Would it be better to invest or pay down mortgage?
 

I have somewhere in the neighborhood of 150k sitting in a low interest account (~4.5%), and want to move most of it. My job is fairly demanding on my time, so I am looking at either putting most of the money into index funds (spy, dia, vti, qqqq, etc.) or paying down my mortgage.

I owe a little more than 300k on my home, with a 6% fixed rate mortgage (~28 years left). Home value is probably currently somewhere between 600k - 700k. I am 40 yrs. old, married with 2 small children.

Which option do you all think would be better in the long run?

Re: Would it be better to invest or pay down mortgage?
 

You're likely to see greater returns in the market. The question is can you handle the risk?

It sounds like you have at least a decent amount of wealth so I'd say throw it in the market and continue to pay your monthly payments.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
I am looking at either putting most of the money into index funds (spy, dia, vti, qqqq, etc.) or paying down my mortgage.

Which option do you all think would be better in the long run?

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What are your goals? If you want to retire in 5 years, I'd say pay down the mortgage. If you want to retire in 30 years, probably the market.

Re: Would it be better to invest or pay down mortgage?
 

If you pay off your house you can pretty much retire or work at a lower paying job closer to home full or part time.

Re: Would it be better to invest or pay down mortgage?
 

Statistically, you would do better in the market but that takes discipline and risk. Paying down the mortgage is risk free and you will sleep easier.

Re: Would it be better to invest or pay down mortgage?
 

Make sure your 401k's , IRA's are maxed out every year then pay down the mortgage with any extra?

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
I have somewhere in the neighborhood of 150k sitting in a low interest account (~4.5%), and want to move most of it. My job is fairly demanding on my time, so I am looking at either putting most of the money into index funds (spy, dia, vti, qqqq, etc.) or paying down my mortgage.

I owe a little more than 300k on my home, with a 6% fixed rate mortgage (~28 years left). Home value is probably currently somewhere between 600k - 700k. I am 40 yrs. old, married with 2 small children.

Which option do you all think would be better in the long run?

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You're 40 years old with 2 small children and 150k in savings. You are probably looking at retiring in your 60's (at the earliest) given that scenario.

Since your investor window is about 20 years minimum, you should definitely get your 150k more aggressively allocated than a mere 4.5% interest bearing account, and even more aggressive than just getting a guaranteed 6% return (which is what you get by paying down the mortgage).

Think of it this way. You're already heavily invested in property at a 2-1 ratio to your other investments (your ~300k in equity). that is a VERY conservative allocation already.

natedogg

Re: Would it be better to invest or pay down mortgage?
 

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Think of it this way. You're already heavily invested in property at a 2-1 ratio to your other investments (your ~300k in equity). that is a VERY conservative allocation already.

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OP, is this $150k all of your savings?

Re: Would it be better to invest or pay down mortgage?
 

Although the stock market offers higher return, I like paying off your mortgage more, especially if you don't have mortgage insurance in case something happens to you and you want to make sure there's a place for the kids to sleep.

Re: Would it be better to invest or pay down mortgage?
 

You could also consider becoming a private lender to real estate investors. With the banks tightening up on the loans right now, you could easily get short term returns (1-5yr) of 11-15% or more . Look into it on some of the REI forums link. Of course don't do this on a whim, research it and then decide if it fits your plan. Alot of people don't even realize that this avenue of investing exists.

Re: Would it be better to invest or pay down mortgage?
 

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Think of it this way. You're already heavily invested in property at a 2-1 ratio to your other investments (your ~300k in equity). that is a VERY conservative allocation already.

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OP, is this $150k all of your savings?

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We also have a little over 100k in retirement accounts (mostly mutual funds), and have a condo rental with around 70k equity.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
You could also consider becoming a private lender to real estate investors. With the banks tightening up on the loans right now, you could easily get short term returns (1-5yr) of 11-15% or more . Look into it on some of the REI forums link. Of course don't do this on a whim, research it and then decide if it fits your plan. Alot of people don't even realize that this avenue of investing exists.

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First, this avenue of investment is VERY complex and fraught with tons of legal barriers just to get started. Not to mention that exercising liens on properties is a significant amount of work and expense. Although, admittedly, the hard money lenders I know make 20%+ on invested capital.

Second, you could get started doing hard money lending with $150k, but you'd have to do only one deal at a time and focus on the lowest end properties. Thats neither here nor there, but something to consider.

Third, most hard money lenders that I know have enough general RE expertise to know if they're making a good deal or not. If you're not sure, you're taking on a lot of risk.

FYI

Re: Would it be better to invest or pay down mortgage?
 

I'm a fan of paying off the mortgage. A guaranteed return of 6% is better than you can expect given average market returns (8%-12% MINUS taxes). It is a no headache way of getting an immediate return on your monies.

In order of priority:

1. Pay off any non tax deductible debt
2. Pay off mortgage debt
3. Invest in 401k or other tax deffered vehicle (Roth IRA etc.. - Keep in mind, I am Canadian so don't know that much about what is available in the US)
4. Invest in non-registered (no tax deffered) equities.

These 4 simple steps will minimize your risk and offer you a balanced approach to maximizing your retirement fund. Gains are always directly correlated to the amount of risk you are willing to take, the more risk you take, the higher the potential gains could be. The approach above is geared towards minimizing risks. If you are happy to take on additional risk (paired with higher rewards), there are more agressive approaches out there (including the approach of investing in the market instead of paying off your mortgage.). What I like to do in these cases is ask people if they would be willing to take a $150,000 loan, at 6% against their home (HELOC) and invest that in the market - if your answer is yes, you would borrow to invest, your risk tolerance may be geared to using that money to buy equities rather than paying off your mortgage.

Re: Would it be better to invest or pay down mortgage?
 

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I'm a fan of paying off the mortgage. A guaranteed return of 6% is better than you can expect given average market returns (8%-12% MINUS taxes). It is a no headache way of getting an immediate return on your monies.


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It is easy to assume that the OP is in the highest tax bracket and is using his interest as an itemized deduction. Including his State tax his 6% savings is reduced to less than a 3.5% savings. No doubt he should put his money in the stock market.

Jimbo

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
[ QUOTE ]
I'm a fan of paying off the mortgage. A guaranteed return of 6% is better than you can expect given average market returns (8%-12% MINUS taxes). It is a no headache way of getting an immediate return on your monies.


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It is easy to assume that the OP is in the highest tax bracket and is using his interest as an itemized deduction. Including his State tax his 6% savings is reduced to less than a 3.5% savings. No doubt he should put his money in the stock market.

Jimbo

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I keep forgetting you guys can deduct the interest you are paying on your primary residence (no such luxury in Canada). While this makes the case better for mainatining that debt, how is it different from the scenario I described where he has a fully paid off home, and takes a $150,000 loan at 6% to invest in the market? I don't see how these situations differ and they directly relate to the level of risk one is willing to take in the market.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
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I'm a fan of paying off the mortgage. A guaranteed return of 6% is better than you can expect given average market returns (8%-12% MINUS taxes). It is a no headache way of getting an immediate return on your monies.


[/ QUOTE ]

It is easy to assume that the OP is in the highest tax bracket and is using his interest as an itemized deduction. Including his State tax his 6% savings is reduced to less than a 3.5% savings. No doubt he should put his money in the stock market.

Jimbo

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I keep forgetting you guys can deduct the interest you are paying on your primary residence (no such luxury in Canada). While this makes the case better for mainatining that debt, how is it different from the scenario I described where he has a fully paid off home, and takes a $150,000 loan at 6% to invest in the market? I don't see how these situations differ and they directly relate to the level of risk one is willing to take in the market.

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It differs because the interest on the 6% loan you suggest to be used to buy stocks is not tax deductible wheras the 6% interest portion of his loan on his home is, effectively making the loan you suggest be an 8.5% loan instead of a 6% loan.

Jimbo

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
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I'm a fan of paying off the mortgage. A guaranteed return of 6% is better than you can expect given average market returns (8%-12% MINUS taxes). It is a no headache way of getting an immediate return on your monies.


[/ QUOTE ]

It is easy to assume that the OP is in the highest tax bracket and is using his interest as an itemized deduction. Including his State tax his 6% savings is reduced to less than a 3.5% savings. No doubt he should put his money in the stock market.

Jimbo

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I keep forgetting you guys can deduct the interest you are paying on your primary residence (no such luxury in Canada). While this makes the case better for mainatining that debt, how is it different from the scenario I described where he has a fully paid off home, and takes a $150,000 loan at 6% to invest in the market? I don't see how these situations differ and they directly relate to the level of risk one is willing to take in the market.

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It differs because the interest on the 6% loan you suggest to be used to buy stocks is not tax deductible wheras the 6% interest portion of his loan on his home is, effectively making the loan you suggest be an 8.5% loan instead of a 6% loan.

Jimbo

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OK, this I didn't know. Canadian rules state that you can deduct the interest on any loan made for "investment purposes" - excluding the mortage on your principal residence (though you also don't face cap gains when you sell). So in the US you can't borrow money to invest and deduct the interest but you can deduct the interest on your principal residence. Understood. In that case, OP would definitely benefit more by keeping the tax deductible mortgage payment and investing the 150k.

Thanks for clearing it up.

Re: Would it be better to invest or pay down mortgage?
 

You are WAAAY too young too be paying off your mortage IMO!

You have a great 6% fixed rate mortgage at this time.Are you thinking of re-locating/moving before your kids settle into a specific area or school district?

There are alot of options that are much more appealing/and basically safe than just a 4.5% MM account,with 2 young children that I assume you will be sending to college one day?

The the tax write off alone from carrying a mortgage is well worth it.If this $150k is a large part of your networth,you should ALWAYS keep some freecash flow for emergencies,job loss,etc.

What is your household monthly income/debt ratio?
(mortage,car loans C/C,etc)

Unless you just cant take or want the risks/rewards of any type of market that go with the territory?

Stephen [img]/images/graemlins/cool.gif[/img]

Re: Would it be better to invest or pay down mortgage?
 

If you only owed $150K on your home, would you go borrow $150K @6% to play the market?

I doubt it. That isn't to say the answer is pay down the mortgage. You don't want to be completely illiquid, of course.

Re: Would it be better to invest or pay down mortgage?
 

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You have a great 6% fixed rate mortgage at this time.Are you thinking of re-locating/moving before your kids settle into a specific area or school district?


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We love our house and have no plans to move. New house in nice area that we moved into ~2 yrs. ago.

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There are alot of options that are much more appealing/and basically safe than just a 4.5% MM account,with 2 young children that I assume you will be sending to college one day?


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Yes, education very important to us. Most likely our state University, which is quite good and relatively inexpensive (currently around 5k/year tuition for resident undergrad). If the talent and desire is there for a private University we will do what we can to facilitate.

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What is your household monthly income/debt ratio?
(mortage,car loans C/C,etc)


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I don't have any debt other than my mortgage. Our combined gross income/mortgage payment is around 4.5.

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Unless you just cant take or want the risks/rewards of any type of market that go with the territory?
Stephen [img]/images/graemlins/cool.gif[/img]

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I am very risk tolerant, my wife less so. That is why I was thinking of just putting the majority in a broad index. If I were not married I would most likely invest most of it in individual stocks and derivatives.

Re: Would it be better to invest or pay down mortgage?
 

OK, I got the answer I think I already knew, that I should invest the money, I just wanted some validation.

I have been reading through past threads and other investment websites. I would like to keep it simple to start with. Would an allocation of

60% VTI
30% EFA
10% VWO
(an alocation suggested by spider in another thread)

be sufficiently diversified, or would I be better off with more funds, like:

10% SPY
10% VTV
10% IWC
10% VBR
10% VNQ
10% EFA
10% EFV
20% DLS
10% VWO

(ETF Equity Buy and hold portfolio suggested by fundadvice.com )?

I plan on buying about 100k in fairly short order, and then adding 2k/month indefinitely. I hope to do any balancing by alocating monthly additions to try and maintain percentages. Any thoughts?

Re: Would it be better to invest or pay down mortgage?
 

Do not invest it.

Re: Would it be better to invest or pay down mortgage?
 

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Do not invest it.

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Are you suggesting he stuff it in his mattress or bury it in his backyard inside of a coffee can? SHEESH!!

Jimbo

Re: Would it be better to invest or pay down mortgage?
 

"The the tax write off alone from carrying a mortgage is well worth it."

This cracks me up, lol. I see it over and over.
Someone please explain to me why paying $10K in interest, to save $2.5K in taxes is good?

Re: Would it be better to invest or pay down mortgage?
 

Right now I think cash is cool. Markets are relatively high and many believe the recent credit scare is only the begining. The FED's main objective is to maintain pice stability and with Gold and Oil taking off I don't think they can continue to bail out lenders by supplying liquidity, pain will be the only option. Pain will create opportunities in stocks.

I would also consider income real estate if you can buy a good property at a decent CAP rate. Depriciation, cash flow and inflation protection make conservatively financed income real estate a great investment. The investment can cause a few headaches though.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
Someone please explain to me why paying $10K in interest, to save $2.5K in taxes is good?

[/ QUOTE ]Say your loan amount is $200,000 and intrest rate is 5%, then you'll indeed pay $10k in intrest. But since you only have to pay $7.5k, you really only payed a 3.75% intrest rate. If you can get higher than a 3.75% intrest rate with your money, then taking the loan would be +EV.

Given a possible return rate of r, a mortgage rate of m, and income tax rate of t, we would need (m - t) < r for the mortgage to be +EV. If the calcs I just did in my head are correct, at least.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
[ QUOTE ]
Someone please explain to me why paying $10K in interest, to save $2.5K in taxes is good?

[/ QUOTE ]Say your loan amount is $200,000 and intrest rate is 5%, then you'll indeed pay $10k in intrest. But since you only have to pay $7.5k, you really only payed a 3.75% intrest rate. If you can get higher than a 3.75% intrest rate with your money, then taking the loan would be +EV.

Given a possible return rate of r, a mortgage rate of m, and income tax rate of t, we would need (m - t) < r for the mortgage to be +EV. If the calcs I just did in my head are correct, at least.

[/ QUOTE ]

This is a level right?
possibe? this implies risk? No?
go back to the drawing board plz.

Re: Would it be better to invest or pay down mortgage?
 

My advice to you:
Invest as much as possible allowed by tax codes in 401K, roth, etc. Invest in most efficient 529's for children. These generate tax free gains.
Then pay-off motgage as quick as possible.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Someone please explain to me why paying $10K in interest, to save $2.5K in taxes is good?

[/ QUOTE ]Say your loan amount is $200,000 and intrest rate is 5%, then you'll indeed pay $10k in intrest. But since you only have to pay $7.5k, you really only payed a 3.75% intrest rate. If you can get higher than a 3.75% intrest rate with your money, then taking the loan would be +EV.

Given a possible return rate of r, a mortgage rate of m, and income tax rate of t, we would need (m - t) < r for the mortgage to be +EV. If the calcs I just did in my head are correct, at least.

[/ QUOTE ]

This is a level right?
possibe? this implies risk? No?
go back to the drawing board plz.

[/ QUOTE ]

I'm wondering if you're leveling now.

Re: Would it be better to invest or pay down mortgage?
 

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My advice to you:
Invest as much as possible allowed by tax codes in 401K, roth, etc. Invest in most efficient 529's for children. These generate tax free gains.
Then pay-off motgage as quick as possible.

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Good advice. No, great advice. I would keep the lquidity though. You could even put the money in a tax free money market and continue to deduct the mortgage interest.

Re: Would it be better to invest or pay down mortgage?
 

pay down the mortgage and keep some money in reserve for good deals. in this world you sit so much better without debt, and then can make better financial decisions and live a more carefree life.
this is a guaranteed 6% investment for your money. you cant get that now or any time in the near future.
good luck with life mano

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Someone please explain to me why paying $10K in interest, to save $2.5K in taxes is good?

[/ QUOTE ]Say your loan amount is $200,000 and intrest rate is 5%, then you'll indeed pay $10k in intrest. But since you only have to pay $7.5k, you really only payed a 3.75% intrest rate. If you can get higher than a 3.75% intrest rate with your money, then taking the loan would be +EV.

Given a possible return rate of r, a mortgage rate of m, and income tax rate of t, we would need (m - t) < r for the mortgage to be +EV. If the calcs I just did in my head are correct, at least.

[/ QUOTE ]

This is a level right?
possibe? this implies risk? No?
go back to the drawing board plz.

[/ QUOTE ]I'm not advocating anything, just stating a mathematical expression that explains why people do it. Look at your original quote; that's exactly the question I answered.

Re: Would it be better to invest or pay down mortgage?
 

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OK, I got the answer I think I already knew, that I should invest the money, I just wanted some validation.


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Mano, you should DEFINITELY use at least some of this to pay down the mortgage. The amount of interest you pay on long term mortgages is really sick. It would be so, so, so criminal for you to not take some of this to pay down some of your mortgage.

Re: Would it be better to invest or pay down mortgage?
 

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[ QUOTE ]
OK, I got the answer I think I already knew, that I should invest the money, I just wanted some validation.


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Mano, you should DEFINITELY use at least some of this to pay down the mortgage. The amount of interest you pay on long term mortgages is really sick. It would be so, so, so criminal for you to not take some of this to pay down some of your mortgage.

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Ummm, I assume I'm not understanding you correctly. Are you saying that he should pay part of the mortgage because the interest compounds? If so that makes 0 sense since the money will be compounding if it's in the market (or even savings account) also.

Let me know what I'm missing.

Re: Would it be better to invest or pay down mortgage?
 

FWIW I would bet $150k on black and flip the table if it lands on red. jk

all depends on how your life would be affected if you lost a decent amount of that 150k. if it would ruin your life than pay off your mortgage, if not then invest in a pretty aggressive portfolio. Maybe consider taking 10k and invest in some penny stocks...may hit big! good luck

Re: Would it be better to invest or pay down mortgage?
 

I don't mean to hijack the thread, but can we look at a hypothetical situation where investor has lots of cash (let's say 5 million) and wants to buy a $500,000 house. Money is not a concern for the investor. Assuming a 6% fixed rate on the mortgage and 9% annual returns in the market. Wouldn't they always be better off making as small a down payment as possible and putting the rest in the market? I've heard arguments that you should try to pay off your mortgage as soon as possible, but I don't really understand that idea. As long as your mortgage interest rate is lower than the return you expect to make in the market long term, it seems it would be wise to put it in the market, regardless of one's financial situation.

Re: Would it be better to invest or pay down mortgage?
 

The only problem is that your 6% will remain fixed but your 9% return may not, in fact you could lose your entire investment and be broke and still have a mortgage. Now if you are talking about Bill Gates type of money his ROR is so low it would never matter either way but in your example of 5 million the ROR may be a deciding factor.

Jimbo

Re: Would it be better to invest or pay down mortgage?
 

I think an even larger factor is what if you lose all of the money? If you have a very stable job that you are very very unlikely to lose and if you did you could get another one easily then invest the money. If you lose it you can still make your payments and live off of that.

Obviously nobody has that secure of a job nor are they necessarily able to handle the idea of losing all their money but I think the idea is still valid.

Re: Would it be better to invest or pay down mortgage?
 

[ QUOTE ]
I don't mean to hijack the thread, but can we look at a hypothetical situation where investor has lots of cash (let's say 5 million) and wants to buy a $500,000 house. Money is not a concern for the investor. Assuming a 6% fixed rate on the mortgage and 9% annual returns in the market. Wouldn't they always be better off making as small a down payment as possible and putting the rest in the market? I've heard arguments that you should try to pay off your mortgage as soon as possible, but I don't really understand that idea. As long as your mortgage interest rate is lower than the return you expect to make in the market long term, it seems it would be wise to put it in the market, regardless of one's financial situation.

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Don't forget the immediate savings in some of the closing costs from paying all cash.

Re: Would it be better to invest or pay down mortgage?
 

I'm a big fan of paying down debt first and then look to invest. You can't lose by doing that imo. You can pay it all off now and invest asap after, without having the burden of carrying a mortgage.