littlefishParticipantStatus: PhysicianPosts: 34Joined: 06/24/2017
I understand the discussions surrounding paying down student interest loans vs maximizing retirement savings. Is the same true for home equity loans as well? If a home-equity loan is less than 6-7%, wouldn’t it be wiser to leverage your money towards retirement savings where 30+ years of compound interest can take effect? Or do the same compound interest principles work in reverse with mortgages/home equity loans if you delay paying them down? Curious to hear people’s thoughts.
Thanks!March 18, 2019 at 10:34 pm MST #199555JBMEParticipantStatus: SpousePosts: 533Joined: 03/26/2018
I’d be interested in others’ thoughts on this as well. If you can do it though, just attack both. I’m in a similar situation as you. We have a home equity loan and now maximize saving for retirement (putting around 35% away across all our retirement accounts). I debated this for years and concluded that paying off the equity loan ASAP at the cost of retirement wasn’t the best since we could deduct the interest on the loan on schedule A. Can’t deduct student loan interest because of high income but there aren’t limits for home equity (that changed a bit with TCJA but I digress).
So our equity loan is adjustable and when we got it interest was 5%. Once the fed started raising rates I got off my butt and used that action to incentivize myself to start paying it down. Interest rate is now 7.25%. We’ve paid off 75% of the total now. I’m hoping to wipe it out this year or next year. But we’ve been maxing 401ks/401a/457/roth IRAs/megabackdoor roth during this time.March 19, 2019 at 4:20 am MST #199565ENT DocParticipantStatus: PhysicianPosts: 3523Joined: 01/14/2017
You have to compare apples to apples when making a decision like this. As JBME points out, you have to adjust for all costs/benefits. Interest rates are often described in APR format, which necessitates understanding of the compounding period to get the APY. Only after knowing the APY can you compare to your marginal investment’s APY, adjusted for taxes as well.
So say your APR translates to 5% APY on the loan. Your marginal investment is in equities in taxable, and you estimate your long-term after-tax return of that to be 5.5%. Invest in taxable. If lower than 5% pay off the loan. Be flexible, as JBME points out, if the rate adjusts or if you no longer qualify for interest deduction. The interest deduction also must be on the margin in order to technically “count” it as a benefit. So if your interest deduction didn’t clear the standard deduction hurdle and then you made a decision to do charitable giving and THIS is what took you over the standard deduction hurdle it’s not your interest that should get the benefit.March 19, 2019 at 4:52 am MST #199568Faithful StewardParticipantStatus: Financial Advisor, Small Business OwnerPosts: 519Joined: 06/12/2017
The decision on paying down your mortgage versus investing for retirement often depends upon your tax bracket and your level of investment risk. So, each individual needs to run their own numbers.
That said, normally you would reap a greater benefit from investing the additional money versus paying down the mortgage.
Michael Peterson, CFP® | Faithful Steward Wealth Advisors
https://ProsperousPhysician.com | (717) 496-0900March 19, 2019 at 5:15 am MST #199572TimParticipantStatus: AccountantPosts: 3088Joined: 09/18/2018
There are too many variables to have one correct answer. Mortgage/equity loan, fixed/variable, pretax/deductible, current tax rate/future tax rate, stage of life/future plans.
Given that, pay yourself first, the retirement bucket. The variable rate was a choice. Many solutions to that without cutting into your retirement. You didn’t mention the retirement savings percentage. That is probably more important. Allocation of your income needs to be sound.
Now if you are referring to discretionary on top of that, the fact that it’s a home equity loan with a variable rate personally leads me to reduce that risk by paying down the loan. Once that is accomplished, it’s spend or save.
That’s a good problem to have.March 19, 2019 at 6:52 am MST #199603ReFinDocParticipantStatus: PhysicianPosts: 145Joined: 01/09/2016
Consider this: Put the amount you would put toward the HEL/HELOC into a taxable, low fee Stock Mkt. Fund. If the investment takes off over the next 10-20 years, use it to pay off the loan at LTCG (potentially 0%) rates. If the Market fund doesn’t go up, then don’t pay down the loan and wait for it to go up. Aggressively tax loss harvest along the way. With a long term loan, you have lot of options.
The new tax law changes the equation a bit since the loan interest may no longer be deductible. Bunching deductions over alternate year might make sense.
Periodically my Bank offers short term low interest options for my HELOC. I use these funds to pay down the HELOC, but at a lower rate. I am arbitraging my own “mortgage.” A HEL/HELOC still retains the asset protection of a mortgage.
I still think Ric Edelman has it mostly right: https://www.edelmanfinancialengines.com/education-center/articles/11-great-reasons-to-carry-a-big-long-mortgageTanglerParticipantStatus: PhysicianPosts: 358Joined: 08/23/2018
I just got a mortgage, but if I could use my stocks to pay off the loan without paying LTCG I would do it in a microsecond. Why? For the same reason that I have money in bonds (not 100% stocks) and for the same reason I have not borrowed 5 million and put it all in VTSAX. No mortgage = less risk. I know we live in a culture that loves to borrow. I also know the math usually works and I know borrowing at a low rate and putting it in the stock market usually wins over long periods but not having a mortgage is a good feeling and I hope to get back to that feeling ASAP.