Would it be better to invest or pay down mortgage?

[Mano]

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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.

[spex x]

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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

[jackdaniels]

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.

[Jimbo]

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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

[jackdaniels]

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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

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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.

[Jimbo]

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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

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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

[jackdaniels]

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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

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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.

[stephenNUTS]

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]

[prohornblower]

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.

[Mano]

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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.