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Pay Off Mortgage or Invest More?
Posted on 3/10/16 at 4:17 pm
Posted on 3/10/16 at 4:17 pm
Apologies for the TL;DR in advance.
I tried to go pay off our mortgage this morning, and the bank rep tried to get me to sit down with a financial planner / investment person to look at our finances before I did this. In theory, it's a good idea-- make sure we're fully prepared to lose a big chunk of change from our bank accounts. In reality, I'm wondering how much is really trying to be helpful and how much is, "we just want you to buy our products."
So give me some advice.
We have a mortgage (conventional 30 yr fixed) that we got in 2005 @ 5.5% interest. For various reasons in the past 10 years, we never refinanced it. It has a payoff balance of about $97,000. Monthly payment is ~ $1000, with about $750 going to the principal & interest & the rest for taxes & insurance.
We plan to stay in this house at least 1-2 more years, and sell it when we're ready to move. Value is only about $160k. Probably won't buy another house until this one is sold.
We have:
Fully funded 401k & IRAs (~ $540,000 all together)
Cash (not really earmarked for anything) $165k
Stocks and mutual funds totaling about $175k
Life insurance for myself & my spouse
529 plans for my kids
2 late model paid off vehicles that we plan to keep for at least another 3-5 years or more
No major upcoming expenses (kids still very young).
We typically run a net profit each month of about $2500 (some months a little more, some months a little less).
The way we look at it, we probably can't earn a guaranteed 5.5% in the market; and we should be able to rebuild a good portion of that wealth in a few years (possibly less). And if some catastrophic expense befalls us, we'll have a $65k cushion plus our Roth contributions that we can access quickly if needed.
We are looking to retire early using our savings and a $4k/month pension to make it happen in about 10 years from now or so-- we're currently in our late 30s. So that does give us pause. But wouldn't an extra $9000 a year (what we wouldn't have to pay in mortgage payments each month) help in that regard? I know there are tax benefits to keeping a mortgage, but I don't know that those benefits outweigh the costs of carrying the mortgage.
I tried to go pay off our mortgage this morning, and the bank rep tried to get me to sit down with a financial planner / investment person to look at our finances before I did this. In theory, it's a good idea-- make sure we're fully prepared to lose a big chunk of change from our bank accounts. In reality, I'm wondering how much is really trying to be helpful and how much is, "we just want you to buy our products."
So give me some advice.
We have a mortgage (conventional 30 yr fixed) that we got in 2005 @ 5.5% interest. For various reasons in the past 10 years, we never refinanced it. It has a payoff balance of about $97,000. Monthly payment is ~ $1000, with about $750 going to the principal & interest & the rest for taxes & insurance.
We plan to stay in this house at least 1-2 more years, and sell it when we're ready to move. Value is only about $160k. Probably won't buy another house until this one is sold.
We have:
Fully funded 401k & IRAs (~ $540,000 all together)
Cash (not really earmarked for anything) $165k
Stocks and mutual funds totaling about $175k
Life insurance for myself & my spouse
529 plans for my kids
2 late model paid off vehicles that we plan to keep for at least another 3-5 years or more
No major upcoming expenses (kids still very young).
We typically run a net profit each month of about $2500 (some months a little more, some months a little less).
The way we look at it, we probably can't earn a guaranteed 5.5% in the market; and we should be able to rebuild a good portion of that wealth in a few years (possibly less). And if some catastrophic expense befalls us, we'll have a $65k cushion plus our Roth contributions that we can access quickly if needed.
We are looking to retire early using our savings and a $4k/month pension to make it happen in about 10 years from now or so-- we're currently in our late 30s. So that does give us pause. But wouldn't an extra $9000 a year (what we wouldn't have to pay in mortgage payments each month) help in that regard? I know there are tax benefits to keeping a mortgage, but I don't know that those benefits outweigh the costs of carrying the mortgage.
4
Posted on 3/10/16 at 4:29 pm to its1999
My Advice is keep the money and use it as a downpayment and Closing Costs for your next house in the next 1-2 years. Don't sell the old house when you move. Properties in the range of $150,000 to $200,000 typically do really well as rental houses. Use the rental income to get pay the second mortgage and get extra cheap equity. It's what my parents did with their "starter" home and it paid off greatly.
Posted on 3/10/16 at 4:35 pm to HYDRebs
I thought to use rental income to qualify for loan you had to have prior landlord experience? Regardless, you still may qualify for both house loans if you choose to go that route.
Posted on 3/10/16 at 4:43 pm to HYDRebs
quote:
In reality, I'm wondering how much is really trying to be helpful and how much is, "we just want you to buy our products."
If they are truly trying to help you plan and acting as fiduciaries then they might be worth listening to. If immediately, they start pitching a product to sell you then say thanks, but no thanks and find someone else.
Posted on 3/10/16 at 5:10 pm to HYDRebs
What makes us gun shy about keeping this as a rental is
A) we rented it out before and we didn't care for the landlord experience. We'd be moving from the area, so we'd have to deal with a property manager, and we had a bad one last go round.
B) housing market here is so iffy. LOTS of new construction in this price range (for larger houses no less) and the economy is largely based on a military base that's (like lots of bases) often on the closure possibility list. If it closes, we are screwed if we still own here.
We paid more than the house is currently worth, so there is that. I wouldn't mind acting as landlord but my spouse just wants rid of the place.
A) we rented it out before and we didn't care for the landlord experience. We'd be moving from the area, so we'd have to deal with a property manager, and we had a bad one last go round.
B) housing market here is so iffy. LOTS of new construction in this price range (for larger houses no less) and the economy is largely based on a military base that's (like lots of bases) often on the closure possibility list. If it closes, we are screwed if we still own here.
We paid more than the house is currently worth, so there is that. I wouldn't mind acting as landlord but my spouse just wants rid of the place.
Posted on 3/10/16 at 5:59 pm to its1999
Fair those are all great points. In that case I'd probably get rid of it in your shoes as well. I would try and stay more liquid and hope for a higher than 5.5% return in the markets, but to each his own. Having the ability to pay it down and have a higher monthly cash flow is still a great route to go.
Posted on 3/10/16 at 6:07 pm to HYDRebs
Yep, just talked it over with my spouse. I think our plan will be to pay it off, and with the additional $750/month that's no longer going to a mortgage, plus the $2500 monthly cushion, use some of that to add to our current nvestments.
Like my husband said, would we borrow $97,000 at 5.5% to put into the stock market or to sit in our bank account right now? Answer to both those is no; so I think for us, pay off is the answer. Build back up some cushion in the next 2 years, use that and hopefully the proceeds from the sale of this house (or worst care scenario) the rental income from it for the down payment on the next place.
Thanks for the advice, y'all. Helps to have real people perspective, not just investment banker talk.
Like my husband said, would we borrow $97,000 at 5.5% to put into the stock market or to sit in our bank account right now? Answer to both those is no; so I think for us, pay off is the answer. Build back up some cushion in the next 2 years, use that and hopefully the proceeds from the sale of this house (or worst care scenario) the rental income from it for the down payment on the next place.
Thanks for the advice, y'all. Helps to have real people perspective, not just investment banker talk.
Posted on 3/10/16 at 6:34 pm to its1999
What about shopping for a refi to lower your interest rate. Probably could get a very low rate on a 10 year fixed. Conservatively "invest" the $97k and wait until you're ready to move.
This gives you additional flexibility in the event of a housing market downturn.
This gives you additional flexibility in the event of a housing market downturn.
Posted on 3/10/16 at 8:29 pm to its1999
Out of curiosity, with a $4k pension, is your husband a LTC or something?
I fee your pain though. When I lived right off base the city built new houses non-stop. I believe they still are, which is ridiculous and over saturates the market. Not to mention it's geared towards military who leave every 3 years. I got so upset with it that I just moved further away from the city. When I pcs elsewhere I'll have an easier decision to make on whether to sell or rent.
I fee your pain though. When I lived right off base the city built new houses non-stop. I believe they still are, which is ridiculous and over saturates the market. Not to mention it's geared towards military who leave every 3 years. I got so upset with it that I just moved further away from the city. When I pcs elsewhere I'll have an easier decision to make on whether to sell or rent.
Posted on 3/10/16 at 10:09 pm to 13SaintTiger
That's right.
That's the tough thing about military towns- they have tons of buyers and renters-- until the day they don't. Our town keeps expanding further from the base, so we're in a decent location for buyers. But 10 years ago, 2000 sq ft was a decently sized house for what we paid. Now there are 4 BR 2700 sq ft places for about what we paid.
As for the idea of investing the 97k... These funds have basically been parked in a money market fund doing jack for years. We're only moderately aggressive, so the idea of dropping that much money into even a mutual fund isn't appealing right now. A portion maybe but not that much. And sitting on cash (which we've been doing) is kind of stupid. We've paid thousands in interest to carry this debt, meanwhile squirreling away $ with no plan. I think we're just at the shite or get off the pot point.
That's the tough thing about military towns- they have tons of buyers and renters-- until the day they don't. Our town keeps expanding further from the base, so we're in a decent location for buyers. But 10 years ago, 2000 sq ft was a decently sized house for what we paid. Now there are 4 BR 2700 sq ft places for about what we paid.
As for the idea of investing the 97k... These funds have basically been parked in a money market fund doing jack for years. We're only moderately aggressive, so the idea of dropping that much money into even a mutual fund isn't appealing right now. A portion maybe but not that much. And sitting on cash (which we've been doing) is kind of stupid. We've paid thousands in interest to carry this debt, meanwhile squirreling away $ with no plan. I think we're just at the shite or get off the pot point.
Posted on 3/10/16 at 10:15 pm to Oenophile Brah
From what I understand (correct me if in wrong), a refi will cost $2-3000. Even if the majority of the costs are rolled into the loan. Probably even more if so, since you'll be paying interest on that for 10 years if you pay to completion.
We had thought about refi pretty seriously, esp now knowing we'll be here longer. But knowing it'll add to the cost of the loan seems counter. Hard to recoup that $ in just 2 years (hoping to unload this place then.)
We had thought about refi pretty seriously, esp now knowing we'll be here longer. But knowing it'll add to the cost of the loan seems counter. Hard to recoup that $ in just 2 years (hoping to unload this place then.)
Posted on 3/10/16 at 11:13 pm to its1999
Yes there will be a cost to refi, but how much will you save by shaving 2.5% in interest? Even in 3 years you'll save a nice amount.
That doesn't even count the interest earned by retaining the $97k and seeking minimal returns.
Plus, as I mentioned earlier, you gain the flexibility in case of a market downturn.
That doesn't even count the interest earned by retaining the $97k and seeking minimal returns.
Plus, as I mentioned earlier, you gain the flexibility in case of a market downturn.
Posted on 3/11/16 at 6:56 am to its1999
Personally, I am of the same mindset as you. If that money is just sitting there making 0%, it's much better to get the 5.5% savings. I'd pay off the mortgage.
Posted on 3/11/16 at 8:45 am to its1999
How old are you?
Posted on 3/11/16 at 9:25 am to its1999
quote:
hanks for the advice, y'all. Helps to have real people perspective, not just investment banker talk.
I'm a mortgage banker, but still a real person I hope.If you and your husbands plans are to sell the house in the next year or two a refi would probably not make sense. Ran some numbers this morning because I got in a little early and you're probably looking at around $4000 in closing costs depending on what state you lived in. You could get a 20 year note to keep your mortgage on the same schedule and lose about $185-190 on P&I a month. It would take you around 21-22 months to recover the $4000 in FCF. So if you are not sure you're going to live there that long don't worry about it.
Posted on 3/11/16 at 12:19 pm to its1999
A 5.5% guaranteed return (even if you itemize and therefore get less) isn't bad these days. Paying off the mortgage now given that you plan to move soon anyway doesn't strike mea as unreasonable.
The thing is though that 30 year mortgage rates are so low now that I prefer being mortgaged to my eyeballs. Assuming you itemize and get the interest deduction your cost of capital is pretty close to the long-term inflation rate.
I prefer the 30 over the 15 because with the latter you're paying extra for basically no real (i.e. post-inflation) return. You don't want to pay extra to push your post-tax interest rate below the rate of inflation.
That said, I'm not planning to move next year. If you are able to I'd consider remortgaging now with the plan of renting later if you can mortgage your next home as well - and I'm guessing you have the capital to do that.
The thing is though that 30 year mortgage rates are so low now that I prefer being mortgaged to my eyeballs. Assuming you itemize and get the interest deduction your cost of capital is pretty close to the long-term inflation rate.
I prefer the 30 over the 15 because with the latter you're paying extra for basically no real (i.e. post-inflation) return. You don't want to pay extra to push your post-tax interest rate below the rate of inflation.
That said, I'm not planning to move next year. If you are able to I'd consider remortgaging now with the plan of renting later if you can mortgage your next home as well - and I'm guessing you have the capital to do that.
Posted on 3/11/16 at 5:40 pm to its1999
~ $150k Cash is a large amount of money to have out of play.
You are certainly better served retiring the mortgage debt early than having that dead money just sitting around.
The remaining $50k is plenty for an emergency liquid fund.
With the wildcard of the property being located in a DOD-dependent locale, I'd be strongly motivated to completely wash my hands of it as soon as possible.
Good luck.
You are certainly better served retiring the mortgage debt early than having that dead money just sitting around.
The remaining $50k is plenty for an emergency liquid fund.
With the wildcard of the property being located in a DOD-dependent locale, I'd be strongly motivated to completely wash my hands of it as soon as possible.
Good luck.
This post was edited on 3/11/16 at 5:41 pm
Posted on 3/12/16 at 10:53 am to soccerfüt
I agree with this. I don't see a clear advantage to refinancing for this short a period of time. By the time you hit the break even, you'd be ready to sell it.
Also, since the OP wants to move on fairly soon anyway, retiring the current mortgage opens up the option of offering the property with seller financing (without triggering a due on sale clause). You may or may not want to do this, but it does become an option... that might get you a higher sales price, plus some interest income going forward. Just a thought.
Also, since the OP wants to move on fairly soon anyway, retiring the current mortgage opens up the option of offering the property with seller financing (without triggering a due on sale clause). You may or may not want to do this, but it does become an option... that might get you a higher sales price, plus some interest income going forward. Just a thought.
Posted on 3/14/16 at 12:00 am to its1999
I would sell it now and rent, if I were that worried about holding it into the future.
Posted on 3/14/16 at 11:15 am to foshizzle
quote:
A 5.5% guaranteed return
The 5.5% return is illusory. It's only that high due to an unwillingness to refinance at the current market rate.
If the OP refinances at 10-15 years the interest rate could drop to around 3.0%. (Correct me if I'm wrong).
That steep reduction mixed with a modest 1.0% return from retaining the funds would more then pay for itself inside the short end 2 year window.
Just my .02
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