choice.

                        Investing in the market is, statistically speaking, higher reward. But that higher reward comes with volatility and uncertainty.

                        The longer your timeline to needing the money, the more likely the market investment makes the most sense. Three decades until retirement, then go for it with the taxable account. Five years until FIRE? Then pay off the mortgage.

                        I typically did some of both. In your shoes, I would accelerate debt pay down with some of the extra dollars, and invest the rest in taxable.

                        Comment


                        • #13
                          Do you need to take the risk to achieve your goals?

                          Comment


                          • #14
                            Originally posted by StarTrekDoc View Post
                            So you're an advocate for 30y mortgage (or interest only even), invest it all, and don't payoff until you're ready hit the retire button?

                            I'm along with you while in the growth phase of career until mid-career where desire for balance risk gains importance. Then again, one could advocate aggressive even past FI up to the point of retirement (or beyond for some).
                            100. In fact I dont even understand the dont have a mortgage in retirement crowd. This increases your longevity risk in reality.

                            Im also not really a forever home person. 90%+ of people that are fast tracking their mortgage payments will eventually move making it a huge tax with transaction costs. Its a lease for a consumptive item for the most part to me.

                            I think I'd rather have bond equivalents than a paid off mortgage. At least I could use that money in a crisis, and in all these scenarios you have more month to month cash invested and available for use.

                            Comment

                            Working...
                            X