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Message
Pay off mortgage or save/invest?
Posted on 10/1/20 at 7:53 pm
Posted on 10/1/20 at 7:53 pm
Refinanced recently for 2.8%. Cuts our mortgage by around $400/month. My initial plan was to put that savings (maybe plus some) into the principle every month and pay the house off faster.
I know that’s not dumb...but with that low of an interest rate would it be better served to put that extra into investing?
I know that’s not dumb...but with that low of an interest rate would it be better served to put that extra into investing?
Posted on 10/1/20 at 7:57 pm to BabyTac
Historically, investing is the much smarter option. BUT you actually have to invest the money and not spend it on other things. That said, there is a certain financial freedom that comes from paying off your house.
Posted on 10/1/20 at 8:44 pm to BabyTac
I personally would invest in the market.
2.8% is almost free money.
2.8% is almost free money.
Posted on 10/1/20 at 10:00 pm to BabyTac
I’m sure some people will come in with a lot of reasons why you should invest but I think it would be incredible to have a house paid off early. That would be a hell of a lot of financial freedom.
My next goal will be to start putting anything I can into extra principal payments.
My next goal will be to start putting anything I can into extra principal payments.
Posted on 10/2/20 at 5:48 am to BabyTac
Great question.
Is house appreciating in value?
If so, paying off could be a good investment.
Especially from a downside risk aspect which would be limited to “opportunity cost.”
The upside of investing would be anything over 3% is making more than pay off.
Ultimately, it depends on your risk tolerance and whether you like being debt free more than fully invested.
Is house appreciating in value?
If so, paying off could be a good investment.
Especially from a downside risk aspect which would be limited to “opportunity cost.”
The upside of investing would be anything over 3% is making more than pay off.
Ultimately, it depends on your risk tolerance and whether you like being debt free more than fully invested.
Posted on 10/2/20 at 7:04 am to BabyTac
You can do both. Doesn't have to be one or the other.
Posted on 10/2/20 at 8:28 am to FinleyStreet
quote:
You can do both. Doesn't have to be one or the other.
This is my approach. I'm refinancing to a 15 yr loan at 1.875%. I'm maintaining my 401K and Roth IRA investing. As of right now, my mortgage is the only debt I have.
Posted on 10/2/20 at 8:36 am to BabyTac
How much is the disposable income worth to you? There is a $ value to that and only you can decide that value. There is no calculator for it.
Posted on 10/2/20 at 9:36 am to BabyTac
If you have to pay PMI, I would pay the principal until PMI is gone; after that...
If it were me, I would want to drop the extra money in investments, but the wife would want to ultimately spend it. Therefore, I would throw it to principal
If it were me, I would want to drop the extra money in investments, but the wife would want to ultimately spend it. Therefore, I would throw it to principal
Posted on 10/2/20 at 9:38 am to BabyTac
Time value of money makes the answer clear, investing is always the right decision in this case, to think otherwise is making an emotional decision over a logical one. Home equity is 100% illiquid and has a guaranteed rate of return of 0, you can't spend the "interest you avoid" but you can use your new surplus to buy diversified, liquid investments that will return a lot more than putting money into a house.
The time for future growth you'd miss while paying off the house is worth infinitely more, hundreds of thousands of dollars over the mortgage term. If you'd missed the increase in the stock market from 2008 to today, you'd have missed the greatest bull market run in history, and I hope you'd kick yourself if all you had was a paid off house instead of 10+ years of share price appreciation and reinvested dividends. Over any decade in the last 100 years, you'd have positive returns investing in index funds, which cannot be said for real estate.
John Bogle said "investing should not be an emotional decision" so don't make an emotional decision that stunts your financial growth. Obviously, I wouldn't recommend buying anything but total market index funds and buying and holding, so buy $400/month in Vanguard Total Stock Market or Fidelity's equivalent with no expenses (FZROX) and enjoy your expanding balance sheet. Your house doesn't pay dividends and is a leveraged, undiversified single asset subject to forces in your local real estate market, versus the long term diversified equity ownership in a (liquid) index fund.
Also, if you lose your job, have unexpected money needs or desire to make major purchases at any point, your lower mortgage balance won't help you at all. You won't be able to call up the bank to get a home equity loan without waiting a while, in order to pay interest to access your own equity, or with no job you'd be totally out of luck.
The value of your house has no relationship to your mortgage balance and you still to get live in it the whole time.
The time for future growth you'd miss while paying off the house is worth infinitely more, hundreds of thousands of dollars over the mortgage term. If you'd missed the increase in the stock market from 2008 to today, you'd have missed the greatest bull market run in history, and I hope you'd kick yourself if all you had was a paid off house instead of 10+ years of share price appreciation and reinvested dividends. Over any decade in the last 100 years, you'd have positive returns investing in index funds, which cannot be said for real estate.
John Bogle said "investing should not be an emotional decision" so don't make an emotional decision that stunts your financial growth. Obviously, I wouldn't recommend buying anything but total market index funds and buying and holding, so buy $400/month in Vanguard Total Stock Market or Fidelity's equivalent with no expenses (FZROX) and enjoy your expanding balance sheet. Your house doesn't pay dividends and is a leveraged, undiversified single asset subject to forces in your local real estate market, versus the long term diversified equity ownership in a (liquid) index fund.
Also, if you lose your job, have unexpected money needs or desire to make major purchases at any point, your lower mortgage balance won't help you at all. You won't be able to call up the bank to get a home equity loan without waiting a while, in order to pay interest to access your own equity, or with no job you'd be totally out of luck.
The value of your house has no relationship to your mortgage balance and you still to get live in it the whole time.
This post was edited on 10/2/20 at 9:48 am
Posted on 10/2/20 at 9:55 am to BallsEleven
Your definition of 'financial freedom' is really an emotional decision that actually would make someone cash poor over the long term while forgoing better, diversified investments with greater liquidity and higher long term returns.
The numbers don't lie, and unfortunately people make emotional decisions about money and investing all the time, to their detriment.
The numbers don't lie, and unfortunately people make emotional decisions about money and investing all the time, to their detriment.
Posted on 10/2/20 at 10:14 am to GoIrish02
quote:
Your definition of 'financial freedom' is really an emotional decision that actually would make someone cash poor over the long term while forgoing better, diversified investments with greater liquidity and higher long term returns.
It is not an emotional decision. There is an actual $ value to financial freedom and everyone has it.
For example, most people work 40 hour weeks at a current salary and almost everyone would take some level of a pay cut to work only 20 hours a week. That freedom has a specific $ value required to accommodate that change.
Posted on 10/2/20 at 10:30 am to makersmark1
quote:
Is house appreciating in value? If so, paying off could be a good investment.
Actually just the opposite is true. The more leveraged you are on an investment that is increasing in value the greater your ROI will be on your money.
The more money you put towards equity, your ROI will decrease.
Posted on 10/2/20 at 10:32 am to notsince98
As long as you realize defining 'financial freedom' as avoiding mortgage interest ~20+ years from now is an emotional decision based on feeling and not logic or math, good luck to you. It is a far less optimal decision than buying an appreciating asset today with a much higher rate of return, which will get you closer to real wealth a lot sooner. It is easier to make life decisions with a large investment portfolio accumulated over 20+ years than a paid off house.
Posted on 10/2/20 at 12:13 pm to GoIrish02
quote:
As long as you realize defining 'financial freedom' as avoiding mortgage interest ~20+ years from now is an emotional decision based on feeling and not logic or math, good luck to you. It is a far less optimal decision than buying an appreciating asset today with a much higher rate of return, which will get you closer to real wealth a lot sooner. It is easier to make life decisions with a large investment portfolio accumulated over 20+ years than a paid off house.
I just gave you a specific example of how it is a calculation based on a value that you have to determine individually. You can keep claiming emotion and not logic but it is just making you look silly.
Posted on 10/2/20 at 2:02 pm to FinleyStreet
quote:
You can do both. Doesn't have to be one or the other.
Exactly. And people usually ask these sorts of questions and never mention their ages or life circumstances. What's right for one person may not be right for another, depending on those factors.
Posted on 10/2/20 at 4:43 pm to Jag_Warrior
both great...
paid off my 30 in under 15 i think???
takes a lot of stress out of life and frees up stuff like college concerns for kids...job security..investment in other real estate etc..
i have paid cash for every car..rental investment property ...college tuition etc... less stress is worth a lot of money...
i suspect you have a pretty solid career and it involves work stress already if you are in a position to do this...reduce your stress!!!!
congrats...regardless of your choice you are a winner!!!!
paid off my 30 in under 15 i think???
takes a lot of stress out of life and frees up stuff like college concerns for kids...job security..investment in other real estate etc..
i have paid cash for every car..rental investment property ...college tuition etc... less stress is worth a lot of money...
i suspect you have a pretty solid career and it involves work stress already if you are in a position to do this...reduce your stress!!!!
congrats...regardless of your choice you are a winner!!!!
Posted on 10/2/20 at 4:47 pm to Hammond Tiger Fan
quote:
This is my approach. I'm refinancing to a 15 yr loan at 1.875%. I'm maintaining my 401K and Roth IRA investing. As of right now, my mortgage is the only debt I have.
Who can I talk to for that 15yr/1.875% rate?
Posted on 10/2/20 at 9:35 pm to Jibbajabba
quote:
Who can I talk to for that 15yr/1.875% rate?
I-bank in Memphis gave me that rate. Found them on bankrate.com
Posted on 10/2/20 at 9:57 pm to Hammond Tiger Fan
Damn
Impressive rate
Impressive rate
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