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re: Pay $1,000 extra to house or invest?
Posted on 6/15/16 at 11:06 am to TexasTiger34
Posted on 6/15/16 at 11:06 am to TexasTiger34
Thank you guys for the advice. I do have a 401K and it is maxed as far as I am willing to go at the moment (company match, etc) I am still struggling with one thing in my thinking though. I get that I can build wealth with saving the $1K a month into something that compounds, but I don't get how freeing up that money per month would not help me after it is paid up. I freely admit that I am a per month type person. I look at finances and how much money I have to work with per month vs. long term. I simply cannot grasp how paying off the mortgage is not a good idea to consider with all of the other options as well. Is it strictly because paying off 120K towards a mortgage vs. investing the $120K and earning interest during 10 years that makes it better? Because in my mind I see that I can be mortgage free in 6 years and that would free up a tremendous amount of cash of future earnings. Yes it does leave me with nothing to show for it liquidity-wise, however, if I stay here long enough than won't that count? I am just trying to understand from a different perspective.
3
Posted on 6/15/16 at 11:21 am to statman34
Because mortgage interest is tax-deductible and as long as you invest in a product that is over 3.5% you win.
You can put thee thousand a month into some type of investment that yeilds more than 3% and when the time comes that the investment is the same as the principal then pay off the house if it means that much to you
You can put thee thousand a month into some type of investment that yeilds more than 3% and when the time comes that the investment is the same as the principal then pay off the house if it means that much to you
Posted on 6/15/16 at 3:50 pm to Kujo
If you are maxing out Roth and any retirement accounts I see no reason to throw an extra few hundred dollars a month toward the house. It's guaranteed savings.
Posted on 6/16/16 at 8:51 am to redfishfan
What kind of returns are you guys getting these days, where passing on the 3.5% is a no brainer
This post was edited on 6/16/16 at 8:52 am
Posted on 6/16/16 at 9:04 am to statman34
quote:
I get that I can build wealth with saving the $1K a month into something that compounds, but I don't get how freeing up that money per month would not help me after it is paid up.
This is really a question you have to ask yourself. Do you think you can make more money by being mortgage free in 6 years or by investing $1k per month over 10. Most have already told you what they think...
Posted on 6/16/16 at 9:13 am to hiltacular
There is absolutely nothing wrong with paying off your house. Saying it is "not the best" thing does not mean its a bad thing, that should be crystal clear. It is certainly the most conservative thing to do and is a great way to most guarantee savings and equity.
For all anyone knows the stock market takes a dive in 2 years while you are paying off your house, and you sell your house in 25 months. In that scenario paying your house off was literally the best investment.
Given that, traditionally most people get about a 7% return in their retirement portfolios on a yearly average. If you take $1000 post tax to pay off your house you are getting about a 3.5% return on that if that is your rate. While at the same time if you put that money into a 401k instead the first year you get an instant tax bracket return plus the stock market. So if you are in the 25% tax bracket you would be putting $1250 into the market and getting about a 7% return for 32% total.
So its pretty simple to see you are potentially trading a 32% return for a 3.5% return. So in year 2 you are looking at $1035 compared to $1337.50.
For all anyone knows the stock market takes a dive in 2 years while you are paying off your house, and you sell your house in 25 months. In that scenario paying your house off was literally the best investment.
Given that, traditionally most people get about a 7% return in their retirement portfolios on a yearly average. If you take $1000 post tax to pay off your house you are getting about a 3.5% return on that if that is your rate. While at the same time if you put that money into a 401k instead the first year you get an instant tax bracket return plus the stock market. So if you are in the 25% tax bracket you would be putting $1250 into the market and getting about a 7% return for 32% total.
So its pretty simple to see you are potentially trading a 32% return for a 3.5% return. So in year 2 you are looking at $1035 compared to $1337.50.
This post was edited on 6/16/16 at 9:15 am
Posted on 6/16/16 at 9:42 am to D Tide
quote:
What kind of returns are you guys getting these days, where passing on the 3.5% is a no brainer
I don't think it's that people are getting easy returns over 3.5% at this moment or in the past year .
I think people are saying that they'd pass on the 3.5% to achieve greater returns based on the average returns of retirement portfolios over a long period of time. Which, if your considering long term returns for retirement, is what you should actually be doing, using an averages mentality, not a "what returns are people getting this year so far" mentality.
This post was edited on 6/16/16 at 9:59 am
Posted on 6/16/16 at 9:59 am to TexasTiger34
I pay extra on my mortgage every month and consider it my "fixed income" slice of my investment portfolio. Im also a risk adverse person and I like the idea of having less debt.
Posted on 6/16/16 at 11:55 am to poops_at_parties
On paper, it makes more since to invest the money. Of course that assumes you don't choose an investment with a negative return. Another advantage to investing extra principal in your home is the ability to use a HELOC if you ever get in a bind for cash or want to use it as a tax deductible interest loan for repairs, college education, or a down payment on investment property. The more equity you have, the more you have available to borrow. It's a nice emergency fund or ability to get an immediate loan without going through the bank for the specific use. Just a thought.
Posted on 6/16/16 at 11:56 am to poops_at_parties
quote:
Wife has a pension at work that would pay her roughly $35,000 a year after 30 years of service
that is a really shitty pension.
I would do some in a roth for you, the wife, and see about tax deferred options (401k, traditional IRA).
Posted on 6/16/16 at 1:50 pm to Hawkeye95
I also just love the idea of not having debt. You can certainly build up a pretty big nest egg with that extra cash flow you'd have after paying the house off.
Posted on 6/16/16 at 2:13 pm to statman34
quote:
I freely admit that I am a per month type person. I look at finances and how much money I have to work with per month vs. long term. I simply cannot grasp how paying off the mortgage is not a good idea to consider with all of the other options as well. Is it strictly because paying off 120K towards a mortgage vs. investing the $120K and earning interest during 10 years that makes it better?
So this is an important question, what would you do with the cash that you were spending on your mortgage once its paid off?
Posted on 6/16/16 at 2:23 pm to barry
quote:For most people it's buy a bigger home or vacation home and start over LOL.
So this is an important question, what would you do with the cash that you were spending on your mortgage once its paid off?
This post was edited on 6/16/16 at 2:24 pm
Posted on 6/16/16 at 4:59 pm to barry
quote:
So this is an important question, what would you do with the cash that you were spending on your mortgage once its paid off?
Invest and assist with college for children.
Actually this thread has been really helpful for me. I think I am going to go the route of investing the extra money instead of paying it to the bank. In 6-8 years I will have enough to pay off the house and pay for 2 of the kid's colleges (if the investments yield reasonably well). So it will accomplish the same task but the investment will allow me to have more money at the end than I would if I had just paid the bank the whole time. And of course, I would have liquidity in the meantime if something bad happens. I am going to probably seek a financial advisor to assist.
Posted on 6/16/16 at 6:53 pm to D Tide
quote:
What kind of returns are you guys getting these days, where passing on the 3.5% is a no brainer
First of all, I itemize deductions so my after-tax interest rate is 75% of that.
The returns on my portfolio of course go up and down year after year, but if I can't beat 2.6% annually over the long run I might as well just off myself.
Posted on 6/16/16 at 7:16 pm to poops_at_parties
This comes up at least 4 or times a month. I am on the side where I don't understand the debt adverse crowd. I'd rather have cash then no mortgage. I can get dividends from stocks that pay higher than current interest rates cost on a mortgage.
As mentioned earlier in a crisis you can't really take money out of the walls of a house. I'd rather have access to money.
Personally I like debt, I borrow as much as I can.
As mentioned earlier in a crisis you can't really take money out of the walls of a house. I'd rather have access to money.
Personally I like debt, I borrow as much as I can.
Posted on 6/16/16 at 7:35 pm to Jp1LSU
quote:
you can't really take money out of the walls of a house
Sure you can. Get a HELOC.
Posted on 6/16/16 at 7:59 pm to foshizzle
To be fair, he prefaced that by saying, "in a crisis." And during the last financial crisis, even those with impeccable credit found it extremely hard to borrow and lines of credit were slashed or discontinued without notice or explanation.
Posted on 6/17/16 at 5:49 pm to Jag_Warrior
Also people here debt and they think credit cards and car payments. House debt is on a non-depreciating asset at worst(long term) and an appreciating one at best.
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