View Full Version : Invest or pay off mortgage
Hello, simple living forum friends! I used to be around a lot more under same screen name (Mermaid) at the old forums and have been lurking here for a while.
I am 50, and have a lot of money questions up for me right now. My partner and I live in a house I bought. We have a joint account and each have our personal accounts. We pay for the house from our joint account, and would eventually like it to be titled /deed in both our names.
I would really like to retire at 60, or at least go to working part time. She figures she'll work for much longer (she is a psychotherapist so that is doable). I bought the house because I had the down payment, and her credit was really bad at that time because of a long unemployment - her credit is much better now.
Right now, my question is, how should I invest my non-retirement funds vs. pay off mortgage, and what should I consider in doing so?
My numbers:
IRAs - Roth and Regular --- 242K
Personal Savings/Invests -- 31K - some earmarked to replace car
Mortgage @ 4.625% -- 123K (worth ~235K)
About 9K of the personal is in no-load mutual funds at Schwab and Vanguard, the rest is in savings accounts (Capital360, formerly ING Direct) earning less than the mortgage rate.
The idea of paying off the mortgage by the time I'm 60 is attractive, but if I'm using the calculator right that would take an extra $600 a month! $250/month to kill it by the time I'm 65. $250 would be tight right now, but some large expense may go away within about a year or so, which would make 250+ very doable.
I think I did the bankrate calculator right because I entered the current balance, 25 year mortgage and current interest rate and it came up with amount same as my current payment. Then I played around w/ adding additional amount each month.
My risk profile for probably 10K would be conservative because I would want it available for emergencies. For the remaining 21K, I would be comfortable with moderately aggressive. (terms from http://www.investopedia.com/articles/basics/03/050203.asp)
Thanks for any thoughts or advice!
awakenedsoul
8-17-14, 4:11pm
Welcome back, mermaid. If it were me, I would pay off the home if I had an eight month emergency fund. I used Dave Ramsey's worksheets, and did his steps, in order. Things started to really take off at a fast rate, once I wrote out all of his plan and implemented it. Both he and Suze Orman are really into owning your home outright, and having no debt.
That said, I did have kind of a cash flow crunch after paying off my home. I didn't have enough in my emergency fund, so I got a second job. That made up the difference. Since then, I've been able to reduce my expenses, and it's all worked out. I've been able to save more money, now that I'm retired. I just spend so much less.
I'd pay off the mortgage once I had some funds tucked away *safely* for emergencies.
Ask yourself the reverse question, perhaps it will help the analysis: would you take out a loan on your home to get money to invest?
Thanks, awakenedsoul and bae. Sounds like it could be much simpler than I was making it!
To answer bae's rhetorical question, I certainly wouldn't take out a loan to invest, but I've seen some calculations saying "With rates so low, keep your mortgage and invest the extra to make more return!" Won't even bring up the multiple issues with that advice.
iris lilies
8-17-14, 5:24pm
Thanks, awakenedsoul and bae. Sounds like it could be much simpler than I was making it!
To answer bae's rhetorical question, I certainly wouldn't take out a loan to invest, but I've seen some calculations saying "With rates so low, keep your mortgage and invest the extra to make more return!" Won't even bring up the multiple issues with that advice.
There are a lot of people who would invest the money rather than pay off the mortgage and would justify it with calculations of financial gain. And that's fine!
But I like the mental peace and security of having a paid-for house. So, I would pay it off.
There are a lot of people who would invest the money rather than pay off the mortgage and would justify it with calculations of financial gain. And that's fine!
You'd have to have a pretty good investment in mind for that to pan out. Your first $250k/$500k of gains in the house are not subject to capital gains taxes. You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win. And then you need to look at the risk of the two approaches. You are basically earning 4.625% tax-free by paying down your loan, and there's *no* risk in the paying-down, except your check getting lost in the mail. (There's the risk of the value of the underlying asset, of course, that's a different problem entirely).
iris lilies
8-17-14, 5:44pm
You'd have to have a pretty good investment in mind for that to pan out. Your first $250k/$500k of gains in the house are not subject to capital gains taxes. You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win. And then you need to look at the risk of the two approaches. You are basically earning 4.625% tax-free by paying down your loan, and there's *no* risk in the paying-down, except your check getting lost in the mail. (There's the risk of the value of the underlying asset, of course, that's a different problem entirely).
Well, I believe that the young mustachians over on the MMM site who advocate this are blinded by the stock market gains of the past 12 months. It's been a heady ride for some of them, those who haven't been in the investment game for very long.
Well, I believe that the young mustachians over on the MMM site who advocate this are blinded by the stock market gains of the past 12 months. It's been a heady ride for some of them, those who haven't been in the investment game for very long.
That's fine, more power to them. I'll need people to do my gardening and ditch digging in another few years :-)
You are borrowing money from the home at 4.625% to invest, you have to find something that will return a higher rate than that after taxes to win.
I agree you have to take taxes into account, but just to be clear isn't the test whether your after tax return exceeds your after tax cost of borrowing (and not the nominal rate)? That said, my house is paid off.
I agree you have to take taxes into account, but just to be clear isn't the test whether your after tax return exceeds your after tax cost of borrowing (and not the nominal rate)?
Ayup. "after taxes" was meant to apply to both.
Teacher Terry
8-17-14, 6:43pm
So many young people on MM are talking others out of paying off their homes-saying those that do are dumb. As IL pointed out that is because with youth comes lack of experience. I am definitely in the pay it off camp & we did before semi-retiring. I don't think you will be sorry.
Even $100 a month toward the principal wil reduce the mortgage and as income allows, you can add more. I would pay off the house.
Blackdog Lin
8-17-14, 8:52pm
I would pay off the house. The peace of mind is priceless.
Wow,a thread where everyone is in agreement thus far.That doesn't happen around here often.
I also say pay off home.I still owe 85k on a 135k mortgage at 3.35% 15 year term. My DW puts minimum in 401k to receive company match,all of our excess wages above that goes into savings which is then used to pay down mortgage in lump sums.
Besides what others have mentioned,I also am concerned about possible asset confiscation or a currency reset.Paying down the mortgage could offer some protection in either of these scenerios.
Austin is a little bit of a different animal than some other real estate markets right now since it is so HOT. It makes it a little harder to figure these things out. I have elected not to pay ours off since we intend to move and sell anyway. I am socking away the savings rather than paying down principal on a 3.25% loan. For now, the annual rise in value makes up for any lost interest. If anything unexpected happens and we end up staying, I will pay it off then.
Hello Mermaid, I am also a psychotherapist by the way :)!
Not sure my example would be relevant to you, but I chose to pay off my mortgage when I got severance payment after leaving my old job. This means I have zero debt now and I am actually a home owner (not the bank).
Moreover, French law allows you to sell your home and still live in it after you turn 60. The buyer pays you a lump sum + a monthly sum and you continue living in your home until you die. Owning a small appartment in Central Paris seems less risky than most other investments, so the choice was obvious to me.
Pay you mortgage off as fast as possible. Wife and I paid ours off 14 years ago; (1) it is exceedingly liberating; (2) your options and opportunities in life (financial or otherwise) grow exponentially and (3) you can grow your savings and investments at a very fast clip with no debt. :)
Ed
Pay off the mortgage. With rare exceptions, always get rid of debt first.
Hello Mermaid, I am also a psychotherapist by the way :)!
Moreover, French law allows you to sell your home and still live in it after you turn 60. The buyer pays you a lump sum + a monthly sum and you continue living in your home until you die. Owning a small appartment in Central Paris seems less risky than most other investments, so the choice was obvious to me.
I recall reading a story several years ago about a woman who did this, allowing the purchaser to live in her basement until her death, for rent of $500 equivalent per month (this had happened quite a while ago when $500 was high for rent, especially a basement) if I recall correctly. He was a young man and she was quite old and the purchase price very low, so he thought he was getting an amazing deal. She ended up living well past 100 and the man, his children now grown adults after being raised in the basement, finally got the house at age 60 or so. Personally I don't think I'd take a chance on that deal...
SteveinMN
8-19-14, 10:11am
Moreover, French law allows you to sell your home and still live in it after you turn 60. The buyer pays you a lump sum + a monthly sum and you continue living in your home until you die.
In the United States, that kind of arrangement is offered by banks/mortgage lenders and is called a "reverse mortgage". They pay you (not sure if it's a lump sum or monthly payments) for as long as any mortgage holders are in the house. When the last one leaves, the property goes to the lender and they can do whatever they want with it.
I recall reading a story several years ago about a woman who did this, allowing the purchaser to live in her basement until her death, for rent of $500 equivalent per month (this had happened quite a while ago when $500 was high for rent, especially a basement) if I recall correctly. He was a young man and she was quite old and the purchase price very low, so he thought he was getting an amazing deal. She ended up living well past 100 and the man, his children now grown adults after being raised in the basement, finally got the house at age 60 or so. Personally I don't think I'd take a chance on that deal...
That was Jeanne Calment--one of my role models. She lived to be 122, I think, and smoked until she got too blind to light her own cigarettes.
In the United States, that kind of arrangement is offered by banks/mortgage lenders and is called a "reverse mortgage". They pay you (not sure if it's a lump sum or monthly payments) for as long as any mortgage holders are in the house. When the last one leaves, the property goes to the lender and they can do whatever they want with it.
Hi Steve - Welcome back after your long hiatus!
Besides the reverse mortgage which, as you stated, is basicly a loan the bank gives you for a certain percentage of your homes value (usually 30% but depends on your age) that doesn't have to be paid back until you die and house is sold, the US also has a thing called a "Life Tenancy" or "Life Estate". It's pretty much like Marion's example and is a deed that allows a person to stay in their home until they die but it is actually deeded and owned by someone else - usually a family member'
From Wikipedia:
In common law and statutory law, a life estate is the ownership of land for the duration of a person's life. In legal terms it is an estate in real property that ends at death when ownership of the property may revert to the original owner, or it may pass to another person. The owner of a life estate is called a "life tenant".
As for the OP, I'd pay off the mortgage before investing once I had an emergency fund in place. I've been mortgage free for more than a decade and it is absolutely the best IMHO!
In France, it's quite popular (despite Jeanne Calment's example ;) because you are not free to leave your possessions to who want after you die. For instance, if you are single with no children when you die, your money will go to your parents and siblings, you cannot cut them off your will. The life estate or reverse mrtgage (called 'viager') allows you to circumvent some of that.
In any case, I think it's always wise to have no debt and to own the place you live in.
Hi, Spartana!:welcome:
I had never heard about that "life tenancy", even when I bought the house that I rent to my mom. Interesting concept. Wonder if that would do anything for us. I must ask a property lawyer (I must know a couple of them by now...)
Hi, Spartana!:welcome:
I had never heard about that "life tenancy", even when I bought the house that I rent to my mom. Interesting concept. Wonder if that would do anything for us. I must ask a property lawyer (I must know a couple of them by now...)Lots and lots of info online - as well as lists of pros and cons. My Dad wanted to do this with my sister and I for his wife once he passed away. Deed us the house and property but deed her a Life Tenancy so she could live there until she dies - then it would fully revert to us. She passed away before him so it never happened but, while it seemed good on the face of it, there were some serious drawbacks too. Here's a site I think answers some questions better then Wikipedia does. Probably has your info about how it works in your state too since all states have different rules: http://theonlinelawyer.blogspot.com/2011/11/what-is-life-estate-deed.html
Thanks for all the responses! That apartment in central Paris sounds sweet ;)
pinkytoe, so true about Austin market being hot right now. We would like to stay in this house for a long time (although sometimes I dream of moving somewhere cooler, but we have so many friends and family here).
Friday, I had a realtor make a cold call to me: we have a buyer wanting a house in your area, what would it take? I told him that if we sold our house we would just have to find another because we love our neighborhood!
I have poked around MMM forums a bit, but I hadn't seen the argument about investing with $ not used to pay off mortgage there yet -- heard it years ago during a previous boom!
Last December I quit my corporate job and went back to graduate school to get my MAT to become a math teacher. I also paid off my house in full early this year. Not having $850 going to the mortgage company each month has been a big stress relief now that I am currently making no income and living off savings while in school and also paying for school out of my own pocket. (No student loans for me!)
Technically, I could get a minimum wage job and still be able to pay my necessary expenses, but would never be able to do that while living under the burden of a mortgage or rent. While it's possible I could come out a bit ahead financially by investing more rather than having paid for my home, the additional worry and stress and being stuck in a job situation I hate because of living expenses would negate any of that benefit. I am definitely in the "pay off mortgage/get debt-free ASAP" camp!
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